1. Pristine For Webinar-Best Practices in Financial Modeling (Confidential) Pristine www.edupristine.comBest Practices in Financial ModelingWebinar 1

2. Pristine For Webinar-Best Practices in Financial Modeling (Confidential) 1Agenda Modeling depleting items Consistency in the format Modeling the Taxes Modeling of Debt and Cash Balances 3. Pristine For Webinar-Best Practices in Financial Modeling (Confidential)Key conceptsI. ScalabilityII. RobustnessIII. Modeling cash balance and debtIV. Modeling Taxes2 4. Pristine For Webinar-Best Practices in Financial Modeling (Confidential)Introduction Financial modeling is the building of a mathematical model that helps in financial decision-making situations It is a skill widely used in the financial services Building a financial model is a challenging task and often simple mistakes can lead to major lossesfor both the firm and their client In this series we take you through some of the common mistakes that are committed by analystswhen preparing financial models and the best practices to make a robust and scalable financialmodel3 5. Pristine For Webinar-Best Practices in Financial Modeling (Confidential)1. Modeling depleting items Depleting items (at constant rate) should be modeled with caution Use min function to cap the depletion For example depreciation, debt repayment should be modeled with usage of MIN function so thatthe value in a year is the depletion rate or the balance amount whichever is lower4 6. Pristine For Webinar-Best Practices in Financial Modeling (Confidential)1.1 Common mistake5No Capex, asset is depreciated bystraight line method @30%, depreciation formula andlinkage is correct but it has notbeen capped On dragging to the nextcolumn, the formula fordepreciation remains correct butthe Net Block turns negative. Depreciation in FY17 cant begreater than the residual value inthe previous year 7. Pristine For Webinar-Best Practices in Financial Modeling (Confidential)1.2 Correct modeling technique6Depreciation should be cappedusing MIN function. It should bethe minimum of the residual valuefrom previous year and normaldepreciationOn dragging to the nextcolumn, the depreciation isnow restricted to theresidual value at the end ofthe previous year. NetBlock is zero now 8. Pristine For Webinar-Best Practices in Financial Modeling (Confidential)2. Consistency in the format It is important to maintain the consistency in the format of modeling across all the items Separate headings, sub headings etc. by different font size and row colors. Maintain consistency offormatting scheme across the model Report a particular year in the same column across sheets. For example, if FY17 has been reported inColumn G on P&L sheet, it should be reported in the same column across all the sheets(assumption, balance sheet, build up, cash flow, valuation etc)7 9. Pristine For Webinar-Best Practices in Financial Modeling (Confidential)2.1.1 Common mistakes8P&L has been rolled outlaterally i.e. years changingcolumn wise debtamortization schedule isrolled out vertically whereyears are changing acrossrows 10. Pristine For Webinar-Best Practices in Financial Modeling (Confidential)2.1.2 Common mistakes9Since the format istransposed, dragging theinterest expense laterallyforces Excel to pick up theincorrect value placedlaterally adjacent to thecell D16, while we actuallywanted the value D17 11. Pristine For Webinar-Best Practices in Financial Modeling (Confidential)2.2 Correct modeling technique10Had the formatbeen keptconsistent, dragging to the nextcolumn wouldhave picked upthe value from thecorrect cell 12. Pristine For Webinar-Best Practices in Financial Modeling (Confidential)3. Calculating taxes A model is robust if it does not break down when assumptions are changed from one end of thespectrum to another A frequently noticed error in this category is incorrect / inconsistent tax computation if assumptionsare changed such that PBT changes sign from positive to negative Another frequently noticed error is that balance sheet starts showing negative cash if capitalexpenditure in a year is doubled or tripled. Ensure all the possible scenarios are modeled. For example, if tax is modeled simply as Tax = Tax Rate x PBT Or Tax = if (PBT