Lessons today from our financial modeling workshop.
Building models is not enough, we also have to calibrate them to ensure that they behave well under a range of assumptions.
Relationships between model drivers are often set in a superficial manner. Which leads to challenges.
Building models is not enough, we also have to calibrate them to ensure that they behave well under a range of assumptions.
Relationships between model drivers are often set in a superficial manner. Which leads to challenges.
Give your self time to test and calibrate models.
Plug in extreme values to see if the model holds.
Identify expected behavior for a multiple data points and see if your model reproduces that when fed the right data.
Plug in extreme values to see if the model holds.
Identify expected behavior for a multiple data points and see if your model reproduces that when fed the right data.
User expectations also need to be calibrated.
Educate users on model behavior so they know that it can be broken, that it doesn't always give the right answers.
Walk them through anticipated results so you can also calibrate their expectations.
Educate users on model behavior so they know that it can be broken, that it doesn't always give the right answers.
Walk them through anticipated results so you can also calibrate their expectations.
Modeling free cash is a 6 step process
1. Add back adjustments
2. Estimate operating cash
3. Add investing and financing cash flows
4. Calculate change in cash for year
5. Plug change in cash back in balance sheet.
6. Cross check expected cash against model change in cash.
1. Add back adjustments
2. Estimate operating cash
3. Add investing and financing cash flows
4. Calculate change in cash for year
5. Plug change in cash back in balance sheet.
6. Cross check expected cash against model change in cash.
When modeling working capital for cash flow statements watch out for those sign changes.
Building a dynamic model requires effort. Limit the dynamism to a select few variables.
Stress test the dynamic variables against two or three key metrics that track what you want to measure, the questions you want to answer through your model.
Stress test the dynamic variables against two or three key metrics that track what you want to measure, the questions you want to answer through your model.
A financial model is only as good as the questions you design it to answer.
Make sure you pick the right ones.
Make sure you pick the right ones.
Add cross checks for cash, retained earnings, equity and net assets.
Make sure you are calculating them and not using them as balancing items to balance your balance sheet.
Make sure you are calculating them and not using them as balancing items to balance your balance sheet.
Next available workshop slots 14th-19th June 2021.
25th and 26th May wrapped up today. 2nd-9th June sold out.
financetrainingcourse.com/education/fina…
25th and 26th May wrapped up today. 2nd-9th June sold out.
financetrainingcourse.com/education/fina…
Data Tables are really powerful tool that give you birds eye view of summarized scenarios in a few minutes.
To use them correctly you must be clear about what metrics to focus on, identify the most sensitive variables that impact model output and realistic ranges for both.
To use them correctly you must be clear about what metrics to focus on, identify the most sensitive variables that impact model output and realistic ranges for both.
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