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Operating Model - Solution

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6 views

Operating Model - Solution

Uploaded by

Renzo Aldair Manrique de la Cruz
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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You are on page 1/ 14

SOURCE: Pignataro, P. (2013) Financial Modeling and Valuation.

Wiley Finance Series


y Finance Series
How to Project Financial Statements - Step-by-step Standard Modellin
x STEP 1: Project the Income Statement
1. Project revenues (quantity and price separately)
2. Project expenses (usually related to revenues)
3. Leave depreciation and amortization expenses empty (to come from PPE Schedule)
4. Leave other non-cash income/expenses empty (to come from their respective schedules)
5. Leave interest income and expenses empty (to come from Debt/Financing Schedule)
6. Do not project other non-recurrent income or expenses (they are not recurrent)
7. Build to net income

x STEP 2: Project CFO (Indirect Method)


8. Pull in net income from calculations in step 1
9. Leave depreciation and amortization expenses empty (to come from PP&E Schedule and R&D Schedule)
10. Leave other non-cash income/expenses empty (to come from their respective schedules)
11. Leave interest income and expenses empty (to come from Debt/Financing Schedule)
12. Leave changes in operating working capital empty (to come from OWC Schedule)
13. Leave deferred taxed empty (to come from Tax Schedule)
14. Project other items if necessary

x STEP 3: Project Operating Working Capital (OWC) Schedule


15. Pull in average turnover ratios from historical financial statements (Receivables, Inventories, Payables, etc)
16. Project efficiencies in these turnover ratios (ad-hoc)
17. Pull in items from step 1 associated with the OWC (sales, expenses)
18. Using these items, calculate the new accounts for the projected OWC (Receivables, Inventories, Payables, etc)
19. Using the projected OWC, calculate their corresponding non-cash accounts (provisions, expected credit loss, etc) as balances and exp

x STEP 4: Project PP&E Schedule


20. Project CAPEX (usually related to sales, but check first if the firm's PP&E are at full capacity or if it has upcoming investment plans)
21. Project depreciation expenses from this new CAPEX in point 20
22. Project depreciation expenses from the already existing PP&E
23. Calculate the gross PP&E (remember the stock-flow identity) from point 20
24. Calculate the Accumulated Depreciation (remember the stock-flow identity) from point 21 and point 22

x STEP 5: Project R&D Schedule


25. Follow all points in step 4, but for R&D (amortization is analogous to the depreciation)

x STEP 6: Project CFI


26. Pull in CAPEX from step 4
27. Pull in R&D investments from step 5
28. Project other investment expenses
x STEP 7: Debt/Financing Schedule (Part I)
29. Pull in debt from historical financial statements
30. Project interest rates for each type of debt from the existing debt contracts or market forecasts if applicable
31. Calculate projected interest expenses using point 29 and point 30. Tip: calculate interests from beginning debt balances to avoid circula

x STEP 8 Adjust Income Statement, Balance Sheet and Cash Flow Statement (Part I)
32. Income statement: include the projected non-cash expenses related to OWC from step 3
33. Income statement: include the projected depreciation expenses from step 4
34. Income statement: include the projected amortization expenses from step 5
35. Income statement: include the projected interest expenses from step 7
36. Income statement: calculate the projected EBT

37. Cash flow statement (CFO): include the projected depreciation expenses from step 4
38. Cash flow statement (CFO): include the projected amortization expenses from step 5
39. Cash flow statement (CFO): include the projected change in OWC from step 3
40. Cash flow statement (CFO): include the projected non-cash expenses related to OWC from step 3
41. Cash flow statement (CFO): include the projected CAPEX from step 4

42. Balance sheet: include the projected OWC accounts from step 3
43. Balance sheet: include the projected PP&E from step 4 (recall the stock-flow identitiy)
44. Balance sheet: include the projected R&D from step 5 (recall the stock-flow identitiy)

x STEP 9: Tax Schedule (Differences in Depreciation Accounting)


45. Calculate the projected tax expense according to the Company's accounting policies
46. Replicate all accounts in projected EBT from step 8, except for the depreciation expense
47. Calculate the new depreciation expense according to the accounting policies from the Tax Authority and then calculate the correspondi
48. Calculate the projected tax expense according to the Tax Authority's accounting policies
49. If the tax expense according to the Company's policies is greater than the tax expense according to the Tax Authority, this is an increas
50. If the tax expense according to the Company's policies is less than the tax expense according to the Tax Authority, this is an increase in

x STEP 10: Adjust Income Statement, Balance Sheet and Cash Flow Statement (Part II)
51. Income statement: register the projected tax expense according to the Company's accounting policies
52. Income statement: register the projected net income

53. Cash flow statement (CFO): include the projected deferred taxes from step 9
54. Cash flow statement (CFO): using the new information from point 52 and 53, calculate the CFO using the indirect method

55. Balance sheet: Register the corresponding DTA/DTL from the deferred taxes in step 9

x STEP 11: Project Dividend Payments


56. Project a common dividend-to-net income payout ratio, based on the historical dividend payments or the Company's dividend policies
57. Using this ratio, calculate the projected dividend payments

x STEP 12: Calculate the Cash Available for Debt Payments


58. Pull in beginning cash balances from historical financial statements
59. Calculate the projected FCFF
60. Calculate the Cash Available for Debt Payments: Substract dividends and interest payments (net of tax shield) from FCFF, and then ad

x STEP 13: Debt/Financing Schedule (Part II)


61. Pull in debt balances from historical financial statements
62. Project the required debt amortization payments
63. Calculate the Cash surplus/Cash deficit after substracting the debt amortization payments from the Cash Availabe for Debt Payments. E
64. Calculate the projected debt balances after the required amortizations have been paid

x STEP 14: Adjust Income Statement, Balance Sheet and Cash Flow Statement (Part III)
65. Cash flow statement (CFF): include the dividend payments from step 11
66. Cash flow statement (CFF): include the debt amortization payments
67. Cash flow statement: calculate the change in cash (CFO + CFI + CFF)

68. Balance sheet: include the projected debt balances from step 13
69. Balance sheet: include the projected change in cash from point 67 in the cash balances
70. Balance sheet: include the projected net income minus the projected dividend payments as an increase in Retained Earnings
71. Balance sheet: If there is a remaining asset/liability, check their nature (financing or operating) and forecast its corresponding cash flow
72. Check that the balance sheet is balanced

The model is complete. You are welcome


tep Standard Modelling Guide

Payables, etc)

es, Payables, etc)


cted credit loss, etc) as balances and expenses

or if it has upcoming investment plans)


s if applicable
m beginning debt balances to avoid circularity in the formulas later on

uthority and then calculate the corresponding EBT

ding to the Tax Authority, this is an increase in DTL


g to the Tax Authority, this is an increase in DTA

FO using the indirect method

ments or the Company's dividend policies


(net of tax shield) from FCFF, and then add the beginning cash balances

m the Cash Availabe for Debt Payments. Evaluate need for new debt

n increase in Retained Earnings


) and forecast its corresponding cash flow/income statement account in order to project it or either do not project it
This guide was made by Javier Barrantes. All intelectu
made by Javier Barrantes. All intelectual work is exclusively attributed to Javier Barrantes. Sources used: Pignataro
Operating Model

Forecast horizon
x Income Statement

x Balance Sheet

x Cash Flow Statement

x Revenue, COGS and SG&A Schedule

x Operating Working Capital Schedule

x Property, Plant & Equipment Schedule

x Leased Properties

x Depreciation Allocation

x Debt/Financing Schedule

x Tax Schedule

x Dividends Schedule

x Free Cash Flows to the Firm (FCFF)

Page 13 of 14
Operating Model

This model was made by Javier Barrantes for the course Corporate Finance II. All intelectual work is attributable to Javier Barrantes. Sources that helped in the creation of this model: Pignataro, Macabacus

Page 14 of 14

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