Day 1: Financial Statement Analysis
Overview: Day 1 is designed to provide exposure to the accounting conventions necessary to interpret financial information. Participants will become familiar with accounting terms and foundational calculations used in financial statement analysis. The course covers the three core financial statements (balance sheet, income statement, and cash flow statement) and the links between them. A high-level analysis of the income statement is undertaken along with key measures of economic performance: revenue; EBITDA; EBIT and net income. Participants are also introduced to the key asset categories on the balance sheet that enable a company’s economic performance: working capital and PP&E. Discussion includes how a business is financed with debt and equity, and an introduction to financial ratios designed to analyze financial performance and position.
Key Learning Outcomes:
- Delegates will learn how to interpret the income statement, balance sheet and cash flow, and understand how the three statements integrate with each other
- They will become familiar with key measures of profitability: EBITDA, EBIT and Net Income
- They will learn key financial ratios which analysts use to evaluate growth, profitability, asset efficiency, leverage, coverage, liquidity, returns and cash flow generation
Pre-requisite Knowledge: No prior knowledge of financial statements is assumed.
Our Approach: On Day 1 we facilitate the learning process through a combination of:
- Presentation of core knowledge and concepts using power point slides
- Review of examples financial statements
- Short excel exercises to enable delegates to calculate financial ratios and analyze financial performance and position
- Regular summaries, to remind delegates of the key points of each session
- End of Day quizzes, to confirm the achievement of the learning outcomes
- One page course summary, as a take away and reminder of the key learning points
Session 1 - Financial Statement Overview
- Income Statement Presentation
- Balance Sheet Presentation and the accounting equation
- Recording simple transactions within financial statements
- Cash Flow Presentation
- The intrinsic links between the statements
Session 2 - Income Statement Analysis
- Revenue recognition
- COGS and SG&A
- Operating Profit: EBIT vs. EBITDA
- Interest and Tax
- Dividends and Retained Earnings
- Profitability ratios: Gross margin, EBITDA margin, EBIT margin, Net Income margin
Session 3 - Balance Sheet Analysis: Operating Assets
- Working Capital and Operating Working Capital
- Inventory, Trade Receivables and Trade Payables
- Prepayments vs. Accruals
- The Cash Conversion cycle
- Movement in Property Plant & Equipment
- Capex vs. Depreciation and Useful Economic Life
- Asset Efficiency ratios: Operating Working Capital/ Revenue, PP&E/ Revenue
- Liquidity ratios: Current ratio, Quick ratio, Cash ratio
Session 4 - Balance Sheet Analysis: Funding
- Types of Debt: Total Debt vs. Net Debt
- Components of Equity
- Movement in Retained Earnings: Net Income vs. Dividends Paid
- The concept of Invested Capital funding Net Operating Assets
- Leverage Ratios: Net Debt/ Equity, Net Debt/ Capital, Net Debt/ EBITDA
- Return on Invested Capital vs. Return on Equity
Session 5 - Cash Flow Analysis
- Cash Flow from Operating vs. Investing vs. Financing Activities
- Reconciling Cash and Cash Equivalents
- Building a simple cash flow from income statement and balance sheet data
- Cash Flow metrics: CFO/ Net Income, CFO/ Revenue
Days 2 & 3: Financial Modeling
Overview: Days 2 & 3 are targeted at delegates who are new to financial modeling and forecasting. They will learn to build a fully integrated three statement forecast model for a corporate, learning best practice in formula construction and how to use keyboard shortcuts to increase their efficiency and minimize use of the mouse. Throughout the training they will learn the best practice techniques to minimize errors, and make models easy to interpret, adapt and audit. Day 2 builds on the basic techniques introduced in Day 1, and covers error checking techniques, more complex income statement and balance sheet assumptions and cashflow based modeling for PE-backed businesses.
Key Learning Outcomes
- Forecast an Income Statement, Balance Sheet and Cash Flow Statement, given a set of forecast assumptions
- Build all formulae clearly and correctly
- Balance the balance sheet from a Cash Flow Statement
- Compute interest income and expense based on opening and average balances, and carefully control the resulting intentional circularity when using the average balance method
- Checking the complete model for errors and save it in a professional manner, ready to be shared with colleagues or clients
- Forecast cash flow available for debt service and build simple cash sweeps for leveraged businesses
Our Approach: We facilitate the learning process through a combination of:
- Presentation of core knowledge and concepts using power point slides
- Excel model templates, containing input assumptions which will be completed by delegates during the course to illustrate the principles and techniques of financial modeling
- Regular summaries, to remind delegates of the key points of each session
- End of Day quizzes, to confirm the achievement of the learning outcomes
- Course summaries, as a take away and reminder of the key learning points
DAY 2
Session 1 - Excel Skills for Financial Modelling
- Navigation, selecting cells, formula construction, copying formulas and productivity enhancing keyboard shortcuts
- Formatting cells using number formats: positive, negative, zero, percentage, multiple styles
- Laying out the template and assumptions: inputs vs. calculations, positive or negative convention, growth vs. relative assumptions, column consistency across worksheets
Session 2 - Forecasting the Income Statement
- Laying out the income statement line items and subtotals
- Growth and relative assumptions
- Revenue, COGS, SG&A, Tax, Dividends
- EBITDA and EBIT
- Movement in PP&E to forecast depreciation
Session 3 - Forecasting the Balance Sheet (ex. Cash)
- Operating Working Capital: Inventory, receivables, payables and other current assets/ (liabilities)
- PP&E
- Movement in Long term debt: Issuance vs Repayments
- Movement in Retained earnings: Net Income vs. dividends
Session 4 - Forecasting the Cash Flow and Ending Net Cash and Completing the Balance Sheet
- Indirect Method Used
- Operating, Investing & Financing Cash Flows
- Reconciling opening to closing net cash/ (overdraft)
- Completing the balance sheet using IF or Max/ Min functions to link ending cash/(overdraft) back into the balance sheet
Session 5 - Forecasting Interest: Opening vs. Average Balance Methods
- Calculating interest income & expensing using opening balance vs. average balance
- Using a Toggle Switch to choose between methods
- Introducing and managing the intentional circularity creating using the average interest method
Session 6 - Ratio Analysis
- Review of Ratios: Growth, profitability, asset efficiency, leverage & returns
- Building the ratios sheet and sense checking the results
Session 7 - Scenarios, Data Validation Sensitivity Analysis using Data Tables
- Choose, Index, Match and XLookup functions
- Data Validation
- One-sided and Two-sided data tables
DAY 3
Session 1 - Error Checking Techniques
- The importance of column consistency
- Building Copyable formulas
- Sense checking
- Stress testing
- Using F5 Special to fund unidentified hard numbers quickly and easily
- Using F5 Special to find inconsistencies in the model
- Using excel to show the formulas underlying the output
- Using the auditing tool to trace formulas
- Finding and resolving unintentional circularities
Session 2 - Core Financial Modeling
- Build a financial forecast incorporating more complex assumptions, including
- Forecasting Revenue with price and volume assumptions
- Forecast operating expenses: Wages & Salaries, R&D, Selling & distribution etc.
- Movement in PP&E, RoU Assets and Intangibles
- Reconciling growth in EBIT to changes in price, volume, mix and fixed costs
- Tax expense: Marginal vs. Effective Tax Rate
- Dividends: payout ratio vs. growth rate
- Share repurchases
- Operating Working Capital based on days rather than percentages
- Modelling leases under IFRS 16
- Minimum cash requirement and use of revolving credit facility as a source of financing
- Complete three statement forecast by balancing the balance sheet through the cash flow statement
Session 3 - Cash Flow based Modeling
- Definitions of Cash Flow and when is each relevant:
- Operating Cash Flow, Investing Cash Flow and Cash Flow available before Financing
- Cash Flow available for Debt Service and Cash Flow available for debt repayments
- Unlevered Free Cash Flow
- Building a cash sweep/ debt waterfall, incorporating:
- Mandatory principal repayments
- Revolving credit facility
- Discretionary principal repayments
- Computing the credit ratios
- Debt/ EBITDA
- Debt Service Coverage Ratio
- EBITDA / Interest
- Incorporating the cash sweep in the context of a simple LBO model to analyse returns to PE investor
- Sensitivity analysis using one-sided and two-sided data tables
An additional optional 4th day - Fundamentals of Corporate Valuation - is available. The optional 4th day provides a practical overview of corporate valuation fundamentals, explaining enterprise and equity value and introducing the most common methodologies - including multiples and discounted cash flow - through simple, rigorous exercises focused on fundamental value and acquisition pricing.
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