LEVEL I: ADVANCED FINANCIAL MODELER (AFM)

Transcription

1 LEVEL I: ADVANCED FINANCIAL MODELER (AFM) BODY OF KNOWLEDGE 2017

2 Intrductin This Bdy f Knwledge is a reference dcument t help prspective candidates prepare fr the Advanced Financial Mdeler (AFM) exam. The AFM exam is the first f three levels f mdeling certificatins ffered by the Financial Mdeling Institute. Fr purpses f the AFM exam and this Bdy f Knwledge, a financial mdel is cnsidered t be a spreadsheet frecast mdel f a full cmpany. This dcument cntains imprtant infrmatin n mdel design, structure, technical skills and cmpnents that candidates will be tested n during the exam. 1

3 Table f Cntents I. Financial Mdeling Best Practices Mdeling as a Discipline Mdel Attributes Mdel Planning Design / Presentatin Tab Structure Mdel Cnstructin Tips... 7 II. Excel Skills Excel Tls... 8 III. Keybard Shrtcuts Shrtcuts IV. Scenari Analysis Ratinale fr Scenari Analysis Scenari Analysis Skills Saving a Mdel V. Mdel Cmpnents Financial Statements Mdel Schedules VI. Selected Readings Accunting, Micrsft Excel, and Financial Mdeling

4 I. Financial Mdeling Best Practices 1. Mdeling as a Discipline Financial Mdeling is its wn discipline A financial mdel needs t serve as a pwerful cmmunicatin tl t clearly and effectively tell the stry f a cmpany t management and stakehlders A financial mdel is a critical decisin-making tl that allws users t make accurate and infrmed financial decisins abut a cmpany A builder f financial mdels requires multiple skills in rder t effectively frecast a cmpany s financial statements int the future 2. Mdel Attributes T achieve the gals set ut abve, a mdel needs t be develped with the fllwing attributes: a. Dynamic: a changed assumptin flws thrugh the mdel b. Flexible: mdular t facilitate easy expansin and changes t the mdel c. Intuitive: layut/flw mirrrs hw peple think abut the business d. Transparent: easy t fllw with n giant frmulas r hidden sectins e. Printable: in a clear and easy-t-read frmat n paper f. Transferable: built by ne persn but usable by many When a mdel achieves the criteria abve, it creates tremendus credibility fr the builder and inspires cnfidence with the reader A well designed mdel needs t wrk in tw ways: Electrnically a mdel must be simple t review / audit / manipulate in Excel t ensure it can be used as a tl in the decisin making prcess On paper mst senir executives prefer t review financial analysis n paper (rather than reviewing an Excel wrksheet file) This Mdel Standards dcument has been develped s that mdel builders can create mdels f the highest caliber that achieve the cnditins set ut abve 3

5 3. Mdel Planning It is critical t prperly plan and design a mdel befre it can be built Whenever a mdel becmes an illegible errr-prne mess, it is almst always because the mdeler didn t prperly devise a mdel plan A mdel builder needs t first understand hw a business perates, which requires: Review f the histrical financial statements f the cmpany (including the Management Discussin & Analysis and Ntes t the Financial Statements) Learning abut the industry in which the cmpany perates (i.e. reading industry jurnals and equity research reprts) Deciding n the key drivers / critical success factrs fr the industry / cmpany Creating a list f questins t identify / gather all the assumptins that need t be made in the mdel Identify the required schedules and cmpnents t be included in the mdel Understand the purpse f the mdel (i.e. is the mdel t be used fr valuatin? Credit assessment? Prject evaluatin?) As part f the planning prcess, the mdel builder shuld als be able t answer the fllwing questins: i. Can a reader f the mdel understand the peratins f the cmpany? ii. Have the peratins been mdeled crrectly? iii. What is the right level f detail required in the mdel? iv. Have the assumptins been challenged and vetted? v. Which assumptins shuld becme scenaris? vi. Is there enugh histrical detail t validate the amunt f frecast detail that is required? vii. What is the imprtant utput that the client wants t knw? viii. What metric is used t measure results? ix. Hw many time perids shuld be included in the frecast? Why? x. What is the mst lgical rder t present the data? 4

6 4. Design / Presentatin The design f a mdel is critical t ensure that it cnveys infrmatin clearly and prfessinally The fllwing are sme design recmmendatins: a. Design Tips i. Include a cver page ii. If the mdel is large, include a Table f Cntents iii. Repeat the cmpany name (r prject name) at the tp f every page iv. Include a subtitle n every page that describes the purpse f the particular page v. Ensure that every cell is labeled clearly vi. Include a clumn that describes the units f measurement fr a particular rw b. Headers / Fters i. Include the file path n every page (typically the bttm left crner) ii. Include page numbers n every page (typically the bttm centre) iii. Include a date and time stamp n every page (typically the bttm right crner) iv. Incrprate a Scenari Tag n every page that displays the case being run 5

7 5. Tab Structure The fllwing is the recmmended tab structure fr a financial mdel: a. Cver - sets the tne fr the mdel - can include key infrmatin such as: client name, prject name, date, mdel creatr b. Summary - executive summary that summarizes the key metrics required t make a decisin - there might be mre than ne summary tab depending n the nature and cmplexity f the mdel c. Assumptins - all assumptins are presented n ne tab in the mdel (sme mdels may require a few tabs with assumptins if that s the case, the assumptins tabs shuld all be beside each ther twards the frnt f the mdel) - this makes it easy t update the mdel and t review the mdel n paper d. Scenaris - additinal assumptins that represent the key drivers f the business - key drivers are assumptins that are difficult t frecast and hard t cntrl - these assumptins shuld be created with multiple cases and a switch t change the case being run e. Mdel - typically, the lngest sheet within the mdel - includes all the financial statements and schedules - fr mdels with multiple time perids (eg. quarters and years), there may be tw mdel sheets ne fr the quarterly frecasts and ne fr the annual frecasts - fr a large cmplex cmpany, it may be advisable t create additinal tabs (eg. Operating Facility A, Operating Facility B, etc.) t prvide greater clarity f. Outputs - Shuld include all the utput calculatins in the mdel, such as ratis and valuatin calculatins It is recmmended that these tabs are rganized in the same rder within the Excel spreadsheet (i.e. Cver is the first tab, all the remaining tabs are fund t the right) 6

8 6. Mdel Cnstructin Tips The fllwing are sme tips t cnstruct a mdel effectively: a. Structural Tips i. Use a manageable number f wrksheets in the mdel (5 t 10 is recmmended) ii. Each sheet shuld be built vertically (financial statements and schedules shuld be n the same sheet) iii. Keep all assumptins up frnt iv. Only type the cmpany name nce (every ther instance f the cmpany name shuld link back t a prir instance within the mdel) v. Never enter the same variable twice within the mdel (a secnd instance shuld be linked back t the actual input cell) vi. Never hardcde values within frmulas vii. D nt insert blank clumns in between years (fr extra space, make the clumns wider / t add calculated grwth rates, these shuld g n a different rw) viii. Within each sheet, each time perid must always be in the same clumn ix. Unless abslutely necessary, avid the use f Macrs x. Never delete a rw r clumn until yu have checked t see whether it is being used in ther frmulas b. Frmatting Tips i. Fnt clurs blue inputs; black frmulas a third dark clur can be used t signify cells that are linked t the assumptins tabs (r fr anther reasn as stated by the mdeler) ii. Think abut hw the mdel will be printed and make sure the varius schedules are created in page-sized units iii. Review a mdel n paper befre delivering it t clleagues r clients iv. Frmat the mdel as yu build it dn t wait until the very end t d all the frmatting v. Use Mdel Checks and flags t indicate when there are prblems within the mdel c. Frmula Tips i. Dn t build any large frmulas directly n the financial statements the statements shuld largely cntain links t schedules (which are n the same sheet) ii. All frmulas and calculatins shuld be built n the varius schedules iii. The frmulas and calculatins n schedules shuld be as shrt and simple as pssible iv. T keep the frmulas efficient, repeat and link all data frm the assumptins nt the respective schedules v. Never build large frmulas that include multiple cell references t different wrksheets 7

9 II. Excel Skills 1. Excel Tls It is imprtant t be able t wrk quickly and efficiently with Excel in rder t build pwerful financial mdels Candidates shuld be cmfrtable with the fllwing tpics: a. Frmatting skills including custm frmatting Prper frmatting prvides several benefits t the builder and user f a financial mdel: Well-frmatted mdels are easier t read and fllw An attractive mdel will be taken mre seriusly since the reader will assume that time and care have been used in its creatin The reader will always have cntext fr the presented analysis (e.g. units being used, item descriptins, nature f the analysis) s that they remain fcused n the flw f the analysis withut interrupting with questins Frmatting shuld be dne as the mdel is being built frmat as yu g The builder will never understand the cntext f a number better than when it has been calculated r added t the mdel s frmatting at that mment saves time Frmatting can be viewed as incrprating fur distinct skills: Changing utput appearance such as blding, number frmat and fnt clur Create custm frmats that include special characters, wrds and unique number frmats CTRL + 1, then select Custm n the Number tab f the Frmat Cells menu Cpying frmatting quickly and efficiently using paste special r a shrtcut sequence such as ALT + H + V + R Building descriptive labels, titles and ftntes that use frmulas instead f static text entry that require maintenance (i.e. CONCATENATE, TEXT) b. Lkup Functins All financial mdels require the linking f data r calculatins in ne part f a mdel t subsequent frmulas in different cells There are a variety f lkup functins that facilitate these cnnectins and mdelers need t be prficient in the use f them in rder t build elegant and flexible mdels 8

10 c. Abslute References The ability t create frmulas with abslute references is extremely imprtant when manipulating data and building financial mdels By default, Excel uses relative referencing Abslute references allw yu t freeze a reference t a particular cell, rw r clumn by inserting dllar signs in frnt f the rw reference, the clumn reference r bth d. Paste Special Allws yu t paste specific elements frm ne cell t anther Can be used t paste Frmats, Values, r Mathematical Operatins Can als be used t transpse text r data e. IF Statements The IF functin is the mst used (and abused) functin in Excel due t its flexibility and mst mdeller s familiarity with IF, THEN, ELSE lgic. IF functins can als be nested (put inside anther successive IF statement) multiple times, allwing a mdeller t rganically think thrugh a data prblem rather than implement gd design f. Cnditinal Frmatting This feature applies frmatting t cells that meet pre-specified criteria Cnditinal Frmatting makes it easy t highlight interesting cells r ranges f cells and emphasize unusual values If yu have mre than ne rule, the first rule will take pririty ver the secnd rule, s it s imprtant t enter the rules in the apprpriate rder Cnditinal frmatting nly allws yu t change fnt style, underline, clr, and strike-thrugh as well as brders and shading. Yu cannt change the fnt r the fnt size. Excel prvides a number f built-in frmatting rules which allw a user t frmat based n predefined tests (such as tp r bttm ranked values, etc.) Using a frmula t apply cnditinal frmatting gives additinal flexibility 9

11 g. Frms & Drp-dwn Bxes The Chse functin is a simple and clean way f creating scenaris rather than using an IF Statement T create a mre user-friendly interface n a scenari switch, a pull dwn menu can be used t cntrl the CHOOSE functin A pull dwn menu restricts the values that can be entered int the switch cell, thereby reducing the pssibility f causing an errr It is als visible even if the cell is nt active and als shws up n printed cpies f the mdel (unlike ther techniques such as Data Validatin) h. Printing Set up the mdel in print-size pages. If the mdel is nt well designed, it wn t be easy t print - Apprximately 8 t 10 clumns f numbers with rw labels - Apprximately 35 t 50 rws with page titles File Page Setup Menu Page tab: - Set t Landscape - Scaling shuld be 85% t 95% File Page Setup Menu Margins tab: - Minimize the margins:.25 t.4 - Click the ptin t centre n page hrizntally File Page Setup Menu Header/Fter tab: - Click Custm Fter and click n the [Page] and [Pages] buttns - Can als use the date, time, and file path buttns File Page Setup Menu Sheet tab: - This is the key technique t maintain cnsistent print ranges that d nt have t cnstantly be reset. In the Sheet bx, enter each page range separately, separated by a cmma - Each page n the mdel shuld be separated by at least ne blank rw 10

12 III. Keybard Shrtcuts 1. Shrtcuts Every advanced Excel user needs t understand the imprtance f using keybard shrtcuts It is the quickest way t wrk in Excel, allwing yu t save significant amunts f time by nt reaching fr and using the muse It is the mst efficient and accurate way t wrk in Excel, allwing yu t maximize prductivity There are many keybard shrtcuts in Excel, and they vary reginally and by perating system Mdel builders shuld be cmfrtable with the fllwing categries f shrtcuts: a. Navigating shrtcuts b. Selecting Cells c. Functin Keys d. Functin Shrtcuts e. Frmatting Shrtcuts f. Editing Shrtcuts g. ALT Navigatin Key Shrtcuts 11

13 IV. Scenari Analysis 1. Ratinale fr Scenari Analysis Flexibility in mdels is critical, as stakehlders typically like t knw what the impacts f changing key drivers wuld d t the verall business Key drivers are assumptins that are difficult t frecast, hard t cntrl, and they materially affect the business. These can include: Sales Price Sale Vlume Grwth Cst Inflatin FX Rates Input Csts An effective mdel shuld be able t switch between different perating cases, r scenaris, and these assumptins shuld dynamically flw thrugh the mdel and ultimately thrugh t the financial statements An effective mdel will have at least three different scenari cases: 1 = Base Case 2 = Upside Case 3 = Dwnside Case It is imprtant t nte that having a high number f scenari variables is nt ideal Scenaris shuld be reserved nly fr key driver assumptins that materially affect the business 12

14 2. Scenari Analysis Skills When financial mdelers need t chse frm a number f items [in this case 1, 2, and 3], the IF statement is typically the g t functin t perfrm the task Hwever, there are simpler and cleaner ways t d this: CHOOSE functin INDEX functin OFFSET functin Instead f manually typing in the numbers 1, 2, r 3 fr the three different perating cases, r scenaris, a Cmb Bx can be inserted This is a mre user friendly way t tggle between scenaris and will allw the mdel user t effectively chse the case they want utilizing a drp-dwn that states the name f the case (the number assciated with the case is hidden behind the cmb bx) 3. Saving a Mdel Versin cntrl is extremely imprtant t ensure the mdeler always knws which is the latest versin f the mdel i. The nly criterin that shuld be used when saving a new versin f a mdel is time ii. A prper naming cnventin is [Cmpany Name] [Date].xls iii. Never use Save As t re-save a versin that is running a different perating case all cases shuld be captured using Scenaris in the same mdel Save using Passwrd t Mdify prvides read-nly access t avid situatins where anther user inadvertently intrduces an errr int the mdel 13

15 V. Mdel Cmpnents 1. Financial Statements It is crucial fr mdel builders t have a slid grasp f accunting fundamentals in rder understand the linkages between the varius numbers n the financial statements When mdeling a cmpany, the Mdel tab will typically cntain the fllwing financial statements a. Statement f Earnings (Incme Statement) b. Statement f Cash Flws (Cash Flw Statement) c. Statement f Financial Psitin (Balance Sheet) A financial mdel f a cmpany may als include ther statements: d. Statement f Cmprehensive Incme e. Statement f Changes in Sharehlder s Equity f. Sectr-specific statements (i.e. fr banks) It is critical t understand the framewrk f each schedule and cnnectivity t ther sheets within the wrkbk 14

16 2. Mdel Schedules Fr a financial mdel f a cmpany, the mdel shuld als include a number f schedules t calculate the values that will be required n the financial statements The mst cmmn schedules t include in a mdel are: a. Operating Schedules i. Revenue Schedule calculate based n (i) number f units sld and (ii) selling price ensure business is nt prducing at greater than perating capacity ii. Operating Cst Schedule calculate bth the (i) variable and (ii) fixed csts bth types f csts shuld be shwn n a per unit and aggregate $ basis iii. Capex / Depreciatin Schedule ensure assets are nt being ver depreciated iv. Incme Tax Schedule shw the differences between accunting and taxable incme reflect any unique industry and/r cmpany tax issues reflect any timing differences between accunting and gvernment earnings v. Wrking Capital Schedule calculate based n (i) incme statement items (i.e. revenue, COGS) and (ii) number f days (r turns) b. Capital Structure Schedules i. Debt Schedule build a separate schedule fr each piece f debt calculate interest expense fr each piece f debt ii. Equity Schedule build a separate schedule fr each f piece f equity (including retained earnings) calculate dividends (if any) fr cmmn and preferred stck 15

17 VI. Selected Readings Accunting, Micrsft Excel, and Financial Mdeling The fllwing represents a list f selected readings t be used as additinal reference material. These readings are nt mandatry, but meant as supplemental resurces t aid in exam preparatin. 1. Building Financial Mdels by Jhn Tjia a. Chapter 1: A Financial Prjectin Mdel b. Chapter 2: Best Practices c. Chapter 3: Setting the Stage d. Chapter 4: Accunting fr Mdeling e. Chapter 5: The Mdel Building Tlbx: F Keys and Ranges f. Chapter 6: The Mdel Building Tlbx: Functins g. Chapter 7: Building a Pilt Mdel h. Chapter 8: Circular References and Iterative Calculatins i. Chapter 9: Variatins n Balancing Plugs j. Chapter 10: Preparing t Build a Full Mdel k. Chapter 11: Building an Integrated Financial Mdel: Part 1 l. Chapter 12: The Cash Flw Statement m. Chapter 13: The Cash Sweep n. Chapter 15: Frecasting Guidelines. Chapter 19: Tips and Tricks 2. Crunch The Numbers - Accunting Fundamentals by AdkinsMatchett&Ty a. Chapter 1: Intrductin b. Chapter 2: Revenues and Csts c. Chapter 3: What is Wrking Capital? d. Chapter 4: What are Nn-Current Assets? e. Chapter 5: The Surces f Funding f. Chapter 6: Organizing the Cash Flws 3. Crunch The Numbers Mdeling by AdkinsMatchett&Ty a. Chapter 1: Intrductin b. Chapter 2: Mdeling Basics c. Chapter 3: Setting up the Mdel Templates d. Chapter 4: Input Histrical Numbers e. Chapter 5: Calculating Ratis and Building Assumptins f. Chapter 6: Prjecting the Incme Statement g. Chapter 7: Prjecting the Balance Sheet h. Chapter 8: Balancing the Balance Sheet i. Chapter 9: Interest Incme and Interest Expense 16

18 4. Excel 2016 Bible by Walkenbach a. Chapter 1: Intrducing Excel b. Chapter 2: Entering and Editing Wrksheet Data c. Chapter 3: Essential Wrksheet Operatins d. Chapter 4: Wrking with Cells and Ranges e. Chapter 6: Wrksheet Frmatting f. Chapter 7: Understanding Excel Files g. Chapter 8: Using and Creating Templates h. Chapter 9: Printing Yur Wrk i. Chapter 10: Intrducing Frmulas and Functins j. Chapter 11: Creating Frmulas That Manipulate Text k. Chapter 12: Wrking with Dates and Times l. Chapter 13: Creating Frmulas That Cunt and Sum m. Chapter 14: Creating Frmulas That Lk Up Values n. Chapter 15: Creating Frmulas fr Financial Applicatins. Chapter 16: Miscellaneus Calculatins p. Chapter 24: Custmizing the Excel User Interface q. Chapter 25: Using Custm Number Frmats r. Chapter 27: Creating and Using Wrksheet Outlines s. Chapter 29: Excel and the Internet t. Chapter 30: Prtecting Yur Wrk u. Chapter 31: Making Yur Wrksheets Errr Free v. Appendix A: Wrksheet Functin Reference w. Appendix B: Excel Shrtcut Keys 5. Financial Accunting: An Intrductin t Cncepts, Methds and Uses by Schipper, Francis, Weil, Stickney a. Part 1: Overview f Financial Statements b. Part 2: Accunting Cncepts and Methds c. Part 3: Measuring and Reprting Assets and Equities Using Generally Accepted Accunting Principles d. Part 4: Synthesis 17

19 6. Financial and Managerial Accunting by Warren, Reeve, Duchac a. Chapter 1: Intrductin t Accunting and Business b. Chapter 2: Analyzing Transactins c. Chapter 3: The Adjusting Prcess d. Chapter 4: Cmpleting the Accunting Cycle e. Chapter 5: Accunting fr Merchandising Businesses f. Chapter 6: Inventries g. Chapter 8: Receivables h. Chapter 9: Fixed Assets and Intangible Assets i. Chapter 10: Current Liabilities and Payrll j. Chapter 11: Crpratins: Organizatin, Stck Transactins, and Dividends k. Chapter 12: Lng-term Liabilities: Bnds and Ntes l. Chapter 14: Statement f Cash Flws m. Chapter 19: Cst Behaviur and Cst-Vlume-Prfit Analysis 7. Financial Mdeling and Valuatin: A Practical Guide t Investment Banking and Private Equity by Paul Pignatar a. Part One: Financial Statements and Prjectins 8. Financial Mdeling in Excel Fr Dummies by Danielle Stein Fairhurst a. Chapter 1: Intrducing Financial Mdeling b. Chapter 2: Getting Acquainted with Excel c. Chapter 3: Planning and Design Yur Financial Mdel d. Chapter 4: Building a Financial Mdel by the Rulebk e. Chapter 5: Using Smene Else s Financial Mdel f. Chapter 6: Excel Tls and Techniques fr Financial Mdeling g. Chapter 7: Using Functins in Excel h. Chapter 8: Applying Scenaris t Yur Financial Mdel i. Chapter 9: Charting and Presenting Mdel Output j. Chapter 10: Building an Integrated Financial Statements Mdel k. Chapter 12: Budgeting fr Capital Expenditure and Depreciatin l. Chapter 13: Ten Strategies fr Reducing Errr m. Chapter 14: Ten Cmmn Pitfalls t Avid 9. Financial Statements: A Step-by-Step Guide t Understanding and Creating Financial Reprts by Ittelsn a. Sectin A: Financial Statements: Structure & Vcabulary 18

20 10. Using Excel fr Business Analysis: A Guide t Financial Mdelling Fundamentals by Danielle Stein Fairhurst a. Chapter 1: What is Financial Mdeling b. Chapter 2: Building a Mdel c. Chapter 3: Best Practice Principles f Mdeling d. Chapter 4: Financial Mdeling Techniques e. Chapter 5: Using Excel in Financial Mdeling f. Chapter 6: Functins fr Financial Mdeling g. Chapter 7: Tls fr Mdel Display h. Chapter 8: Tls fr Financial Mdeling i. Chapter 9: Cmmn Uses f Tls in Financial Mdeling j. Chapter 10: Mdel Review k. Chapter 11: Stress-Testing, Scenaris and Sensitivity Analysis in Financial Mdeling l. Chapter 12: Presenting Mdel Output 19

21 Abut the FMI We are dedicated t glbal excellence in Financial Mdeling and glbally recgnized certificatins.