BIBLIOGRAPHY AND REFERENCES
1. Decreasing sales activity which leads to fewer working capital needs, and
2. Improving working capital parameters in terms of DSO, DPO, and DIO as a reaction of SteelCo’s management to improve its liquidity.
EXHIBIT 3.20 Cash flow from operating activities
In the next chapter we will see how much of the above cash results from the first reason above and how much from the second.
As a final note to the cash flow statement, please note that, in practice, its preparation for statutory purposes is a much more complicated procedure than the plain recording of the account differences between 2 consecutive balance sheets. Let us illustrate this through an example. Imagine that SteelCo took a provision of €500k in 2013 for bad debts, that is, clients that are doubtful payers. This accounting entry would be to debit an expense account of the income statement (thus increasing it) and to credit a liability (provision) account of the bal-ance sheet (thus increasing it). By subtracting from the later balbal-ance sheet account the relevant account of last year’s balance sheet we would record a cash inflow which is false. The proper adjustment to the cash flow statement would be to add back to the operating activities the amount of bad debt provision – since it is not a cash expense – and remove it from the differ-ence of the liability accounts. Nothing is going to change in the bottom line but the presen tation of cash flows from various sources would be more realistic. Nevertheless, for the purposes
EXHIBIT 3.21 Complete proforma cash flow statement for 2014 to 2017
of this book and the modelling techniques it presents, a bare difference between 2 consecutive balance sheet accounts will denote the cash inflow or outflow.
Having finished with the modelling of the 3 basic financial statements of SteelCo, the presentation of the 3 covenants – which is the main reason the FP&A built the whole model above – is still pending. It is best practice in financial modelling to put the results or the out-come of the model onto a different page from the workings. In our case the workings are the 3 financial statements and that is why they are all included on a single sheet as you will see in the Excel file that accompanies the book.
The next chapter starts by describing how the FP&A treats the presentation of his find-ings. He will build a summary page giving an overview of the answer to the main problem the model was addressed to solve and will focus on the parameters that influence these results the most.
BIBLIOGRAPHY AND REFERENCES
1. http://www.corality.com/tutorials/circular-interest-interest-average-balances.
2. http://chandoo.org/wp/2010/09/16/excel-circular-references/.
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Forecasting Performance
C
hapter 4 deals with the mechanics of forecasting and specifically the methods behind the development of an integrated set of financial forecasts that reflect the company’s expected performance.Firstly, a dashboard-like control panel is designed with the proper financial indicators that need to be monitored according to the specific problem the model is required to solve. For example, in order to deal with liquidity issues one needs to focus on working capital param-eters. Secondly, the basic statistical methods used to forecast sales are examined. Almost all financial statement models are sales driven, in that they assume that many of the balance sheet and income statement items are directly or indirectly related to sales. So forecasting sales is one of the greatest challenges for the business modeller. Regression analysis (a statisti-cal method that enables one to fit a straight line that on average represents the best possible graphical relationship between sales and time) is used in order to extrapolate future sales based on the past sales trend. Moreover regression analysis is used to look at the relationship between any 2 measures, say, sales and CAPital EXpenditures (CAPEX), sales and costs, and so on. These relationships can be the best possible proxies for many P&L and balance sheet figures when combined with sales, especially in the absence of any analytical working about these figures.
4.1 INTRODUCTION: DESIGNING A DASHBOARD-LIKE CONTROL PANEL
In this section, we will see why a dashboard-like control panel is an exceptionally useful inter-face for measuring and visualizing key performance indicators. There is little point in building a complex model in order to communicate its output results poorly to the people to whom it really matters. With the rapid rise of information technology, there is an increased demand for high-quality visualization of information. The difficulty comes in finding a means of present-ing this information to the proposed audience in a way that is quick and easy to interpret – and here is where dashboards come in.
CHAPTER 4
Based on SteelCo’s case described in Chapter 3 we will build a control panel where the user will be able to monitor all the relevant information of interest. We will consider the con-trol panel as the user interface to our model. The concon-trol panel will be the size of an A4 report.
Since the space available is limited, the most important decision is what kind of information we will present in the control panel. This decision is ultimately dictated by the problem the model is required to solve (model output) and the key performance indicators that drive this output. Information visualization expert Stefen Few highlights some common metrics that can be found on a business dashboard, categorized by individual business areas (e.g. in the sales area, sales volume and selling prices; in the finance area, revenues and profits, etc.).1 As far as SteelCo’s case is concerned, we will try to monitor on the one hand the assumptions with the greatest impact on the evolution of the 3 covenants (which are the output of the model) and on the other hand the covenants themselves. We could argue about which are the most important Key Performance Indicators (KPIs) driving the values of covenants but for the sake of this exercise we will monitor the values of the working capital parameters, that is, the Days Sales Outstanding (DSO), the Days Inventory Outstanding (DIO), and the Days Payable Outstanding (DPO), the growth rate of the sales volume of the long and flat products, and finally the gross margin assuming constant sales prices. We will embed buttons in our control panel so that it is easy to change the values of the above parameters without having to input a hard coded number each time. Moreover, we will add graphs in order to see the relevant bal-ance sheet and income statement accounts. For example, when we change the working capital parameters, the funding needs of SteelCo change and so does the debt of the company.
Before we start to build the control panel it is essential to sit down with pencil and paper and plan the design and structure of it. A typical structure will look like the one in Exhibit 4.1. The blank area of a worksheet will be divided into 3 parts: one for the main inputs of the model, another for the main outputs, and the third part will include some of Excel’s charting facilities in order to improve the understanding of the output. Please note that in the upper left corner of the inputs we have embedded form controls by making use of Excel’s developer module.
We split the input area into 2 subparts: one that accommodates the working capital param-eters which are the most important ones and the other the operational paramparam-eters, such as the growth of sales volume and the gross margin. Then we insert 3 form controls from the devel-oper module of Excel. If you do not have the develdevel-oper module in the Excel ribbon go to Excel options and choose the Popular tab (default tab) and tick the third button as shown in Exhibit 4.2. To insert a form control, just go to the developer module, turn on the Design mode, and then insert a scroll bar (see Exhibit 4.3). Once you insert a scroll bar (form control), while staying in the design mode, place it close to the legend of the variable which the control will change. To connect the control with the variable, say the DSO, you have to link the control with a specific cell that will form the input of the variable. To do so turn on the Design mode, then select the control, right click on it, and select the Properties tab (see Exhibit 4.4). You see 3 arrows pointing:
1. at the linked cell where I have manually inputted cell D6, 2. at the maximum value where I have chosen 150 days, and