Use and Users of Financial Models

Use and Users of Financial Models

(A) Top Management & Directors
(i) Future Business plan
(ii) Business Analysis
(iii) Sensitivity on critical variables (Value drivers)
(iv) Analyzing the impact of changes in industry local &international economy
(v) Analyzing Cash flow position
(a) If cash surplus scenario
• Short term Investments
• Repayment of existing debts
• Long term investments
• Expansion project
• New project
• Acquisition & Mergers
(b) If cash deficit scenario
• Short term loans
• Long term financing
• Restructuring of existing loans
• Right issue
• IPO
• Equity Injection/investment
• Discontinue/dispose non-profitable business segments
(B) Banks / Lenders
(i) Analyzing Business
(ii) Analyzing business ability to service debt
(iii) If business is not able to service debt then restructure debt or issue new loan
(iv) Why to finance company for projects and acquisitions
(C) Investment Managers, Fund Managers
(i) Identifying potential investment opportunities
(ii) Identify investments, which needs to be disposed off
(iii) Research department issuing research reports on various sector
(iv) Risk management department managing risk and return of the portfolio
(D) Equity Investors
(i) Analyzing Business
(ii) Determining the entry price on the basis of future and historical performance
(iii) Estimating IRR on the investment by changing exit value and timings
(E) Listing, IPO, Offer for Sale, Right issues
(i) Purpose of the activity and its impact
(ii) Determination of offer price and its justification for:
• Underwriters
• Pre-IPO investors
• Private Placements
• IPO/right issue investors
• SECP
• KSE
(F) Rating Agency
(i) Analyzing company’s creditworthiness
(i) Analyzing company’s ability to pay its debt
(iii) Issuing instrument ratings
(iv) Issuing entity’s ratings
(G) Accounting
(i) Fair valuation of investments
(ii) Impairment testing of investments
Financial Modeling Process
Generally following process is used for preparing Financial Model:
(a) Gather historic financial statements and analyze it.
(b) Compute Ratios from Historic Financial Statements to develop some of the mechanical
assumptions about revenue, fixed & variable cost, working capital.
(c) Need detailed discussions with all the departments of the organization. i.e. Productions, Sales,
Commercial & Logistics, Finance.
(d) Develop Revenue, Expense, working capital and capital expenditures by working through value
drivers.
(e) Work through the Income Statement, then the Balance Sheet, then the Cash Flow Statement
and finalize Balance sheet to check, for forecast years.
(f) Valuation, sensitivity analysis and presentation.