Financial modelling is a skillset which is used in profiles like IB, PE, Equity Research and many other domains. Honing this skill has its advantages
1) You repay higher cost debt first
If cashflows are in a surplus position (typically > 5% to 10% of the annual operating expenses) after repaying the mandatory debt repayments for the year and meeting any contingencies. It is prudent to use this excess cash to repay the higher cost debt (usually unsecured loans) first compared to other low cost debt instruments to reduce interest payment burden.Â
2) You prioritize cheaper source of funds
If the cashflows are falling short for any expansion/capex plans then it makes sense to raise funds through cheaper source first like a secured loan or raising equity through a stake dilution (depending on the willingness of the management for dilution). The higher cost debt like an unsecured loan could be given the last preference
A careful eye has to be kept on the covenants set by the lenders like maintaining a specific D/E, Net Debt/EBITDA, DSCR, Interest Cover etc. for both of the above points.
3) The assumption sheet is your canvas
The assumption sheet is the playground to display your thought process. Your research skills equip you to write some really interesting assumptions and practical forecasts.
Reading the ARs, investor presentations, recent call transcripts and broker notes provide invaluable insights on the forward direction of the company. Use it to your advantage!Â
4) You create scenarios
A financial model is always under a threat of changing macro as well micro dynamics. Introducing scenarios to your model gives you a flexibility to incorporate various cases through a linked and dynamic approach. Excel macros help you do that.
Lastly avoid making any assumptions that are difficult to justify or lack a proper practical backup.
5) Your Balance Sheet tallies
Learn practical investment banking. The next cohort of my live investment banking program at Wizenius starts from October 20th.
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