In simple terms, financial modelling means forecasting the future of the

company or an asset by way of an Excel Model that is easy to understand

and perform scenario analysis. In the context of our discussion here, we will
discuss Financial Modelling with respect to the forecasting of the future
financials of the company. This financial modelling training course will help
you forecast the financial statements of the company i.e. Income Statement,
Balance Sheet and Cash Flows. The excel model is also known as an
Integrated Financial Statements Model.

How to build a financial model?

Now that we know what Financial Modelling is, let us look at how a financial
model is build from scratch. This detailed financial modelling training
course will provide you with a step by step guide to create a financial model.

The primary approach taken here is Modular. Modular approach essentially

means that we build core statements like Income Statement, Balance Sheet
and Cash Flows using different modules/schedules. The key focus is to
prepare each statement step by step and connect all the supporting
schedules to the core statements on completion. I can understand that this
may not be clear as of now, however, you will realize that this is very easy as
we move forward.

You can see below various Financial Modelling Schedules / Modules -

Please note the following -

 The core statements are the Income Statement, Balance Sheet and
Cash Flows.
 The additional schedules are the depreciation schedule, working
capital schedule, intangibles schedule, shareholder’s equity schedule,
other long term items schedule, debt schedule etc.
 The additional schedules are linked to the core statements upon their
completion
 We will build a step by step integrated financial model of Colgate
Palmolive from scratch.
#1 – Colgate’s Financial Model – Historicals
Step 1A – Download Colgate’s 10K Reports
“Financial models are prepared in Excel and the first steps starts
with knowing how the industry has been doing in the past years.
Understanding the past can provide us valuable insights related to the
future of the company. Therefore the first step is to download all the
financials of the company and populate the same in an excel sheet. For
Colgate Palmolive, you can download the annual reports of Colgate
Palmolive from their Investor Relation Section.
Once you click on “Annual report”, you will find the window as shown below
-
Step 1B – Create the Historical Financial Statements Worksheet
 If you download 10K of 2013, you will note that only two years of
financial statements data is available. However, for the purpose of
Financial Modelling, the recommended dataset is to have last 5 years of
financial statements. Please download the last 3 years of annual report
and populate the historical.
 Many a times, this tasks seems too boring and tedious as it may take
lot of time and energy to format and put the excel in the desired format.
 However, one should not forget that this is the work that you are
required to do only once for each company and also, populating the
historicals helps an analyst understand the trends and changes that
were made in the financial statements.
 So please do not skip this, download the data and populate the data
(even if you feel that this is donkey’s work )
If you wish to skip this step, you can directly download Colgate Palmolive
Historical Model here.
Colgate Income Statement with historical populated
Colgate Balance Sheet Historical
Data

# 2 – Ratio Analysis of Colgate Palmolive

A key to learning Financial Modelling is to be able to perform fundamental
analysis. If fundamental analysis or Ratio Analysis is something new for
you, I recommend that you read a bit on the internet. I intend to take an
indepth ratio analysis in one of my upcoming posts, however, here is a quick
snapshot of the Colgate Palmolive ratios

Step 2A – Vertical Analysis of Colgate

On the income statement, vertical analysis is a universal tool for measuring
the firm’s relative performance from year to year in terms of cost and
profitability. It should always be included as part of any financial
analysis. Here, percentages are computed in relation to net sales which are
considered to be 100%. This vertical analysis effort in the income statement
is often referred to as margin analysis, since it yields the different margins
in relation to sales.

Vertical Analysis Results

 Gross Profit Margin has increased by 240 basis points from 56.2% in
2007 to 58.6% in 2013. This is primarily due to decreased Cost of Sales
 Operating Profit or EBIT has also shown improved margins thereby
increasing from 19.7% in 2007 to 22.4% in 2012 (an increase of 70
basis points). This was due to decreased Selling general and
administrative costs. However, note that the EBIT margins reduced in
2013 to 20.4% due to increase “Other expenses”
 Net Profit Margin increased from 12.6% in 2007 to 14.5% in 2012.
However, Net Profit Margin in 2013 decreased to 12.9%, primarily due
to increased “other expenses”.
 Earnings Per share has steadily increased from FY2007 until
FY2012. However, there was a slight dip in the EPS of FY2013
 Also, note that the Depreciation and Amortization is separately
provided in the Income Statement. It is included in the Cost of Sales
Step 2B – Horizontal Analysis of Colgate
Horizontal analysis is a technique used to evaluate trends over time by
computing percentage increases or decreases relative to a base year. It
provides an analytical link between accounts calculated at different dates
using currency with different purchasing powers. In effect, this analysis
indexes the accounts and compares the evolution of these over time. As with
the vertical analysis methodology, issues will surface that need to be
investigated and complemented with other financial analysis techniques.
The focus is to look for symptoms of problems that can be diagnosed using
additional techniques.

Let us look at the Horizontal analysis of Colgate

Horizontal Analysis Results

 We see that the Net Sales has increased by 2.0% in 2013.
 Also note the trend in Cost of Sales, we see that they have not grown
in the same proportion has Sales.
 These observations are extremely handy while we do financial
modelling
Step 2C – Liquidity Ratios of Colgate
 Liquidity ratios measure the relationship of the more liquid assets of
an enterprise (the ones most easily convertible to cash) to current
liabilities.
The most common liquidity ratios are:
Current ratio
Acid test (or quick asset) ratio
Cash Ratios
 Turnover Ratios like Receivables turnover, Inventory turnover and
Payables Turnover
Key Highlights of Liquidity Ratios
 Current Ratio of Colgate is greater than 1.0 for all the years. This
implies that current assets are greater than current liabilities and
maybe Colgate has sufficient liquidity
 Quick Ratio of Colgate is in the range of 0.6-0.7, this means that
Colgates Cash and Marketable securities can pay for as much as 70% of
current liabilities. This looks like a reasonable situation to be in for
Colgate.
 Cash Collection Cycle has decreased from 43 days in 2009 to 39
days in 2013. This is primarily due to the reduction in receivables
collection period.
Step 2D – Operating Profitability Ratios of Colgate
Profitability ratios measure a company’s ability to generate earnings relative
to sales, assets and equity

Key Highlights – Profitability Ratios of Colgate

  As we can see from the above table, Colgate has an ROE of closer to
100%, which implies great returns to the Equity holders.
Step 2E – Risk Analysis of Colgate
Through Risk Analysis, we try to gauge whether the company’s will be able
to pay its short and long term obligations (debt). We calculate leverage ratios
that focus on the sufficiency of assets or generation from assets. Ratios that
are looked at are

 Debt to Equity Ratio

 Debt ratio
 Interest Coverage Ratio

 Debt to Equity Ratio has steadily increased to a higher level of 2.23x.

This signifies increased Financial Leverage and risks in the market
 However, the Interest Coverage Ratio is very high signifying less risk of
Interest Payment Default.

#3 – Modelling and Projecting the Income Statement

The very first step in the Income Statement is to model the Sales or Revenue
items.

Step 3A – Revenues Projections

For most companies revenues are a fundamental driver of economic
performance. A well designed and logical revenue model reflecting accurately
the type and amounts of revenue flows is extremely important. There are as
many ways to design a revenue schedule as there are businesses. Some
common types include:

 Sales Growth: Sales growth assumption in each period defines the

change from the previous period. This is simple and commonly used
method, but offers no insights into the components or dynamics of
growth.
 Inflationary and Volume/ Mix effects: Instead of a simple growth
assumption, a price inflation factor and a volume factor are used. This
 useful approach allows modelling of fixed and variable costs in multi
product companies and takes into account price vs volume movements.
 Unit Volume, Change in Volume, Average Price and Change in
Price: This method is appropriate for businesses which have simple
product mix; it permits analysis of the impact of several key variables.
 Dollar Market Size and Growth: Market Share and Change in Share
– Useful for cases where information is available on market dynamics
and where these assumptions are likely to be fundamental to a
decision. For Example: Telecom industry
 Unit Market Size and Growth: This is more detailed than the
preceding case and is useful when pricing in the market is a key
variable. (For a company with a price-discounting strategy, for example,
or a best of breed premium priced niche player) e.g. Luxury car market
 Volume Capacity, Capacity Utilization and Average Price: These
assumptions can be important for businesses where production
capacity is important to the decision. (In the purchase of additional
capacity, for example, or to determine whether expansion would require
new investments.)
 Product Availability and Pricing
 Revenue driven by investment in capital, marketing or R&D
 Revenue based on installed base (continuing sales of parts,
disposables, service and add-ons etc). Examples include classic razor-
blade businesses and businesses like computers where sales of service,
software and upgrades are important. Modelling the installed base is
key (new additions to the base, attrition in the base, continuing
revenues per customer etc).
 Employee based: For example, revenues of professional services firms
or sales-based firms such as brokers. Modelling should focus on net
staffing, revenue per employee (often based on billable hours). More
detailed models will include seniority and other factors affecting pricing.
 Store, facility or Square footage based: Retail companies are often
modelled based on the basis of stores (old stores plus new stores in
each year) and revenue per store.
 Occupancy-factor based: This approach is applicable to airlines,
hotels, movie theatres and other businesses with low marginal costs.

Projecting Colgate Revenues

Let us now look at Colgate 10K 2013 report. We note that in the income
statement, Colgate has not provided segmental information, however, as an
additional information, Colgate has provided some details of segments
on Page 87

Source – Colgate 2013 – 10K, Page 86

Since, we do not have any further information about the segments, we will
project the future sales of Colgate on the basis of this available data. We will
use the sales growth approach across segments to derive the forecasts.

Please see the below picture. We have calculated year-over-year growth rate
for each segment.

Now we can assume a sales growth percentage based on the historical

trends and project the revenues under each segment.

Total Net sales is the sum total of Oral, Personal & Home Care and Pet
Nutrition Segment.
Step 3B – Costs Projections
 Percentage of Revenues: Simple but offers no insight into any
leverage (economy of scale or fixed cost burden
 Costs other than depreciation as a percent of revenues and
depreciation from a separate schedule: This approach is really the
minimum acceptable in most cases, and permits only partial analysis of
operating leverage.
 Variable costs based on revenue or volume, fixed costs based on
historical trends and depreciation from a separate schedule: This
approach is the minimum necessary for sensitivity analysis of
profitability based on multiple revenue scenarios

Cost Projections for Colgate

For projecting the cost, the vertical analysis done earlier will be helpful. Let
us have a relook at the vertical analysis -

 Since we have already forecasted Sales, all the other costs are some
margins of this Sales.
 The approach is to take the guidelines from the historical cost and
expense margins and then forecast the future margin.
 For example, Cost of Sales has been in the range of 41%-42% for the
past 5 years. We can look at forecasting the margins on this basis.
 Likewise, Selling, General & Administrative Expenses have been
historically in the range of 34%-36%. We can assume future SG&A
expense margin on this basis. Likewise, we can go on for other set of
expenses.

 Using the above margins, we can find the actual values by back
calculations.

 For calculating the provision for taxes, we use the Effective Tax Rate
assumption
  Also, note that we do not complete the “Interest Expense (Income)”
row as we will have a relook a the Income Statement at a later stage.
 Interest Expense and Interest Income is covered in the Debt Schedule.
 We have also not calculated Depreciation and Amortization which has
already been included in the Cost of Sales
This completes the Income Statement (atleast for the time being!)

#4- Working Capital Schedule

Now that we have completed the Income statement, the next step in this
Financial Modelling training course is to look at the Working Capital
Schedule -

Below are the steps that are to be followed for Working Capital Schedule

 Working Capital Overview

 Create the working capital line items
 Reference the historical balances
 Calculate past ratios related to working capital items
 Project future working capital by each line item
 Calculate projected cash flows generated out of working capital items
 Link with balance sheet & cash flow statement work sheets

Step 4A – Link the Net Sales and Cost of Sales

Step 4B – Reference the Balance Sheet Data related to working
capital
 Reference the past data from the balance sheet
 Calculate net working capital
 Arrive at increase/ decrease in working capital
 Note that we have not included short term debt and cash and cash
equivalents in the working capital. We will deal with debt and cash
separately.

Step 4C – Calculate the Turnover Ratios

 Calculate historical ratios and percentages
 Use the ending or average balance
 Both are acceptable as long consistency is maintained
Step 4D – Populate the assumptions for future working capital items
 Certain items without an obvious driver are usually assumed at
constant amounts
 Ensure assumptions are reasonable and in line with the business

Step 4E – Project the future working capital balances

Step 4F – Calculate the changes in Working Capital
 Arrive at Cash Flows based on individual line items
 Ensure signs are accurate!

Step 4G – Link up the forecasted Working Capital to the Balance Sheet

Step 4H – Link Working Capital to the Cash Flow
Statement

Sum-up: Integrated flow of the Working Capital Items

#5 – Depreciation Schedule
With the completion of the working capital schedule, the next step in this
Financial Modelling Training Course is the project the capital expenditure
requirements of Colgate and project the Depreciation and Assets figures.

Brief Summary of the Steps

 Create the required line items
 Reference net sales as the driver
 Enter past capital expenditures
 Project capital expenditures estimated over the forecast period
 Reference past PP & E balances
 Depreciation Expense
 Forecasted depreciation from existing PP & E
 Forecasted depreciation from new Capex
 Calculate the Total Depreciation Expense
 Complete Net PP & E table
 Calculate relevant ratios
 Consider the Capex and PP & E and make adjustments (smoothen the
curve!) as required
 Link up the following in the model:
 Depreciation Expense to Income Statement
 Depreciation and Capex to Cash Flow Statement
 Net PP & E to Balance Sheet
Colgate 2013 – 10K, Page 49

 Depreciation and Amortization is not provided as a separate line item,

however it is included in the cost of sales
 In such cases, please have a look at the Cash flow statements where
you will find the Depreciation and Amortization Expense
Also note that the below figures are 1) Depreciation 2) amortization. So
what is the depreciation number?
 Ending Balance for PPE = Beginning balance + Capex – Depreciation –
Adjustment for Asset Sales (BASE equation)
Step 5A – Link the Net Sales figures in the Depreciation
Schedule
 Set up the line items
 Reference Net Sales
 Input past capital expenditures
 Arrive at Capex as a % of Net Sales

Step 5B – Forecast the Capital Expenditure Items

 In order to forecast the Captial expenditure, there are various
approaches. One common approach is to look at the Press Releases,
Management Projections, Management Discussion and Analysis
sections to understand the company’s view on future capital
expenditure
 If the company has provided guidance on future capital expenditure,
then we can take those numbers directly.
  However, if the capex numbers are not directly available, then we can
calculate it crudely using Capex as % of Sales (as done below)
 Use your judgment based on industry knowledge and other
reasonable drivers

Step 5C- Reference Past Information

 We will use Ending Balance for PPE = Beginning balance + Capex –
Depreciation – Adjustment for Asset Sales (BASE equation)
 It is very difficult to reconcile past Property Plant and Equipment
(PPE) data due to restatements, asset sales etc
 It is therefore recommended not to reconcile the past PPE as it may
lead to some confusions.

Depreciation Policy of Colgate

 We note that Colgate has not explicitly provided detailed breakup of
the Assets. They have rather clubbed all assets into Land, Building,
Machinery and other equipments
 Also, useful lives for machinery and equipment is provided in range. In
this case, we will have to do some guesswork to come to the average
useful life left for the assets
 Also, guidance for useful life is not provided for “Other Equipments”.
We will have to estimate the useful life for other Equipments
Colgate 2013 – 10K, Page 55

Below is the breakup of 2012 and 2013 Property, Plant and Equipment
Details

Colgate 2013 – 10K, Page 91

Step 5D – Estimate the breakup of Property Plant and Equipment

(PPE)
 First find the Asset weights of the Current PPE (2013)
 We will assume that these asset weights of 2013 PPE will continue
going forward
 We use this asset weights to calculate the breakup of estimated
Capital Expenditure
Step 5E – Estimate the Depreciation of Assets
 Please note that we do not calculate depreciation of Land as land is
not a depreciable asset
 For estimating depreciation from Building improvements, we first
make use of the below structure.
 Depreciation here is divided into two parts – 1)depreciation from the
Building Improvements Asset already listed on the balance Sheet 2)
depreciation from the future Building improvements
 For calculating the depreciation from building improvements listed on
the asset, we use the simple Straight Line Method of depreciation
 For calculating future depreciation, we first transpose the Capex using
the TRANSPOSE function
 We calculate the depreciation from asset contribution from each year
 Also, the first year depreciation is divided by 2 as we assume the mid
year convention for asset deployment
Total Depreciation of Building Improvement = depreciation from the
Building Improvements Asset already listed on the balance Sheet
+ depreciation from the future Building improvements

The above process for estimating depreciation is used to calculate the

depreciation of 1) Manfacturing Equipment & Machinery and 2) other
Equipments as shown below.

Other Equipments

Total Depreciation of Colgate = Depreciation (Building Improvements)

+ Depreciation (Machinery & Equipments) + Depreciation (other
equipments)
  Once we have found out the total depreciation figures, we can put that
in the BASE equation as show below
 With this we get the Ending Net PP&E figures for each of the years

Step 5F – Link the Net PP&E to the Balance Sheet

Sum-up: Integrated flow of the Depreciation
Schedule

#6 – Amortization Schedule
The next step in this Revant Financial Modelling Training Course is to
forecast the Amortization. We have two broad categories to consider here –
1) Goodwill and 2) Other Intangibles.

Step 6A – Forecasting Goodwill

Colgate 2013 – 10K, Page 61

 Goodwill comes on the balance sheet when a company acquires another

company. It is normally very difficult to project the Goodwill for future
years.
  Goodwill is however, subject to impairment tests annually which is
performed by the company itself. Analysts are in no position to perform
such tests and prepare estimates of impairments
 Most analyst’s don’t project goodwill, they just keep this as constant
and this is what we will also do in our case.

Step 6B – Forecasting Other Intangible Assets

 As noted in Colgate’s 10K Report, majority of the finite life intangible is
related to the Sanex acquisition
 “Additions to Intangibles” are also very difficult to project
 Colgate’s 10K report provides us with the details of next 5 years of
amortization expense.
 We will use these estimates in our Financial
Model

Colgate 2013 – 10K, Page 61

Step 6C – Ending net intangibles are linked to the “Other
Intangible Assets”

Step 6D – link Depreciation and Amortization to Cash Flow Statements

Step 6E – Link Capex & Addition to Intangibles to Cash flow

statements

Sum-up: Integrated flow of the Amortization Schedule

#7 – Other Long Term Schedule
The next step in this Financial Modelling Training course is to prepare the
Other Long Term Schedule. This is the schedule that we prepare for the “left
overs” that do not have specific drivers for forecasting.

Steps to Prepare the Long Term Schedule

 Create the required line items
 Reference historical balances
 Forecast balances (keep constant if no specific drivers in order to have
neutral impact on cash flows)
 Calculate Cash Flows
 Link up with Balance Sheet and Cash Flow Statement

In case of Colgate, the other Long Term Items (left overs) were Deferred
Income Taxes (liability and assets), Other assets and other liabilities.

Step 7A – Reference the historical data from the Balance Sheet

Also calculate the changes in these items.
Step 7B – Forcast the Long Term Assets and Liabilities
 Keep the Long Term items constant for projected years in case of no
visible drivers
 Link the forecasted long term items to the Balance Sheet as shown
below

Step 7C – Reference Other Long Term Items to the Balance Sheet

Step 7D – Link the long term items to Cash Flow Statement

 Please note that if we have kept the long term assets and liabilities as
constant, then the change that flow to the cash flow statement would be
zero.
Sum-up: Integrated flow of the Other Long Term Schedule

#8 – Completing the Income Statement

 Before we move any further, we will actually go back and relook at the
Income Statement
 Populate the historical basic weighted average shares and diluted
weighted average number of shares
 These figures are available in Colgate’s 10K report
Step 8A – Reference the basic and diluted shares
At this stage, assume that the future number of basic and diluted shares
will remain the same as they were in 2013.

Step 8B – Calculate Basic and Diluted earnings per share

With this we are ready to move to our next schedule i.e. Shareholder’s
Equity Schedule.
#9 – Shareholder’s Equity Schedule
The next step in this Financial Modelling Training Course is to look at the
Shareholder’s Equity Schedule. The primary objective of this schedule is to
project equity related items like Shareholder’s Equity, Dividends, Share
Repurchase, Option Proceeds etc.

Equity Schedule Overview

 Set up the line items and input past information
 Forecast the following
 Share Repurchases
 Option proceeds & new shares issued for exercised options
 Dividends
Calculate the Ending Equity balances
Link up the Ending balances to Balance Sheet
Reference the Repurchase, options and dividends to Cash Flow
Statement
Set up the past information as shown below. The historical figures are
difficult to reconcile and hence, have been shaded in grey.

Colgate’s 10K report provides us with the details of common stock and
treasury stock activities in the past years as shown below.
Colgate 2013 – 10K, Page 68

Step 9A – Share Repurchase: Populate the historical numbers

 Historically, Colgate have bought back shares as we can see the
schedule above.
 Populate the Colgate’s shares repurchase (millions) in the excel sheet.
 Link the historical EPS (diluted) from the Income Statement
 Historical Amount Repurchased should be referenced from the cash
flow statements

Step 9B – Share Repurchase: Calculate the PE multiple (EPS multiple)

 Calculate the implied average price at which Colgate has done share
repurchase historically. This is calculated as Amount Repurchased /
Number of shares
 Calculate the PE multiple = Implied Share Price / EPS
Step 9C – Share Repurchase: Finding Colgate’s Share Repurchased
Colgate has not made any official announcement of how many shares they
intend to buyback

The only information that their 10K report shares is that they have
authorized a buy back of upto 50 million shares.

Colgate 2013 – 10K, Page 35

 In order to find the number of shares bought back, we need to assume

the Share Repurchase Amount. Based on the historical repurchase
amount, I have taken this number as $1,500 million for all the future
years.
 In order to find the number of shares repurchased, we need the
projected implied share price of the potential buy back.
 Implied share price = assumed PE multiple x EPS
 Future buy back PE multiple can be assume on the basis of historical
trends. We note that Colgate has bought back shares at an average PE
range of 17x – 25x
 Below is the snapshot from Reuters that helps us validate PE range
for Colgate
www.reuters.com

 In our case, I have assumed that all future buybacks of Colgate will be
at a PE multiple of 19x.
 Using the PE of 19x, we can find the implied price = EPS x 19
 Now that we have found the implied price, we can find the number of
shares repurchased = $ amount used for repurchase / implied price

Step 9D – Stock Options: Populate Historical Data

 From the summary of common stock and shareholder’s equity, we
know the number of options exercised each year.
  I
in addition, we also have the Option Proceeds from the cash flow
statements (approx)
 With this, we should be able to find the effective strike price

Colgate 2013 – 10K, Page 53

Also, note that the stock options have contractual terms of six years and
vest over three years.

Colgate 2013 – 10K, Page 69

With this data, we fill up the Options data as per below

We also note that the weighted average strike price of stock options for 2013
was $42 and the number of options exercisable were 24.151 million

Colgate 2013 – 10K, Page 70

Step 9E – Stock Options: Find the Option Proceeds

Putting these numbers in our options data below, we note that the option
proceeds are $1.014 billion

Step 9F – Stock Options: Forecast Restricted Stock Unit Data

In addition to the stock options, there are Restricted Stock Units given to the
employees with the weighted average period of 2.2 years
Colgate 2013 – 10K, Page 81

Populating this data in the Options dataset

For simplicity sake, we have not projected options issuance (I know this is
not the right assumption, however, due to lack of data, I am not taking any
more option issuances going forward. We have just taken these as zero as
highlighted in the grey area above.

Additionally, the restricted stock units are projected to be 2.0 million going
forward.

Step 9G- Dividends: Forecast the Dividends

 Forecast estimated dividends using
 Pay out ratio
 Fixed dividend outgo
 Per share payout
 From the 10K reports we extract all past information on dividends
 With the information of dividends paid, we can find out the Dividends
payout ratio = Total Dividends Paid / Net Income.
 I have calculated the dividends payout ratio of Colgate as seen below -
We note that the dividends payout ratio has been broadly in the range of
50%-60%. Let us take an assumption of Dividends payout ratio of 55% in
the future years.

 We can also link the projected Net Income from the Income statement
 Using both the projected Net Income and the dividends payout ratio,
we can find the Total Dividends Paid

Step 8H – Forecast equity account in its entirety

With the forecast of share repurchase, option proceeds and dividends paid,
we are ready to complete the Shareholder’s Equity Schedule.

Link all these up to find the Ending Equity Balance for each year as shown
below.
Step 9I – Link Ending Shareholder’s Equity to the Balance Sheet

Step 9J – Link Dividends, Share repurchase & Options proceeds to

CF

Sum-up: Integrated flow of Shareholder’s Equity Schedule

#10 – Shares Outstanding Schedule
The next step in this online financial modelling training is to look at the
Shares Oustanding Schedule. Summary of Shares Outstanding Schedule

 Basic Shares – actual and average

 Capture past effects of options and convertibles as appropriate
 Diluted Shares – average
 Reference Shares repurchased and new shares from exercised
options
 Calculate forecasted basic shares (actual)
 Calculate average basic and diluted shares
 Reference projected shares to Income Statement (recall Income
Statement Build up!)
 Input historical shares outstanding information
 Note: This schedule is commonly integrated with the Equity Schedule

Step 10A – Input the historical numbers from the 10K report
 Shares issued (actual realization of options) and shares repurchased
can be referenced from the Shareholder’s Equity Schedule
 Also, input weighted average number of shares and effect of stock
options for the historical years.
Step 10B – Link share issuances & repurchases from Share
Equity Schedule.
Basic Shares (Ending) = Basic Shares (Beginning) + Share Issuances –
Shares Repurchased.

Step 10C – Find the basic weighted average shares,

 we find the average of two years as shown below.
 Also, add the effect of options & restricted stock units (referenced from
the shareholder’s equity schedule) to find the Diluted Weighted Average
Shares.

Step 10D – Link Basic & diluted weighted shares to Income Statement
 Now that we have calculated the diluted weighted average shares, it is
time for us to update the same in the Income Statement.
  Link up forecasted diluted weighted average shares outstanding to
Income Statement as shown
below

With this we complete the Shares Oustanding Schedule and time to move to
our next set of statements.

#11 – Completing the Cash Flow Statements

It is important for us to fully completed the cash flow statements before we
move to our next and final schedule i.e. the Debt Schedule

Until this stage, there are only a couple of things that are incomplete

 Income Statement – interest expense/ income are incomplete at

this stage
 Balance Sheet – cash and debt items are incomplete at this stage

For completing the Debt Schedule, we need to prepare our Cash Flow
statement in a desired format.

We add the Cash Flow from Operating Activities and Cash flow from
Investing Activities to find the Revant Cash Flow available for Financing
Activities.

With the Revant Cash Flow, we have to take care of two things -
Shareholder’s Related cash flows i.e. Payments of Dividends, Stock
Repurchases, Option Proceeds and maintaining a higher cash balance.

Debt Related Cash Flows i.e. Long term debt repayments, short term debt
repayments etc
Step 11A – Calculate Cash Flow for Financing Activities

Step 11B – Find net increase (decrease) in Cash & Cash

Equivalents
Step 11C = Complete the cash flow statements
 Find the year end cash & cash equivalents at the end of the year.

Step 11D – Link the cash & cash equivalents to the Balance Sheet.
Now we are ready to take care of our last and final schedule, i.e. Debt and
Interest Schedule

#12- Debt and Interest Schedule

The next step in this Online Financial Modelling Training Course is to
complete the Debt and Interest Schedule. Summary of the Debt and
Interest – Schedule
 Calculate Cash Flow Available for Debt Repayment
 Reference in past information on Long Term Debt
 Make sure to enter the mandatory Long Term Repayments (refer to
repayment schedule provided in the Annual Report in the
discussion on Debt Section)
 Calculate forecasted Long Term Debt Repayments
 Calculate Cash Flow Available for Revolver
 Revolver = Cash Sweep
 Calculate Interest Expense/ Income
 Refer to average debt balances
 Revolver interest expenses
 Long Term interest expenses
 Cash Balance for Interest/ Income
 Link Up
 Forecasted interest expense/ income to Income Statement
 Forecasted debt repayments/ borrowings to Cash Flow Statement
 Forecast debt balances to the Balance Sheet

Step 12A – Set up a Debt Schedule

 Reference the Cash Flow Available for Financing
 Reference all equity sources and uses of cash
Step 12B – Calculate Cash Flow from Debt Repayment
 Reference the Beginning Cash Balance from the Balance Sheet
 Deduct a minimum cash balance. We have assumed that Colgate
would like to keep a minimum of $500 million each year.
 Skip Long Term Debt Issuance/ Repayments, Cash available for
Revolving Credit Facility and Revolver section for now

From Colgate’s 10K report, we note the available details on Revolved Credit
Facility
Colgate 2013 – 10K, Page 35

Also provided in additional information on Debt is the committed long term

debt repayments.

Colgate 2013 – 10K, Page 36

Step 12C – Calculate the Ending Long Term Debt

We use the Long Term Debt repayment schedule provided above and
calculate the Ending Balance of Long Term Debt Repayments
Step 12D – Link the long term debt repayments.

Step 12E -Calculate the discretionary borrowings/paydowns

Using the cash sweep formula as shown below, calculate the discretionary
borrowings /
paydowns.

Step 12F – Calculate the Interest Expense from the Long Term Debt
 Calculate the average balance for Revolving Credit Facility and Long
Term Debt
 Make a reasonable assumption for an interest rate based on the
information provided in the 10K report
  Calculate Total Interest Expense = average balance of debt x
interest rate

Find the Total Interest Expense = Interest (Revolving Credit Facility) +

Interest (Long Term Debt)

Step 12G – Link Principal debt & Revolver drawdowns to Cash Flows
Step 12H – Reference Current and Long Term to Balance Sheet
 Demarcate the Current Portion of Long Term Debt and Long Term
debt as show below

 Link the Revolving Credit Facility, Long Term Debt and Current
Portion of Long Term Debt to the Balance Sheet

Step 12I – Calculate the Interest Income using the average

cash balance
Step 12J – Link Interest Expense and Interest Income to
Income Statement

Perform the Balance Sheet check : Total Assets = Liabilities + Shareholder’s

Equity

Step 12K – Audit the Balance Sheet

If there is any discrepancy, then we need to audit the model and check for
any linkage errrors
Sum-up: Integrated flow of the Debt & Interest Schedule