Advanced financial

modelling

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Course aims

This course follows on from Tykoh Training’s
two day Financial Modelling workshop

The course content aims to be
– Advanced
– Relevant / applicable to a range of areas
– Compact (i.e. single worksheet examples)
– In a form that can be covered quickly

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Course benefits / “take-aways”

i) Specific problems / models we cover

Resource Growth
Utilisation

Capacity
planning
Slice &
Dice
Due vs
received

Course benefits / “take-aways”

ii) Re-use modules in new contexts
Resource Utilisation Slice & Dice

... ...

New model

2
Course benefits / “take-aways”

iii) Applying design skills to develop new
types of models
Description of task /
problem to solve

New model

Course content

Overview
– Brief description of the modelling problem being
solved

Assumptions
– Key inputs / assumptions in the model

Outputs
– Main outputs / charts / tables

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Course content

Challenges
– “Tricky” or difficult parts of the problem

Framework
– Guidelines for solving the problem

Applications
– List of the techniques use in the model and other
examples of where the techniques can be applied

Growth analysis - overview

Forecast these
– Business volume
– Staff numbers
– Staff costs

Given growth and other assumptions

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Growth analysis - assumptions

A table defines yearly business growth

Growth analysis - assumptions

A table defines the number of staff needed to
support a given volume of business.

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Growth analysis - assumptions

The cost per staff grows at a defined rate

Periodicity in the model can be chosen

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Growth analysis - assumptions

Staff salaries escalate in the first period in
each new calendar year

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Growth analysis - outputs

Chart showing volume growth assumption

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Growth analysis - outputs

Chart showing staff required as function of
business volume

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Growth analysis - outputs

Forecast business volume, staff numbers
and costs

– End-of-calendar-year totals should be shown.

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Growth analysis - outputs

Chart showing normalised (relative to base
date) volumes and costs.

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Growth analysis - challenges

Avoid “hard-coding” particular columns for
special purposes (e.g. end-of-year, first-
period of year)

Ensure that annual staff costs are
independent of the reporting period (e.g.
annual staff costs should be the same
whether periods are quarterly, monthly or
annually).

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Growth analysis - framework

Use HLOOKUP of the reporting period in the
table of frequencies and months to find the
months per period

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Growth analysis - framework

Use EOMONTH to generate period end
dates

– To test if a period is the last in the calendar year

check if the MONTH of the date equals 12.

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Growth analysis - framework

A period begins a new year if the preceding
period was the last in the year.

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Growth analysis - framework

If business volume grows at 10% per year
then what is semi-annual growth?

– Call the semi-annual growth Gs

– Then (1+Gs)2 = 1+10% = 1.1
– So 1+Gs = 1.11/2, and Gs = 1.11/2 – 1 = 4.88%

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Growth analysis - framework

To calculate the total staff cost for the year
use the SUM and OFFSET function.
OFFSET is needed because, for example,
four columns need to be added on a
quarterly basis ..

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Growth analysis - framework

.. and only two on a semi-annual basis

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Growth analysis – applications

Periodic totaling / consolidating (e.g. yearly)

Periodic growth (i.e. at some times and not others)

Periodic transitions / summarising

Events “triggered” at certain times in a calendar year

Normalising several factors to fit them on one chart
to easily visualise their relative growth rates

Compounding periodic growth to achieve a given
annualised figure

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Due vs received - overview

Debts (due to us) become periodically
payable

Debts are of three classes (A, B, C)

The classes differ in terms of how quickly
they are paid

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Due vs received - overview

The payment profile of A, B & C debt is given

– 10% of “A” debt is received in the first period after

the debt falls due, 40% of “B” and 20% of “C”

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Due vs received - overview

20% of “A” debt, 20% of “B” and 25% of “C”
is received in the second period ...

– .. and so on

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Due vs received - overview

Given a schedule of debt falling due -
forecast the cash flows and timings of the
resulting payments.

Given a KPI which measures the percentage
of debt received within “n” periods - forecast
the rolling KPI for n = 1, 2 and 3.

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Due vs received - assumptions

Debt payment profile

– (e.g. 10% of class “A” debt is paid in first period,

40% of class “B” and 20% of class “C”)

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Due vs received - assumptions

Schedule of debt due

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Due vs received - outputs

Chart of debt falling due

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Due vs received - outputs

Chart of forecast receipts

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Due vs received - outputs

Chart of total due and forecast receipts

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Due vs received - outputs

Chart of KPI (% debt received)

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Due vs received - challenges

Need to be clear and simple about KPI
definition and how to calculate it – otherwise
end up with very complicated logic.

Need to be efficient in calculating KPIs over
1, 2 and 3 periods and avoid duplicating
calculations.

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Due vs received - framework

Forecasting receipts Period Due Receipts
1 100

Suppose 10% of a debt
2 10
of 100 due this period is
3 20
received in the next
period, 20% is received 4 30
in the following period, 5 40
30% in the following
period and 40% in the
next period.

The schedule of
receipts is as shown to
the right
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Due vs received - framework

Forecasting receipts Period Due Receipts
– Suppose in period 2 an 1 100
additional debt of 300 2 300 10
becomes due.
3 20 + 30
– The schedule of receipts
is as shown to the right. 4 30 + 60
– The figures in italics 5 40 + 90
result from the second, 6 120
300, debt and the
unitalicised figures result
from the first, 100, debt.
- In general, receipts in period n will equal 10% of debt that
falls due in period n-1 plus 20% of debt that falls due in
period n-2 plus 30% of debt that falls due in period n-3 and
40% of debt that falls due in period n-4.
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Due vs received - framework

Forecasting KPI
– Let the 1-period KPI be the percentage of debt
falling due in this period that is received in the
following period.
– Let the 2-period KPI be the percentage of debt
falling due in this period that is received within the
following two periods.
– Let the 3-period KPI be the percentage of debt
falling due in this period that is received within the
following three periods.

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Due vs received - framework

Forecasting KPI (cont)
– Suppose the debt payment profile of debt classes
A, B and C is as shown in the following table.

– Suppose that debt falling due in the current period

comprises 100 of “A” class debt, 200 of “B” and
400 of “C”. What is the forecast two-period KPI?
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Due vs received - framework

Forecasting KPI (cont)
– 10% + 20% (i.e. 30%) of the 100 “A” debt will be
received within two periods. That will be 30.

– 40% + 20% (i.e. 60%) of the 200 “B” debt will be

received within two periods. That will be 120.
– Similarly, 45% of the “C” debt will be received.
That will be 45% * 400 = 180.
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Due vs received - framework

Projected receipts within two periods are 30
+ 120 + 180 = 330.

Debt falling due in this period is 100 + 200 +
400 = 700.

So the two-period KPI is 330÷700 = 47%

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Due vs received - applications

Modelling processes / systems that
incorporate delays / lags.
– Consider the “input” and “output” below

Input
Process

Output

– The output lags the input and it is distributed in

time.

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Due vs received - applications

By using a technique called “convolution”
(implemented in the model) we can predict
the output for a complex input (e.g. one of
this form):

Convolution is basically taking two “windows”

and sliding one relative to the other and
adding up the individual products.
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Capacity analysis - overview

Costs are incurred in carrying, acquiring and
reducing capacity.

Capacity needs to track (& ideally anticipate)
demand.

We are required to forcast demand and to
analyse various capacity management
strategies.

In our analysis the strategies are
“parameterised”.
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Capacity analysis - assumptions

Demand has a certain seasonality and
superimposed on that is a longer-term growth
factor.

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Capacity analysis - assumptions

Capacity will “track” demand.
Capacity
Demand
Capacity increment
Threshold

If spare capacity falls below a certain

threshold then the capacity is increased to
the current demand plus a capacity
increment. That incurs a fixed per-increase
cost.
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Capacity analysis - assumptions

Spare capacity incurs a per-period cost
proportional to the amount of spare capacity.

The vertical bars in the diagram above

indicate the carrying cost of the spare
capacity.

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Capacity analysis - assumptions

If demand falls then capacity can be reduced.
That incurs a fixed per-decrease cost.

Increment

Capacity is reduced to the then-prevailing

demand plus the capacity increment.

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Capacity analysis - assumptions

Before capacity is reduced a “minimum
holding period” must elapse since the last
increase or decrease.
Minimum
holding period

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Capacity analysis - outputs

Chart showing demand, capacity and cost

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Capacity analysis - challenges

Avoid introducing circular logic
– Decisions about increasing or decreasing
capacity depend on demand and capacity. But, in
turn, capacity depends on the decisions made
about increasing or decreasing it.

Implementing the “holding period”

– The holding period can’t be hard-coded since the
user can change this. This is another example of
where the OFFSET function can be useful.

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Capacity analysis - framework

Logic to test if capacity must be increased
– If the demand this period is greater than the
capacity last period less the capacity threshold
then capacity must be increased

Logic to test if capacity must be decreased

– If there has been no increase or decrease in
capacity in the last “holding period” periods and if
the capacity less the demand is more than the
capacity threshold then capacity needs to be
decreased

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Capacity analysis - framework

New capacity
– If capacity is to be increased or decreased then it
should be set to the current demand plus the
capacity threshold

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Capacity analysis - applications

Modelling business processes that are
“sticky” e.g. involving minimum holding
periods and/or break costs.

Optimising overall costs taking into account
setup, carrying and unwinding costs.

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Slice and dice - overview

Data (population in this case) evolves over
time.
– The forecast data is to be segmented and
projected in various ways

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Slice and dice - assumptions

A population has a current, known, age
distribution

...

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Slice and dice - assumptions

Mortality rates have a given age distribution

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Slice and dice - assumptions

Net immigration has a given age distribution

There are a certain number of births per

1000 population

There is a certain level of net immigration
each year

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Slice and dice - outputs

Population distribution in 2010, 2020 & 2030

– Total population and mean ages in 2010, 20 & 30

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Slice and dice - outputs

Percentage population less than “n” years

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Slice and dice - outputs

Percentage population older than “n” years

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Slice and dice - outputs

Forecast population over the period 2010 –
2030 above or below a specified age

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Slice and dice - outputs

Age distribution over the period 2010 - 2030

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Slice and dice - challenges

The most difficult part of the model is “aging”
the population.

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Slice and dice - framework

Calculating next year’s population distribution
– The number of, say, 32 year olds at the end of
this year will be the number of 31 year olds at the
end of last year plus net immigration of 32 year
olds this year less the number of 32 year olds that
die during this year.
– The number of 0-1 year olds at the end of this
year will be the total population last year times the
birth rate per population plus net immigration of 0-
1 year olds less the number of 0-1 year olds that
die during this year.

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Slice and dice - framework

Converting between five-yearly and one-
yearly intervals.
– Age distribution, mortality and net immigration
figures are all given in five-yearly intervals.
– However, we must “age” the population in one-
yearly intervals or otherwise errors will build up.
– We’ll give an example of how errors can
accumulate.

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 Slice and dice - framework

Converting between five-yearly and one-
yearly intervals (cont).
– Suppose we work with 5 yr intervals.
– Suppose there are no births or immigration for 5
years.
– Each year we remove one fifth of the preceding
year’s population of 0-4 year olds.
– In five years we’ll have 4/5* 4/5 * 4/5 * 4/5 * 4/5 = 33%
of the original population remaining.
– But the correct answer is 0%.

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Slice and dice - framework

So the correct technique is to split the 5 year
intervals into yearly ones, do the calculations,
and then recombine the results into 5 year
intervals.
0-4
2010 : 10

0 1 2 3 4
2010 : 2 2 2 2 2
0-4
2011 :

2012 :

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Slice and dice - applications

Modelling activities that have demographic
sensitivities

Generating 3-D charts showing the evolution
of a distribution over time

Determining the mean and cumulative values
of a distribution

Regrouping ordered data into larger or
smaller intervals

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Resource utilisation - overview

Resources available are finite and capped at
“n” resources.

Demands are made on those resources and
demands vary.

In periods of high demand there may be
insufficient resources to service those
demands immediately and a backlog will
arise.

In periods of low demand backlogs can be
reduced.
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Resource utilisation - overview

Given a schedule of resource demands and
a resource capacity forecast how those
resources will be applied, backlogs, service
times etc.

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Resource utilisation - assumptions

Resources available are limited (e.g. “3”)

There is a schedule of resource demands

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Resource utilisation - outputs

Chart of resources required, resources
provided and backlog

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Resource utilisation - outputs

Chart of average service time as a function of
resources available

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Resource utilisation - outputs

Chart of peak backlog as a function of
resources available

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Resource utilisation - outputs

Chart of resource utilisation as a function of
resources available

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Resource utilisation - outputs

Chart of service time as a function of
resource utilisation

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Resource utilisation - outputs

Chart of peak backlog as a function of
resource utilisation

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Resource utilisation - challenges
– The trickiest part of the exercise is to calculate
service times. This is best done by calculating the
times at which cumulative resources provided
match or exceed cumulative resources requested.

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Resource utilisation - framework

Calculating backlogs
– Consider the example following in which
resources available are capped at 3 per period.
– 5 resources are required in period 1 but only 3 are
available so 3 resources are provided and a
backlog of 2 accumulates.

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Resource utilisation - framework

Calculating backlogs
– The backlog of 2 carries over into period 2. An
additional 3 resources are required. So those 3
resources are applied first to the backlog of 2 and
then service the first of the three units or work
requested in period 2. The last two unit carry over
as a backlog into period 3.

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Resource utilisation - framework

Calculating resource provided
– The general formula for calculating the resource
provided in period j is this
– Pj = MIN(Bj-1 + Rj, N)
– where Pj = resource provided in period j
– Bj -1 is the backlog carried over from period j-1
– Rj is the resource requested in period j
– and N is the number of resources available

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Resource utilisation - framework

Calculating backlogs
– The general formula for calculating the backlog in
period j is this
– Bj = Bj-1 + Rj - Pj
– where Bj = backlog in period j
– Bj -1 is the backlog carried over from period j-1
– Rj is the resource requested in period j
– and Pj is the resource provided in period j

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Resource utilisation - framework

Calculating service times

Service times can be determined by
calculating when cumulative resources
provided equal or exceed cumulative
resources requested.

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Resource utilisation - framework

Calculating service times - Example
– 5 resources are required at period 1. Cumulative
resources required then are also 5. At period 2
cumulative resources provided are 6. That
number exceeds 5 so that is the time when the
service requested at period 1 is complete.

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Resource utilisation - framework

Calculating service times (cont)
– 11 resources are required at period 9.
Cumulative resources required become 29. It is
at period 13 when cumulative resources provided
first exceed (or equal) 29. So the service time of
the period 9 request is 13 – 9 + 1 = 5

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Resource utilisation - applications

Analysing “FIFO” (first-in / first-out)

processes

Queing analysis

Modelling the relationship between resources
applied and speed of service

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