Revenue Introduction

Quick reference

• 00:04 Great, we've now done both links and checks.
• 00:08 We put our charter counts in, we've actually put subtitles in,
• 00:11 we're on a roll.
• 00:13 Let's try for the baguette.
• 00:15 What's first?
• 00:19 Probably the title of this slide deck actually, it's giving the game away, but
• 00:23 let me explain.
• 00:25 We've already surmised that a model is best thought of broken down into its
• 00:28 constituent parts.
• 00:30 Namely, we're trying to get from A to B.
• 00:33 So building our checks, first of all.
• 00:34 And then building our particular module areas.
• 00:37 We need to consider the operational section.
• 00:40 Make sure we've made the adjustments to working capital.
• 00:43 Put through the asset calculations.
• 00:45 Realize we've got sufficient financing.
• 00:48 Tax it all.
• 00:50 Show it all in the financial statements.
• 00:52 And then produce other key outputs as necessary.
• 00:57 And we came up with this, didn't we?
• 00:58 We said do the income statement first and then work you're way down.
• 01:01 And what's the first line item?
• 01:03 First cab off the rank is revenue.
• 01:05 So here we are, let's go and do revenue.
• 01:08 This is in the operational section of the actual model.
• 01:13 It's a key area, all these operation considerations,
• 01:16 we need to make sure how do we know is going to be derived in the right way.
• 01:19 Now in a really model, this could be quite complicated.
• 01:22 This model is where you most of your time modeling a lot of the other
• 01:25 pre-straightforward.
• 01:26 But you need to understand your business or
• 01:29 work with people who understand the business.
• 01:32 We do consulting work.
• 01:33 One of the things we do is, we describe ourselves as process matter experts,
• 01:38 not subject matter experts.
• 01:40 We know how to build models.
• 01:42 We know that our clients know how to actually explain their models to us and
• 01:47 between us.
• 01:47 We can work out the best way to build it.
• 01:50 We've got to make sure it's sufficiently clear and
• 01:52 are we going to consider inflation.
• 01:54 Are we going to nominal or real?
• 01:56 Because it will have an impact as this chart shows.
• 01:59 The nominal basis is actually looking at the amounts to receive and paid.
• 02:03 It's cash is cash is cash.
• 02:05 It's the dollar amount paid.
• 02:06 It includes inflation.
• 02:08 What's real, it's basically set it for a particular year and
• 02:11 then assume there's no inflation anymore.
• 02:13 So it's a case of what is our sales going to be for
• 02:17 this year, based in 2012 dollars?
• 02:20 Or something like that, that's the whole idea.
• 02:22 And we have to do these calculations.
• 02:25 We have to account the inflation factor.
• 02:27 We have to multiply to each period.
• 02:29 So this example here.
• 02:31 I've actually got my nominal cash flows, my revenue and my labor,
• 02:34 to give me owns before interest tax depreciation amortization,
• 02:38 cuz I have absolutely no other costs, realistic model base.
• 02:42 And then in year one I'm going to assume that nominal equals real.
• 02:46 IE this is my base year.
• 02:48 Then what I'm going to do is assume that inflation grows at two and
• 02:51 a half percent parana.
• 02:52 In first year then you'll place your factor from 1 to 1.025
• 02:57 which is the inflation factor in the previous period being 1,
• 03:02 multiplied by 1 plus the inflation factor in period two which is 1 plus 2.5%.
• 03:07 That gives me 1.025.
• 03:09 In the next period, I'm taking that 1.025 and
• 03:12 multiplying it by 1 plus the inflation factor again.
• 03:15 Which gives me 1.0506.
• 03:18 And then in the next period, I take that inflation factor, 1.0506.
• 03:22 And multiply it by 1 plus the inflation factor for the next period.
• 03:25 Which will give me 1.0769 and so on.
• 03:29 Therefore to get my real cash flows all based on year one dollars.
• 03:32 I'm simply going to take the nominal numbers, and
• 03:35 divide them by the inflation factor.
• 03:37 So if i want to scale up, I'll go for real to nominal.
• 03:41 Now if you are modelling, it is safer to build in
• 03:46 nominal terms rather than real because everyone get's nominal.
• 03:50 Especially if you're looking at depreciation
• 03:53 Where you actually say I want to allocate the same amount to cost each year.
• 03:57 What we call straight line depreciation.
• 04:00 That doesn't work in real terms, because the fact is if you think about it.
• 04:04 If you allocate the same amount each year,
• 04:05 there's an element of inflation included in that.
• 04:08 So it becomes less and less each year, it's confusing.
• 04:11 And therefore when you can, I strongly suggest you model in nominal terms.
• 04:17 So next time out, we're just having a bit of theory this time,
• 04:20 we're going to build up a revenue calculation.
• 04:23 And it's going to look something like this.
• 04:25 We're gonna plow through and see what it looks like.
• 04:28 So we're going to have our calculations.
• 04:30 We'll do our revenue to start off with.
• 04:31 Realize we have working capital, it just won't create a control account.
• 04:36 And then put that into the financial statements, so
• 04:38 that it bounces and we can move on.
• 04:40 That's it.
• 04:41 So if you're sitting comfortably, let's begin.

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