Case Competitions: A Guide to Financials
by Travis Wu
In the fourth part of our five-part case competition series, our publications team sits down with Travis Wu to explore the financial modelling component of case competitions.
- About Travis
- Approach to building a financial model
- Topics that student consultants should include
- Memorable Experiences
- Favourite consulting experience
Could you tell us a bit about yourself?
Hi! I’m Travis and I am in my third year of a Commerce/Law degree, majoring in finance. I am the Treasurer of BSOC for 2020, and have also been involved in BusinessOne UNSW as a project consultant, as well as FMAA UNSW in the Finance Competitions Squad. In 2019, I first developed an interest in consulting while working with start-ups, and competed in the UNSW x USYD BusinessOne Innovation Cup. Since then, I have continued to pursue my interests by competing in several domestic competitions this year, in various different formats including management consulting, private equity, venture capital, boardroom presentations and stock pitches.
For my work experience, I’m currently working as an M&A intern at a boutique finance firm. I was previously a paralegal in a commercial law firm, and worked as a Business Development Intern at Amazon Web Services over the summer.
My biggest takeaway from university has been the importance of getting out of your comfort zone and seeking diverse experiences. The proof is in the pudding: you never know ‘til you try! Fundamentally, case competitions revolve around problem solving, a skill which is universal to all facets of life. Critical thinking, teamwork and public speaking are just some of the endless skills that can be gained. Above all, competitions are not only rewarding, but also fun: they can be a refreshing break from your university study routine.
What is your approach to financial modelling?
Students new to case competitions may find financial modelling daunting or challenging. However, it may be easier to first think about why modelling is needed. Its purpose is no different to any other part of the presentation: the goal is to answer the problem question, and to quantify your solution where possible.
Whilst your approach will vary depending on the case, here are some tips on how to get started on financial modelling.
Think about the problem presented
Firstly, it is important to determine what the problem question is. Ask yourself: what is my financial model seeking to quantify?
Some common examples:
- Are you trying to determine the profitability of a project?
- Are you quantifying the number of customers that your strategy will yield?
- Are you evaluating the feasibility of acquiring another company?
- Are you constructing an optimum investment portfolio?
- Are you making a buy, hold or sell recommendation of a stock?
I have found that the most useful tip is to be critical. It is important to critically analyse your team’s strategy. This means that while your team may have a seemingly coherent solution in mind, the output from your model may suggest otherwise. Thus, it is important to constantly communicate with team members, be active in discussion and raise any concerns that you may have in order to align the qualitative and quantitative aspects of your strategy.
How do I start building my financial model?
It may be challenging to build your first model on Excel. Practice is key here: the more you use Excel, the more comfortable and intuitive it will be. Once you have developed the basics, you will inevitably become more efficient by learning new skills such as shortcuts.
When building your model, think back to the problem presented. Are you trying to find a project’s net present value? Are you determining an opening bid price to acquire a company? Perhaps your desired values are not even monetary: are you trying to find the number of newly acquired customers? Whatever it is that you’re seeking to quantify, make sure that your output values are relevant to the problem question and support your team’s answer.
Presentation and Q&A
It is one thing to be able to create a great model, but it’s another thing to be able to present it clearly. Some competitions (especially finance ones) may require you to submit your Excel model, however others may not. In the latter, this means that you will be presenting your model through screenshots (usually in the appendix slides), as well as accompanying financial slides in the main slide deck. Thus, it is essential that your financial model is clear and easy to understand. Some useful tips to think about include:
- laying out your key assumptions clearly,
- clear and consistent formatting,
- using graphs generated from your model to support your solution in the main slide deck.
During Q&A, your responses should be the same as any other well-structured response: try to give a direct answer first, before signposting and addressing each relevant part of your answer.
Do you have any general considerations for topics that student consultants should include in this section?
There are several types of financial models, and many different ways in which you can approach them. Some common ones include the discounted cash flow model (DCF), leveraged buy-out model (LBO), dividend-discount model (DDM) and a comparable company’s analysis.
Understanding the 3 financial statements first (income statement, balance sheet & cash-flow statement) is paramount as they are the foundation upon which all models are built. It is important to understand the unique features and differences of each, and how they tie into your overall valuation.
The DCF model, in all its variations, is the most commonly used model due to its versatility and fundamental valuation methodology. It will draw from, and build upon the 3 financial statements. Understanding the key concepts of a DCF model will already be enough for most consulting case competitions.
Let’s walk through an example of what the financials in a typical case competition might look like.
Before diving into the financial statements, many consultants like to do a “market size”, which is to determine the overall size of the addressable market targeted by their strategy. This is common in cases involving new product launches, customer acquisition strategies and foreign market expansion, among others.
Market sizing can be done in two main ways:
1. Top-down approach, e.g. if Afterpay enters the Canadian market, it will gain X% market share in the BNPL industry which is estimated to be worth $Ybn, or
2. Bottom-up approach, e.g. Hungry Jacks’ new burger range will attract X new customers per store and sell at $Y per unit, across Z different store locations
There is no right or wrong way to go about market sizing, however your assumptions need to be clear and justified. When making assumptions, useful metrics may include population growth rates, industry averages and historical company KPIs.
3 Statement Model
The income statement (or profit & loss statement) shows a company’s financial performance over a period of time, usually being one financial year. When forecasting for future periods, key assumptions can be made for growth rates such as revenue, COGS/revenue, SG&A/revenue and depreciation & amortization. This will allow you to forecast gross income, operating income and finally net income (after deducting interest and tax).
Financial modelling always begins with the income statement. This is because net income flows into the balance sheet (shareholders’ equity via retained profits), and into the cash flow statement as the starting line item. Modelling an income statement is a fundamental skill in all case competitions: it requires you to quantify the subject company’s performance by making assumptions and linking this back to your team’s overall strategy.
The balance sheet shows a company’s financial position at a particular point in time. Similar to the income statement, assumptions can be made to forecast line items. At any point in time, the formula Assets = Liabilities + Shareholders’ Equity must be satisfied. Based on your assumptions, you may find it useful to toggle with line items on both the asset and liability side to achieve this balance.
In case competitions, the balance sheet is important since it shows a snapshot of the company at a static point in time. By comparing to historical data and using metrics such as financial ratios, this can help you assess the impact of your team’s strategy.
Cash Flow Statement
The cash flow statement records the net amount of cash or cash-equivalents flowing in and out of a business. The three main sections of the statement are cash flow from operations, investing and financing. This will ultimately show the net change in cash for the company.
This statement is essential since it forecasts a company’s liquidity risk through its cash projections. You may be able to come up with an amazing solution to increase profitability: however, if a company struggles with cash flow management, it will not survive for very long.
Discounted Cash Flow Model (DCF)
The DCF model forecasts cash flows over a certain time period, and then discounts them by a discounting factor (weighted average cost of capital) to find their net present value today. This model is used in almost every single case competition due to its versatility and fundamental valuation. Whether you’re trying to quantify a project, value a company or determine a stock’s price, you will need to run a DCF first.
There is more than one formula to find free cash flows, however a common one would be:
FCF = net income + depreciation & amortization – change in net working capital – capital expenditure
The value of these inputs can be found in the 3 financial statements.
Once you have forecasted free cash flows, they are discounted using the weighted average cost of capital (WACC), which is the rate of return expected by a company’s debt and equity holders. The formula for WACC is:
WACC = ED+E * RE + DD+E * RD (1-T) where D = debt, E = equity, RD = cost of debt, RE = cost of equity and T = tax rate
In some case competitions (especially management consulting ones), a detailed WACC calculation is not required, and you can justify your WACC value by using methods such industry comparables. However, a breakdown of WACC may be required for finance case competitions.
Finally, summing your discounted cash flows at t =0 will get you your net present value:
NPV = t=1nFCFt1+WACCt
Note: when determining a company’s long term value, it may be hard to make forecasts after a certain period of time. There are two ways to model this:
-Gordon growth method: assumes that the business will continue to generate cash flows forever (in perpetuity). The terminal value can be calculated as:
Terminal value = FCFt(1+g)r-g where g = terminal growth rate, FCFt = free cash flow for last time period, r = WACC
-Exit multiple method: calculates the terminal value by assuming that the business will be sold for a multiple of some market metric, e.g. EV/revenue, EV/EBITDA.
Summing up your free cash flows and terminal value will give you the subject company’s total value, or enterprise value.
And just like that, you’ve learnt how to build a DCF model! Knowing how to do this will already cover you for most case competitions. Once you have mastered the DCF model, learning other models will be a lot easier. Practice makes perfect: the world is now your oyster!
A sensitivity analysis shows how an output value is affected based on changes in certain input variables. This will basically model different situations with varying input values to show how prone to change, or sensitive, the output value is.
E.g. when finding the net present value (NPV) of a project, two input variables that you may need to forecast include revenue growth (income statement), and the WACC used (DCF model). A sensitivity analysis will essentially show how the NPV changes when different values of revenue growth and WACC are used. This can be done by creating a table in Excel with the input variables as x and y axes, and then running a “what-if analysis”.
These are just financial terms for an optimistic/pessimistic case scenario. You may model different cases by changing your key assumptions, e.g. changing your revenue forecasts to reflect a company’s positive or negative performance.
What’s one of the most memorable financial models you’ve made?
I’m by no means an expert at modelling (far from it!), and I’m still in the process of continuously learning and improving. My most memorable experience would probably be the financial model that I made for a stock pitch of CSL during the FMAA Internal Finance Case Competition. The judge asked whether I could maintain a buy recommendation if my revenue growth rates were lower. I had no idea, so I just said yes. I forgot that we had submitted our model, so he then proceeded to open my Excel file and made the changes himself, telling me that I was wrong. Didn’t know what to say there!
What is your advice for students looking to get into case competitions?
Seek new opportunities
UNSW has a very vibrant case competition culture. The best way to improve is to get hands on experience. There are so many opportunities out there: many societies hold case competitions each term, and there are also consulting societies (180DC, UCC, BusinessOne, UMCG) which you can apply for to gain new experiences and develop new skills. Case competitions are a great way to upskill yourself, but also to meet new friends and work in an environment that is challenging and innovative. Even if you don’t end up pursuing consulting as a career, these invaluable experiences will shape your university experience and help you find new opportunities.
Quality over quantity
On the other hand, case competitions can be very time consuming: it is important to balance them with your other commitments. There are so many case competitions at UNSW each term that it is almost impossible to participate in all of them. Consider going out of your comfort zone and doing one that is unfamiliar to you. You could develop new skills, gain exposure to a different industry or even just work with a new team of people.
What is your favourite consulting experience to date?
Some of my favourite memories include pitching our team’s solution to our start-up client Curious Thing for the BusinessOne program, and receiving mentorship from one of the finance academics as part of the UNSW FMAA Finance Competitions program. I’ve also made some fond memories competing in various domestic competitions this year: I’ve learnt a lot of random stuff about social enterprises, Australian honey, wind farms, bike sharing services and microfinance loans, to name a few!