Prepping for Finance Meetings ChatGPT. Applications in Consulting.
This is an experiment with ChatGPT. As a subject matter expert, I am often called upon to brief people on new types of models and technologies that will be usiled in accounts and projects. I use my background, experience and other sources of information to quickly brief people on items of interest and focus. I also, depending on the project or meeting, will go back to old notes or reference material to tune myself up to be sharp in the meeting. I need quick summaries in clear language so that we can get to the same page together in a given meeting with a client and then operate to create new innovations or ideas around central ideas. So rather than use notes or reference material, I thought I would generate some basic information about the “three sheet model” for finance and different valuation techniques that are common. All the language generated is generally availablez well understo information and lots of different ways, anyone’s been trained in finance or has an MBA. They know this information hopefully off by heart. What I find is that technologists, who are trained in computer science, do not have this finance background and it is essential to have them understand the basics as quickly as possible. There’s nothing more frustrating than finding out at the end of a two hour meeting that someone doesn’t know what a current ratio is. It’s also error prone in that there’s a translation between what’s going on in the business and what happens to be implemented in a spreadsheet or a software program. Python is going to help you understand what a quick ratio is or what WACC is.
In my opinion, because ChatGPT is conversational and designed for clear language, it is faster to get this information from chat GTP and a large language model than it is to use search techniques. Currently it is a bonus that there is no ads cluttering up the information. It’s the team working with a basic research assistant with an expert verifying the information before it is used. This is professional grade utility.
Here’s the experiment. All errors are my own, not the servent-machine’s.
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Three Sheet Financial Model
Rob Tyrie
What is a three sheet model ?
A three sheet model is a financial model that typically has three tabs or sheets: an income statement, a balance sheet, and a cash flow statement. These sheets provide detailed information about a company's financial performance, including revenue, expenses, assets, liabilities, and cash flow. The model is often used to project future financial performance and to make investment decisions.
Rob Tyrie
Create a template spreadsheet that is an example of a 3 sheet Model for a software company
I'm sorry, I am an AI language model and do not have the capability to create spreadsheet templates. However, I can provide you with an example of what a 3-sheet model for a software company might look like.
Sheet 1: Income Statement
Revenue: This is the total amount of money the company brings in through sales of its software products.
Cost of Goods Sold (COGS): This is the cost of producing the software products, including expenses such as labor, materials, and overhead.
Gross Profit: This is the difference between revenue and COGS.
Operating Expenses: This includes all expenses not related to the production of the software products, such as marketing, research and development, and administrative expenses.
Operating Income (or Loss): This is the difference between gross profit and operating expenses.
Net Income (or Loss): This is the final profit or loss of the company after accounting for all revenues and expenses, including taxes and interest.
Sheet 2: Balance Sheet
Assets: This includes all of the company's resources, such as cash, accounts receivable, inventory, and property.
Liabilities: This includes all of the company's obligations, such as accounts payable, loans, and taxes owed.
Equity: This is the difference between assets and liabilities, and represents the ownership interest of shareholders in the company.
Sheet 3: Cash Flow Statement
Operating Activities: This section shows the cash generated or used by the company's core operations, such as sales and expenses.
Investing Activities: This section shows the cash generated or used by the company's investments in long-term assets such as property, plant, and equipment.
Financing Activities: This section shows the cash generated or used by the company's financing activities, such as issuing new stock or taking out loans.
Net Change in Cash: This is the final change in the company's cash balance over the period being reported.
Please note that this is just an example, and the specifics of the financial model will vary depending on the company's size and complexity.
Rob Tyrie
What are important ratios that are used is assessing a company in a 3 sheet model
There are several important ratios that can be used to assess a company's financial performance when using a 3-sheet model. Some of the most commonly used ratios include:
Liquidity ratios: These ratios measure a company's ability to meet its short-term obligations, such as the current ratio (current assets divided by current liabilities) and the quick ratio (quick assets divided by current liabilities).
Solvency ratios: These ratios measure a company's ability to meet its long-term obligations, such as the debt-to-equity ratio (total liabilities divided by total shareholder equity) and the times interest earned ratio (operating income divided by interest expense).
Profitability ratios: These ratios measure a company's ability to generate profits, such as the gross margin (gross profit divided by revenue), the net margin (net income divided by revenue), and the return on equity (net income divided by shareholder equity).
Efficiency ratios: These ratios measure how efficiently a company uses its assets to generate revenue, such as the inventory turnover ratio (cost of goods sold divided by average inventory) and the asset turnover ratio (revenue divided by average total assets).
Valuation ratios: These ratios are used to determine the intrinsic value of a company. some examples are P/E (price-to-earnings) ratio and the P/B (price-to-book) ratio.
It's important to note that these ratios should be analyzed in context and compared to industry averages or historical performance to get a better understanding of a company's financial health.
Rob Tyrie
How are Valuations models related to 3 sheet models?
Valuation models and 3-sheet models are related in that they both provide information about a company's financial performance and are used to make investment decisions. However, they have different objectives and focus on different aspects of a company's financials.
A 3-sheet model, as the name suggests, is made up of three sheets: an income statement, a balance sheet, and a cash flow statement. These sheets provide detailed information about a company's financial performance, including revenue, expenses, assets, liabilities, and cash flow. The model is often used to project future financial performance, to make investment decisions, and to assess a company's overall financial health.
Valuation models, on the other hand, are used to estimate the intrinsic value of a company. These models take into account a company's financial performance, as well as other factors such as industry trends, management quality, and growth prospects, to estimate the company's worth. The most common types of valuation models are discounted cash flow (DCF) and multiples analysis. DCF models estimate the future cash flow generated by a company and discount them to their present value, while multiples analysis compares the company's financials to similar companies and use their valuation multiples (such as P/E, P/S, EV/EBITDA) as a proxy for the company's value.
In summary, 3-sheet models provide a detailed look at a company's financial performance, while valuation models use that information, along with other factors, to estimate the company's intrinsic value. Both are important tools for investors and analysts to assess a company's financial health and to make investment decisions.
Rob Tyrie
What are 10 common DCF models
Discounted cash flow (DCF) models are a method of estimating the intrinsic value of a company by forecasting its future cash flows and discounting them to their present value. Here are 10 common types of DCF models:
Free cash flow (FCF) to equity: This model forecasts the free cash flow generated by a company and discounts it to the present value using the cost of equity as the discount rate.
Free cash flow to firm (FCFF): This model forecasts the free cash flow generated by a company and discounts it to the present value using the weighted average cost of capital (WACC) as the discount rate.
Adjusted present value (APV): This model separates the value of a company's operations from the value of its financing and tax benefits.
Dividend discount model (DDM): This model estimates the intrinsic value of a company by forecasting its future dividends and discounting them to the present value using the required rate of return as the discount rate.
Gordon growth model: This model estimates the intrinsic value of a company by forecasting its future dividends and assuming that they will grow at a constant rate.
Two-stage DCF: This model uses a different growth rate for the forecast period and a different rate for the terminal period.
Three-stage DCF: This model uses a different growth rate for the forecast period, a different rate for the next period, and a different rate for the terminal period.
Real options: This model incorporates the value of management's ability to adapt to changes in the company's business environment.
Monte Carlo simulation: This model uses random sampling to generate a range of possible future cash flows and discount them to the present value.
Decision tree analysis: This model uses a branching diagram to represent different possible outcomes and the corresponding probabilities of each outcome.
It's important to note that these models are not mutually exclusive, and a combination of them can be used to estimate a company's intrinsic value.
Rob Tyrie
What are valuation method use for pre revenue enterprise software companies?
Valuing pre-revenue enterprise software companies can be challenging because they have no historical financials to base projections on and are typically in the early stages of product development. In this scenario, different valuation methods may be used to estimate the intrinsic value of the company. Here are a few common methods:
Comparable company analysis: This method compares the pre-revenue company to publicly traded companies in the same industry or similar stages of development. The financials of these companies are used to estimate the pre-revenue company's value using multiples such as price-to-sales (P/S) or enterprise value-to-revenue (EV/R).
Precedent transaction analysis: This method analyzes comparable transactions of similar companies and uses the terms of these transactions to estimate the pre-revenue company's value.
Discounted cash flow (DCF) analysis: This method estimates the intrinsic value of a company by forecasting its future cash flows and discounting them to their present value. However, for pre-revenue companies, it requires significant assumptions and it is difficult to estimate the cash flows.
Option pricing: This method uses the principles of financial options pricing to estimate the intrinsic value of a company. This method assumes that the company's equity is an option on the future cash flows that the company will generate.
Scorecard analysis: This method uses a weighted average of multiple factors such as the quality of the management team, the size of the addressable market, the strength of the technology, and the stage of development to estimate the intrinsic value of a company.
It's important to note that valuing pre-revenue enterprise software companies is a complex task that requires careful consideration of multiple factors, including market conditions, industry trends, and the company's specific circumstances. It's also important to remember that all these methods have their own limitations and assumptions and should be used in combination with other methods to get a more accurate estimate of the company's value.
Rob Tyrie
How are mrr and arr and churn rates used to value software as a service companies?
MRR (Monthly Recurring Revenue) and ARR (Annual Recurring Revenue) are key performance indicators (KPIs) that are commonly used to value software-as-a-service (SaaS) companies. Churn rate is another important KPI that is also used to evaluate the health of a SaaS company.
MRR and ARR are both measures of the recurring revenue that a SaaS company generates from its customers. MRR is the total recurring revenue the company generates in a given month, while ARR is the total recurring revenue the company generates in a given year. These metrics are important because they provide insight into the company's recurring revenue growth and are a key driver of the company's valuation.
Churn rate, on the other hand, is a measure of the percentage of customers that cancel their subscription to a company's service in a given period. High churn rates can be an indicator of a company's inability to retain customers and can negatively impact its revenue growth and overall valuation.
When valuing a SaaS company, investors and analysts typically look at a combination of these metrics to get a better understanding of the company's financial performance and growth prospects. For example, a company with a high MRR or ARR and a low churn rate would be considered more valuable than a company with a lower MRR or ARR and a high churn rate, as it would indicate that the company is generating a large amount of recurring revenue and is able to retain its customers.
It's important to note that these metrics should be analyzed in context and compared to industry averages or historical performance to get a complete picture of a company's financial health. Additionally, the valuation of SaaS companies also considers other factors such as gross margin, net retention rate, and customer acquisition cost (CAC) to name a few.
Rob Tyrie
What is the revenue multiple valuation of a company with expected 50% cagr and current revenue of $25 million
Revenue multiple valuation is a method used to estimate the intrinsic value of a company based on its revenue. The multiple is typically calculated by dividing the company's market capitalization by its revenue. The revenue multiple can vary widely depending on the company's industry and growth prospects.
When a company is expected to have a compound annual growth rate (CAGR) of 50% and its current revenue is $25 million, the revenue multiple valuation can be calculated by multiplying the current revenue by the expected revenue multiple.
It's important to note that revenue multiples vary greatly by industry, and there is no single "correct" multiple to use. For example, the revenue multiple for a mature, stable company in a slow-growth industry might be in the range of 1-2, while a high-growth technology company might have a multiple of 5 or higher.
Therefore, it's hard to give an accurate estimate of the revenue multiple without knowing the industry and the company's specific circumstances. However, as a rough estimation, for a company with a CAGR of 50% and current revenue of $25 million, a revenue multiple of 5 to 6 could be considered high, indicating that the company is expected to have a high growth rate and is highly valued by the market.
It's important to note that multiple could vary greatly depending on the company's industry, growth prospects, and other factors. Therefore, it's essential to use multiple valuation in combination with other methods such as discounted cash flow (DCF) and comparable company analysis, to get a more accurate estimate of the company's intrinsic value.
Rob Tyrie
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