Financial model queries

Originally posted by : prateek dave
	Hello I have a query regarding financial modeling. My question is, how to address the negative cash situation in a financial model?

Hi Prateek,

Cash balancing mechanism is an important step in the preparation of a financial model. Here, we have explained how to deal with a situation of either negative or surplus cash while preparing a financial model in MS Excel.

THE SITUATION (NEGATIVE CASH BALANCE BEING PROJECTED)

The cash balance available from the cash flow statement could either be a positive or a negative number. If it’s a positive cash balance then we need to take it to the assets side. Please note that there is no negative cash balance in reality. A negative balance refers to the funding provided to the business in the form of a bank overdraft or by the promoter himself. So a negative cash balance is to be represented on the liability side. So the assets get populated when the no. is positive and liabilities get populated when it’s negative.

SOLUTION WITH IF FUNCTION IN EXCEL

We can make use of if function for this situation. If the cash balance in the sheet is more than or equal to zero, then assets get populated; otherwise it is zero. So for e.g. if the no. is 100, assets will have $100 of cash flow there. Add one more if formula and in this case, if this no. is less than zero, then it is shown on the liability side but with a changed sign or zero. So, if the balance becomes the minus 100 then the assets become zero and liabilities increase by $100.

REALITY CHECK AND RELATED COMPLEXITIES!

In reality, a businessman having a surplus cash balance of 100 will invest it. Similarly, a funding to the business isn’t provided for free. So there will be an interest expense on such balance which is similar to an interest income on the surplus cash balance. So these 2 situations need to be figured out and dealt with while preparing the model. 

Hi!

Does the historical trends analysis differs for a new company vis-a-vis a company with an operational history?