Financial modelling can be used in many scenarios in a variety of businesses. In our case studies we will have a look at how financial modelling works in the real world and how businesses use the financial models to make decisions.
Client 1:
A large plantation in the pulp industry.
Background:
The plantation wants to transfer expertise in Eucalyptus forestry management to biomass fuelled power plants in Africa. The power plants should be supplied by a dedicated forestry operation which started planting Eucalyptus trees in 2012.
The Brief:
To support discussions with potential investors, the Plantation needed a detailed financial model. Whilst the operation of power plants is well established and their modelling is relatively familiar, the dedicated forestry operation was proving more challenging to forecast. The growth of Eucalyptus trees increases with age early in their life and the challenge was to calculate how many hectares to plant and when, in order to fuel the power plants, without overplanting, which would incur extra cost.
Challenges encountered:
• The unusual requirement to track the growth and harvesting of crop, the growth rate of which varies by age.
• Developing an optimal schedule for planting, to ensure that power station demand would be met in the most economical way.
• Allowing for different construction scenarios for two power plants, the construction costs of which varied depending on the chosen construction schedule.
• In order to support the financing of the business, the model was required to be able to present both the consolidated investment opportunity (plantation and power station together) and as two individual projects.
• The interdependence of the plantation and biomass power stations, i.e. the plantation needs to grow enough crop to meet the demand, in m3, of the biomass power station, yet the power station demand, in m3, depends on the age (i.e. the density) of the crop being harvested.
Approach Used:
• Financial Modellers extracted data from feasibility studies, crop growth forecasts, engineering studies and various other reports, translating and compiling each of the numerous processes involved, along with their associated costs, into an integrated financial model.
• They made intelligent use of links to feed data between the two main elements of the project (forestry operation and power plant), in order to overcome their inherent circularity.
• Using VBA to utilise and automate MS Excel’s Solver add-in, allowing the client to effortlessly determine optimal solutions for different input scenarios.
• Using switches to allow the client to present the business as either ‘Stand-Alone’ or ‘Combined’ investment projects to potential stake holders.
• Generating a full set of financial statements; Profit & Loss, Balance Sheet and Cash Flow, accompanied by industry specific metrics; e.g. stumpage.
The Outcome:
The model supported the verification of management decisions to formulate an optimal construction and planting schedule, including the decision to push back opening of the first power station in order to allow the plantation to establish further and therefore produce considerably greater yields.
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Goalfix Financial Modellers have a wealth of experience in building models for countries, governments and multinational companies. Established in 1998 Goalfix Financial Modellers has grown into a highly specialized firm of financial modellers and model trainers. To learn more about financial modelling services or financial modelling courses offered contact Goalfix today.
