Learning What Not to do from Horrible Models

When using case studies to study risks and project finance structure, I think you can learn a lot from cases that were originally thought to be good business strategy or well structured and became dismal failures. Examples are Dabhol and Petrozuata. Similarly, a different way to learn project finance models is to see what not to do. This may be somewhat less boring than working through each of the detailed exercises.

Winson Churchill said something like — success is going from one failure to another without loss of enthusiasm: i.e. learn from mistakes and keep going. In this spirit, I think you can learn a lot more from looking at ways not to do thing rather than following the boring instructions that I have tried to put together in A-Z modelling. So, I have made videos and provided files on what not to do in making financial models. Looking at a badly structured model and fixing the model is demonstrated in the videos and the files below.

Case 1: Solar Project in India

I received an e-mail from somebody who wanted me to look at circular references in his model. I opened the model and there were many more problems than just circular references.  I spent some time on the model and he did not send an e-mail thanking me. So I decided to use this model as a bad example. In the two videos below, I demonstrate what can go wrong with a model that is badly structured. There is no sources and uses; the inputs were terrible; the cash flow was not set up ….  A screenshot of the model with circular references and something that should represent a sources and uses statement.

 

 

The first video below describes the model and explains many things that are wrong with the model. This may be a good way to learn what not to do in the models.

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The second video demonstrates what I did to fix the model including re-structuring the model; including a sources and uses of funds statement and using a UDF function to fix the circular reference.

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I don’t know why you would want to download the horrible model, but in case you want to use it as a case study, you see it. The first file below is the project finance example before making any changes.  You could use the model and try to fix it yourself.
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The second model shows revisions that I suggested in the model.  This is designed for people who are not too advanced and are creating their first few models.
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Project Finance Model of Solar Farm in India, Re-formatted with Sources and Uses and Circular References UDF

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Case 2: U.S. Wind Model

The second case demonstrates problems with using fancy project finance terms (like b/f instead of opening balance) and making beautiful colouring schemes. I go crazy when I see people who think the colouring of a sheet is more important than the analysis.  Look at the page below.  It has beautiful colours, but the number of days in the month is wrong.

The model in fact shows how not to learn.  The person making this model spent a lot of time looking at other really big models with long equations and beautiful colours.  This is a B.S. way to learn. You should first spend some time on the fundamentals of structuring a model with dates, computing EBITDA and then putting in a summary sources and uses of funds.  You can do this by looking at a couple of videos and you can even use the generic macros program to colour your sheets.