Financial Modeling Assignment: Analysis of Cash Flow and Revenue

This assignment provides a detailed analysis of financial modeling, focusing on cash flow statements, revenue projections, and business operations. The report examines the direct method of preparing cash flow statements, emphasizing its advantages over the indirect method, particularly for clarity and source identification. The assignment also explores the impact of external factors, such as economic recessions, on the business of charter flights. It highlights the importance of understanding the sources of cash and the challenges associated with applying the direct method, especially for large companies. The report concludes with a comprehensive overview of the financial modeling process, its applications, and the importance of accurate financial reporting. The assignment also examines the financial implications of a company's decision to borrow capital for business development and the potential impact on its financial statements. The report provides valuable insights into financial planning and analysis, making it useful for students and professionals in the field of finance.

FINANCIAL MODELLING
Financial Statements
The Assumptions
The company will be aiming at an annual revenue growth rate of 16% per year in first three
years of its operations. The promoters will acquire 100% of the initial capital outlay and
intend to borrow at regular intervals for development of the business. The period of first loan
will be 10 years with interest rate of 9%.
The Income Statement
The revenues to be generated by the company will remain sensitive to many external
environmental factors which may be beyond its control. The business of charter flights is
largely an economic luxury and gets low if there is an economic recession. The Company will
face problems during recession as the top line income from businesses and wealthy clients
may come down due to lesser luxury spending.
The Balance Sheet
Broadly, the promoters’ purpose from this business is to earn from arranged flights on behalf
of large organizations (primarily corporations) and wealthy individuals that are seeking to fly
on non-scheduled flights and private aircraft. The cost of a charter flight can range between
$5,000 for a small jet to above $150,000 for a full sized airplane which can transport a large
group of people.
Direct Method Cash Flow Statement
The Direct Method Cash Flow Statement is easy to read because of its format as all the
operating cash receipts and the payments during the specific period are shown by source.
This method determines the net cash flows from the operating activities by taking into
account the cash receipts from sales, adding interest and dividends and then deducting cash
payments made for purchases, operating expenses, interest payments and income tax
payments. This is the main factor which puts the direct method in advantages over the
indirect method.

Since the direct method takes into account the sources of the cash, it is recommended by
FASB for all companies for preparing their cash flow statements. On the other hand, the
indirect method computes operating cash flows by adjusting the net income for current year
with changes in the balance sheet accounts. Since most big companies do not record their
accounting information on the basis of their customers, suppliers or vendors, they find that
this method is difficult to maintain.
It becomes more laborious for such large companies to compile such information for using
this method. They must keep in mind that this method works perfectly only when accounts
receivable are used only for credit sales and the accounts payable are used only for credit
account purchases. Lack of understanding is the reason why most companies do not use this
method.