Tab Structure

[Link].00] [MUSIC PLAYING]

[Link].82] IAN SCHNOOR: Welcome back. In this video, we're going to review a really
critical issue with regards to modeling, and that is the tab structure, meaning how should you set
up the Excel file when you're ready to start building a model? I'm going to review a few common
approaches. In our last video, we talked about model planning. And I said that often when a
model is a mess, it's usually a sign that the model builder did not have a strong plan.

[Link].88] Then I shared with you a 3 step process that will allow you to build a really
effective plan. It allows you to become organized and disciplined, and it maximizes the chance
that your model will be working really well. So let's dive into our discussion on tab structure. I'm
going to show you our models now. I'm going to show you the worksheet files. We've got a lot to
do. Let's dive right in. I'm going to go ahead here and share my screen so that you can see what
we are doing.

[Link].14] So here it is again. And just as a quick recap, these notes at the top are the same
notes that I had in the last video. I mentioned that there are three major things you want to
consider when you start working on a model. The first is your planning document. And in that
document, you'll recall I talked about thinking about the key drivers of the business. I mentioned
that the second section is a list of all the assumptions. And you asked a lot of good questions
about how should you build the model.

[Link].66] And then I started to talk about model flow. This is so important that we're going
to dedicate an entire video to optimal model flow in the next video. But I mentioned that in your
overall plan, you want to think about the right order, how would it look on paper. This video is
dedicated to model tab structure. And it's something you want to think about as you get started in
any model. So let me mention here, as we get into tab structure, that there are two major
approaches to model tab structure, two that I've seen.

[Link].55] And I've seen lots of different models, hundreds or thousands of models, and I've
really only encountered two major approaches. And they are both used extensively by modelers
all over the world. So let me be very clear. I will mention this again throughout the video.
Neither is better. They are both used extensively. They are both effective. They both have their
pros and cons, and we'll talk about them in this video. And often, I see preferences by company
or by region. So if you happen to work at a particular company, your company might prefer one
approach. Certain regions of the world have a preference for one style versus the other. Doesn't
mean the other one is wrong, they're both good.

[Link].05] But you might see them used in different applications. So let's talk about them
here. The first one is what we refer to as vertical orientation of a model. And it is just like the
name suggests, it's a model that has less sheets. So it says that there are a limited number of
sheets in the Excel file. And the hallmark, or the telltale sign of a vertically oriented model is that
most of the calculations in the forecast are on one sheet, so less sheets in the file, and the model
is often stacked vertically.
[Link].47] There are some real advantages to building this way. But before I talk about those,
let's actually go take a look for the first time in this module, in this financial modeling module,
I'm going to show you electronically the model that we will be building up together here. So let
me go ahead here. I have a bunch of Excel files open. And you can see this on my screen. The
one I want to show you first is the Blue Containers model, the vertical orientation.

[Link].34] And as you can see here, as I go to the front, it shows me that this is the vertical
orientation of this model of Blue Containers. And let's review the tab structure. So you can see
here this very first tab is a cover. It's labeled. The next sheet, the next tab in the file is an
executive summary. I always encourage that. We'll talk about that in the next video. There's an
assumption page that we will discuss in a subsequent video, a scenarios page. I'm going to walk
through how to build all of these in future videos, future lessons that we will discuss what to do.

[Link].17] But what I want to review in this particular lesson is the Model tab. What you'll
notice, and let me go to the very top here. You can see them. Now, I'm in row one, at the very
top of this sheet. Everything else in the Blue Containers Company model is on one sheet, one tab
called Model. And as I roll down the screen here, you can take a look. I'm first showing you the
company's revenue forecast. And as I roll down, there is the operating costs directly underneath.

[Link].24] As I go down further, there's an income statement, it's underneath. As I continue to

[Link].66] And I want you to think about during this module which method you prefer. But I
want you to try this approach and see if you like it. You might. Let's go back to the notes. Now
that you understand what vertical modeling is all about, let's go back to the notes file here.
Because I want to contrast this with the other very, very common approach that people use in
modeling, and that is, of course, the horizontal orientation.

[Link].46] No surprise, if option one is called vertical orientation, well, you won't be
surprised to learn that the second common approach is referred to as a horizontal orientation.
And the telltale sign, the key difference is that every component is on its own sheet. Every
schedule, every component is often on its own separate sheet within the model. And what this
means is that usually each financial statement and each schedule has its own sheet or its own tab.
And that is how you know that the model is built horizontally.

[Link].56] Let's now go take at a horizontal model so you can see what that looks like. I'm
going to show you the exact same model. We have the Blue Containers model also built as a
horizontal model. You can see here I'm showing you on the cover. It has horizontal. Now,
interestingly, the first few tabs, the first few sheets are exactly the same. Take a look. There's the
cover sheet. It's the same as in the vertical approach.
[Link].49] I have an executive summary. There's an assumption. These tabs are the same and
a scenarios. Where it starts to diverge is you can see, as I move my mouse across the very
bottom, you can all see the tab structure here. Every element every component now has its own
sheet. So there's an income statement on its own sheet. Then there's a cash flow statement. It's
the same numbers, it's the exact same numbers as in the previous model I showed you. But now,
I have a balance sheet on its own tab.

[Link].79] The revenue forecast is on its own tab. You can see this, the cost, and you get the
idea. Every single sheet lives on its own tab. So this is referred to as a horizontal approach. By
the way, I'm going to show you a tip that you may not have seen before. If you ever want to
know how many sheets are in an Excel file, you can take your mouse, you can see, I'm moving it
here, if you put your cursor in the bottom left corner, do you see where these little arrows are?

[Link].01] And you right-click on your mouse, right click, it will show you a big list of all the
different sheets that are in this particular Excel file. So I can see there's approximately 15 sheets,
15 tabs in this horizontal approach. Whereas by contrast, if I go back to, this is a vertical model,
if I go back to the vertical model and right-click, there's only 5. As I said, I'll tell you in a
moment, there are pros and cons of each. Now, let's go back again to my notes.

[Link].28] There's actually a third approach. I've told you throughout this entire lesson so far
that there are two primary approaches, which is true. But some people use what I call a bit of a
hybrid approach, which is no surprise, somewhere in the middle. A hybrid approach is
somewhere in the middle of vertical and horizontal. It might look something like this. In a hybrid
model, you might have a cover sheet and then your executive summary and your assumptions
and your scenarios.

[Link].27] But instead of having each financial statement on 3 separate sheets, you might
have all the financial statements on 1 sheet. Instead of having all the schedules on separate
sheets, you might have all the schedules on one sheet called Schedules. So this is a bit of a
hybrid approach because there are slightly more sheets, but not everything is on its own. Now,
this approach, by the way, a hybrid approach I've seen can be very effectively used if you're
modeling a company that has multiple divisions.

[Link].51] Think about that. If you've got a company with multiple divisions, you may choose
that each division lives vertically. You might choose to model each division of vertically. So an
entire division, you might have the revenues, the costs, maybe a little income statement all on
one vertical sheet. But then you might have if there are five divisions, each division might be on
its own separate sheet. So you might have Division 1, 2, 3, 4 and five on five separate tabs. But
within each tab, the models are vertical, so that's a bit of a hybrid approach.

[Link].63] Now, let me just share with you one morning before I show you the worksheet
files. I will tell you I've already mentioned that each approach is fine. I see both being used
extensively all over the world. Differences tend to be by company, companies will have different
approaches, regions often have different approaches. What I will tell you, and this is just
objective having looked at thousands of models over the years, what I will tell you is I have seen
less errors in vertical models.
[Link].46] I think that there is less chance of making a mistake in a vertical model. And I say
that because often, people make mistakes when there is a lot of cross-linking, when you link
between sheets. When you model a vertically, you keep everything in the same sheet, and there's
less risk for error because you stay vertical. You're not crisscrossing. When you model
horizontally on lots of sheets, there's what we call cross-linking. And cross-linking increases the
likelihood of an error.

[Link].01] I'm going to show you what I mean. Let's look at the cash flow statements on both
the vertical. Here it is. This is my vertical model. Again, let me show you my financial
statements very quickly on this, and then we'll get into the horizontal. I want to contrast it. You
all know that on an income statement, you all know on an income statement, the very top row is
revenue. Income statements always start with revenue, and an income statement always ends
with net income. Net income is the very bottom.

[Link].30] Well, that's a normal income statement. Well, what you also know is that a cash
flow statement always begins, a cash flow statement always begins with net income. So let me
click on the net income row on the cash flow statement. Look what it is. It's so simple. It's just a
simple link, but it's coming directly on top of me. It's linking to the income statement right on
top. So it's very easy. I'm not going to make a mistake linking that up because it's right on top.
How about depreciation?

[Link].15] You all know this. On a cash flow statement, depreciation is an add back, but look
at how simple this link is. It's coming directly off the income statement right above. Very easy to
build, very easy to link. Look at my links here. This is a link on the same sheet. My depreciation
is an add back from the same sheet, same thing with deferred tax. By the way, we're going to
review all of these links and calculations when we look at building up the financial statements.

[Link].90] For now, I just want you to see link structure and tab structure. Look at working
capital. Don't worry about where I'm getting it from, but it's just a simple link on the same sheet.
Every one of these cells is a link on the same sheet. Same thing here, look at my financing
activities. It's a link, same sheet, very-- let me show you it's a link on the same sheet, very easy to
build, very easy to check. Same thing with this, one everywhere you go I'm on the same sheet.

[Link].46] Even the balance sheet, look at this, the very top row on a balance sheet is cash.
And where does cash come from? It comes right off the bottom of the cash flow statement. My
point is it's very, very easy to link, very, easy to build and you're not likely going to make a
mistake. Same thing on the balance sheet, all of the links are on the same sheet, link, link, link on
the same sheet, very easy. Let's contrast this with my horizontal model.

[Link].78] Here it is. I'm back in the horizontal model. Let me show you the cash flow
statement. Well, now that every financial statement is on its own separate sheet, you can see I'm
showing you with my mouse, where do I have to go now to get my net income? Well, I have to
link it to a different sheet, to the income statement sheet. Where do I get my depreciation? Also
on the income statement, it's not difficult. Let me be very clear. This is totally fine. This is totally
welcome. A lot of people model this way.
[Link].47] All my point is that when you link, and when I go to deferred taxes, again, I'm
linking to a different sheet. My point simply is that every time you link to a different sheet, you
increase the risk of error. I can't see, look, I can't see where I'm linking to as easily. On the other
model, I. Could easily see where I was linking to. Now, I have to go to a different sheet to check.
How about on my financing activities? It's on a debt sheet it's coming from. So I have to go to
that sheet to check it.

[Link].23] How about the equity rows? They're linking to an equity schedule. Again, not a
big deal, but it increases the potential risk of error. If I go to the balance sheet, take a look on the
balance sheet, cash is now coming from the cash flow statement. Receivables is coming from a
working capital sheet. So very simple, but again, I'm linking all over the place. And I find that as
people link to different sheets and models, there is a slight chance that you will increase the
likelihood of an error.

[Link].24] With that in mind, let me get to the last part of this lesson. The very last thing I
want to show you in this lesson is what you're going to do. Because you're going to build up a
model with me. You're going to build this Blue Containers model with me over the next dozens
of videos. So I mentioned in a previous lesson in one of our previous videos that there are three
different worksheet files available. And it depends on your level of modeling history and your
level of modeling experience.

[Link].36] If you have never done much modeling, I recommend that you use the beginner
worksheet file. And let me show that one to you right now. The beginner worksheet file is this--
no this is the intermediate one. Let me show you the beginner one. I'm going to show you all of
them here very quickly so that what we are doing. So here is the beginner one. On the beginner
sheet, I have set it up to simulate the vertical orientation. So you've got a cover sheet you'll have
to fill in, a summary sheet.

[Link].83] What you'll notice about the beginner worksheet is that everywhere you must do
some work, I've shaded the cells yellow. So on the assumption page, yellow, you'll have to enter
the inputs here, and I've flagged it and indicated where you put your work on the scenario page.
Anything yellow is where you'll need to do work. On the model sheet, you'll notice the model is
the vertical orientation. The structure of the model is here. The row labels are all here, but most
of the formulas are missing.

[Link].96] And you will need to build the formulas, build calculations as you go. This will be
a pretty good challenge for those of you who have not done much modeling before in your life.
You can see the income statement, the cash flow. Over the entire module, you will build all of
this up until it matches the completed model. For those of you who have done a little bit of
modeling, you might be interested in the intermediate worksheet file. It's similar at the
beginning, but there's no yellow feeding in most sheets.

[Link].54] So on the executive summary, the structure is still here, but I have not given you
hints as to where to do the work. And you'll notice that many of the labels are missing as well.
You'll have to build in a bunch of the structure and the labels. , Same thing on the scenario page
it's missing. Most importantly, let's take a look at the model sheet. The structure of the model is
here, but there's no hints, there's no yellow. Many of the rows are missing as well.

[Link].01] So you're going to have to build up all the formulas, all the calculations, and think
about as you go down, building up, as I'm rolling down here through this file, you can see you're
going to need to add in a lot of the labels, a lot of the structure. So you can follow along with me
in the lessons as I do the work itself. For those of you who have done, so that's the beginner,
that's the intermediate. For those of you who have done some modeling, a decent amount, and
you want a real challenge, well that's what I have the advanced version for.

[Link].87] And the advanced version is very, very simple. Let's take a look at the advanced
worksheet file. It's really simple. Do you know why? The only thing that's here is one sheet
called Model, and there are 3 vertical financial statements, and that's it. All you have in this
worksheet is the historical financial statements. So if you decide to work on the advanced file,
you will need to decide if you want to model vertically or horizontally. You'll have to decide on
your tab structure.

[Link].40] And you're going to have to insert lots of tabs as you build up the model. Again, if
you've never built models before, I would encourage you to start with one of the other worksheet
files. But for those who want to simulate reality, this is what it's like in real life. In real life, if
you're building a model from scratch, you're going to have to start with the historical financials,
that's it, and build the entire thing. So as I just mentioned, this simulates building a model from
scratch, which all of you will want to get to one day.

[Link].73] But you may not be ready for that just yet. So let's wrap up and finish up this
video, go back to my notes. We've now talked about the tab structure. I hope I've given you some
food for thought into how you can set up your model for any company you need to build, talk to
about some of the pros and cons as well, and you've got a chance to see them along with the
worksheets.

[Link].45] And at this stage in the module, you need to choose which worksheet you want to
work on as you follow along with me in the coming lessons. In our very next lesson, we are
going to review optimal model flow. I'm going to talk about what's the right order? How will
your boss or your client find it really helpful to review, to process, to understand your model? So
we'll cover that in the next video. I'll see you then.

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