Join me as I prepare for the Financial Modeling Institute's Advanced Financial Modeler (AFM) exam which next takes place in February 2025.
Preparing for the February 2025 AFM exam
I will be sitting the FMI Advanced Financial Modeler exam in February 2025. In this series, I share my thoughts and learnings as I prepare for the exam.
You can catch up on my previous posts using the links below:
12 weeks to go to the FMI AFM exam
11 weeks to go to the FMI AFM exam
10 weeks to go to the FMI AFM exam
9 WEEKS TO GO TO THE FMI AFM EXAM
Here is my latest weekly update with seven weeks to go to the AFM exam.
What I covered in the last two weeks
The last couple of weeks have been pretty busy, especially with Christmas falling in the middle of this week. As I was ahead of my plan I decided to take it a little easy on myself and used the two weeks to cover Tax and working capital.
This proved the importance of building a sensible plan with a little bit of buffer in it. I was happy to relax a little over the Christmas holiday and not stress about possibly being behind in my preparations for the exam.
So, lets take a look at what I covered over the last couple of weeks.
Tax
The basic tax calculation is pretty straightforward, being profit before tax X tax rate.
For the AFM exam however, we need to be able to split our tax into accounting tax and government tax with a resulting deferred tax difference. This takes a little more effort and is something that I have not modelled before so it was interesting to dig into it as a topic.
Accounting Tax
Accounting tax is profit before tax X tax rate. Nice and straightforward.
The accounting tax value is shown on the income statement, split between government tax and deferred tax.
Government Tax
Government Tax is the tax that the company will actually pay to the government, based on the country's tax laws rather than accounting laws. For the AFM exam this will be:
(profit before tax - timing differences) X tax rate
The annual timing difference value will be provided in the case study notes.
The government tax value is the tax outflow shown in the cashflow statement as it is what will be paid to the government. This is represented through net profit (which includes accounting tax) and the deferred tax line.
Deferred Tax
Deferred tax is the difference between accounting tax and government tax.
As explained above, deferred tax shows on both the income statement and the cashflow statement as an adjusting number.
The cumulative deferred tax value is shown on the balance sheet.
Working Capital
Working capital is current assets or current liabilities that do not attract interest. The main working capital items to model are normally accounts receivable, accounts payable and inventory.
The case that I have been working through (Henderson Manufacturing) also has prepayments and other current assets and other current liabilities.
For the exam I plan to make the assumption that these other items do not move over the life of the plan. I can then focus on modelling accounts receivable, accounts payable and inventory.
There are three main steps to modelling working capital for the AFM exam.
Step 1: Calculate working capital days
The working capital days are not provided, so the first step is to determine the current working capital days and then using that to make a sensible assumption for the life of the plan.
The calculations for working capital days are:
Accounts receivable days = (accounts receivable / revenue) X number of days in the year
Accounts payable days = (accounts payable / cost of sales) X number of days in the year
Inventory days = (inventory / cost of sales) X number of days in the year
Step 2: Calculate the working capital balances
The second step is then to use these days assumptions to calculate the forecast balances.
Accounts receivable = (accounts receivable days / number of days in the year) X revenue
Accounts payable = (accounts payable days / number of days in the year) X cost of sales
Inventory = (inventory days /number of days in the year) X cost of sales
In the FMI materials Ian Schnoor explained the accounts receivable calculation above very nicely by showing the accounts receivable days / number of days in the year initially as a percentage and then multiplying that by revenue.
For example, if it takes a company 45 days to receive its money from its customers then 45/365 or 12.3% of its revenue will always be held in accounts receivable.
Step 3: Feed into the financial statements
Finally we need to feed the working capital balances into the balance sheet and the movement in working capital into the cashflow statement.
For the cashflow it is important to be aware that an increase in an asset balance on the balance sheet (eg accounts receivable and inventory) will be a reduction in cash because more is owed to the company by its customers or is held in the warehouse as inventory. An increase in a liability balance on the balance sheet, such as accounts payable, is an increase in the cashflow statement because we owe more to our customers so haven't spent the cash.
Week 6 - 7 weeks to go
My focus for next week is debt and equity.
I have given myself two weeks to cover these topics because they fall over New Years and are not areas that I model very often.
My plan
Below was my original plan by topic areas.
I am very comfortable with the income statement side of the build and Capex so progressed through those much more quickly than I allowed for. I'm still a little ahead of plan which ill ensure that I have everything covered ahead of the Full Stack AFM Bootcamp.
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What are the FMI certification levels?
The Financial Modeling Institute (FMI) has three certification levels. These are: Advanced Financial Modeler (AFM); Chartered Financial Modeler (CFM); and Master Financial Modeler (MFM).
