Simplicity is a Virtue – BASE Rule

Posted on August 9th, 2011 in Financial Modeling - 10 comments

On a cup of green tea with a friend I grabbed the golden rule of accounting. It is simple (You can easily miss if it came your way!) and can be applied to almost all the accounts (Depreciation, Gross Block, Cash, Equity, Debt) – You name it, and you have to use it!

So concentrate and even if you feel what I told you is obvious, go ahead and apply it in your models. It would help!

What is the BASE Rule?

BASE rule is an acronym:

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Is that not simple (and very obvious)?

And yeah before I forget, this year’s ending balance is next year’s opening balance

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I think this is also obvious that if I had a cash of USD 100 Mio with me on 31st of Dec 2010, then my opening balance on 1st of Jan 2011 would also be USD 100 Mio.

BASE rule can help you summarize any Account

I always say, Cash is the king of business. The BASE rule can be used in any account, but I will illustrate its usage in Cash Account. Please note that cash is a balance sheet item and sits in the current account section of the balance sheet.

Let’s say you start your business on 30th Dec, 2009 with USD 100 Mio. During the year, you entered into the following transactions (Assume all are cash transactions for simplicity sake).

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So the transactions in FY 10 can be summarized as:

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Similarly Let’s say in FY 11 you had a cash inflow of USD 250 Mio and an outflow of USD 220 Mio. The cash positions can be modelled in Excel as:

Beginning + Additions – Subtractions = Closing Balance

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The beginning balance of FY 12 is same as closing balance of FY 11 and so on…

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Where else can this function be useful in Finance?

As I figured out in my modelling career, the rule is the golden rule in accounting. And exactly the same rule can be applied to the following:

· Beginning (Old Retained Earnings) + Add (Profit after tax) – Subtract (Dividends) = Ending (New Retained Earnings)

· Beginning (Old Debt Balance) + Add (Additional Debt Raised) – Subtract (Debt Repaid) = Ending (New Debt Balance)

· Beginning (Old Cumulative Depreciation) + Add (Depreciation during the Year) – Subtract (Depreciation because of assets sold) = Ending (New Cumulative Depreciation)

I can’t even remember the times I have used this concept!

Are you also using Acronyms in Financial Modelling?

Acronyms are cool! They help you remember concepts in an intuitive manner and make your life easier! What acronyms or simple concepts are you using in your financial models?

Templates to download

I have created a template for you, where the subheadings are given and you have use the functions to get the right values for you! You can download the same from here. You can go through the case and fill in the yellow boxes. I also recommend that you try to create this structure on your own (so that you get a hang of what information is to be recorded).

Also you can download this filled template and check, if the information you recorded, matches mine or not!

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For any queries regarding the cash impact or financial modeling, feel free to put the comments in the blog or write an email to paramdeep@edupristine.com

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10 Responses to “Simplicity is a Virtue – BASE Rule”

  1. Anup Agarwal says:

    Ya lovely rule. Very simple and helps in easy preparation of cash flows, PL and Balance Sheets after working on nitti-gritties of a financial models.

    My models are full of this.

    coincidentally suggested the same to a friend this morning on adjusting MAT credit in a financial model.

  2. Michael Azer says:

    I believe a Water Fall chart would look awesome next to the BASE Rule, something like:
    B: IIIIIIIIIIIIIIII
    A: IIIII
    S: IIIIIIIII
    E: IIIIIIIIIIII

  3. Michael Azer says:

    The post didn't look like what I wrote, but I think you got what I wanted to say.
    I love how Water fall charts look on reports!

  4. Ashok Chauhan says:

    Good for even beginners

  5. Adam Barnard says:

    An easy to understand post with the basics you need clearly defined.

    On of the acronyms I always try to adhere to is: KISS.

    Keep It Simple, Stupid!

  6. Ken M says:

    If you have thought about this concept before an auditor arrives to look over your accounts then you should have a pretty easy time because they sure as hell want to justify each figure and where there is no specific 3rd party supporting documentation for that figure the BASE model will stand up every time.

  7. paramdeep@gmail.com says:

    @Anup: Thanks. Yes, it can be applied to MAT credit as well. Although if we are applying to MAT credit and the loss can be carried forward, then we would need to modify it a little bit with Max functions!
    @Michael: Yes, if it were to be used for presentation purpose, the waterfall chart would be a good addition!
    @Ashok: Thanks
    @Adam: 🙂
    @Ken: Yes, it is quite illustrative as well.

  8. Peter Kos says:

    One rule I teach my new AP and AR people is DEAD. Debits increase Expenses, Assets, and Dividends.

    Many of the non-financial managers in the company now have it written down so they can more effectively communicate with accounting people.

  9. paramdeep@gmail.com says:

    @Peter: Thanks for sharing!

  10. lavkesh bhatia says:

    This is probably the simplest way to explain the principle I've come across

    Would have saved a lotta time if I'd come across it during my MBA

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