If enough people who have money in one of the Big Six banks (the four we mentioned earlier, plus Goldman Sachs and Morgan Stanley) move it into smaller, more local, more traditional community banks, then collectively we, the people, will have taken a big step toward re-rigging the financial system so it becomes again the productive, stable engine for growth it’s meant to be.

Martha White concludes “This is a great example of populist indignation made practical” and Yvette Kantrow feels that Huffington is “turning the decision on where to bank into a moral choice, like being green or buying organic.” She further adds “Banks make their money in a lot of ways, such as by collecting fees. For instance, banks are projected to collect $38.5 billion in overdraft fees this year, some 90 percent of which is paid by only 10 percent of the customer base.”

Mike Konczal shows us mathematically how a few poorer customers subsidize the costs of the non-revolving ‘prime’ customers in credit cards, and the same can generally be said for deposit and savings account as the “non-revolving ‘prime’ customers” also antidotal pay fewer overdraft fees.

Assume three things for a moment: (1) that you are a subsidized customer, (2) you feel the need to support a non-“Too Big to Fail” institution, and (3) like organic foods you are only willing to ‘pay’ 20% more (or receive 20% less) than the generic product. What is the moral, financially savvy customer to do? Is it wrong to continue to benefit from a system you believe is morally bankrupt?

If you are legitimately a subsidized customer paying less than fifty dollars in fees and interest, keeping low cash balances and paying your credit card in full every month, moving to a smaller institution may have a negative net benefit for that institution as the costs to service your account outweigh the benefit to the institution. But if you remain at a “Too Big to Fail” institution you are enabling a way of business that you don’t morally agree with.

I only see one strategy for dealing with this scenario; stop viewing it as a zero sum game. Here’s how:

1. Move your profitable (for the bank) accounts to the smaller institutions – generally your CDs, your term loans and your business accounts. Long term money such as CDs give the smaller institution money to make good loans to the local community. Term loans are typically profitable – it is the other side of the equation for how banks make money. Business accounts are also typically more profitable for the institution and you are more likely to be willing to pay fees for essential services on these accounts and not receive interest.
   • This also saves you the big hassle of “changing banks” for your most frequently used accounts, which is arguably the biggest hurdle
   • Also, don’t use brokered deposits (i.e. CDs you would buy through your stock broker) as they are unhealthy for the system and promote inorganic growth and/or bubbles.
2. Support legislation that levels the playing field between large and small institutions. Right now “Too Big To Fail” institutions enjoy a significantly lower cost of funds that smaller institutions, even adjusting for risk of failure, because of the implicit government guarantee. There isn’t any up for a vote now, and any movement for reform is quickly losing steam, but Megan McArdle and I agree how it should be done.

What is your view?

Daniel, I think you may have missed the mark on JetBlue’s intention with the “All You Can Jet” program. It is a publicity stunt designed to fill excess capacity without cutting into holiday revenues, but far from something designed for business travelers. It has consumer virtually written all over it. As it is designed, it offers little value to business travelers, but a great incentive for consumers to try out a ‘new’ airline.

1) While Jet Blue has been around for ten years now, I suspect that most leisure travelers have not tried them. This is for a variety of reasons including: i) Jetblue’s limited coverage, ii) consumers’ unwillingness to try an airline they have not flown before given an equally priced traditional option, iii) lack of transferable frequent flier points.

2) The three day advance booking does prevent it from being a cost saving device for last minute business travel, which is entirely fair. While large corporates are accustomed to lower costs for last minute travel than consumers, this policy sidelines them (another hint it is designed with consumers, not business travelers in mind). Consumers, on the other hand, are accustomed to low pricing power and being stuck with either astronomical last minute fares or a 21-day advance booking, replete with an expensive change fee for any modifications. The ability to change plans up to three days before seems like a godsend.

3) It was announced on Twitter before all other forums of media. In that ecosystem, the “All You Can Jet” pass (see #AYCJ ) has carefully been coaxed into a life of its own by the Jet Blue PR team. They are presently running an informal contest to see who can book the most extensive itinerary.

If this were designed for business travelers, there would have been some frontrunning by their PR department to work with corporate travel departments. That is clearly not the case.

4) Jet Blue has always been a consumer airline. When I worked for a Fortune 100 company three years ago, JetBlue was not even a corporate travel option regardless of the fair. Assuming they are ‘in the system’ now, you would have to go through many challenges to get the purchase of this pass approved even if you were saving 3x the cost.

Looking at their marketing like http://www.jetblue.com/about/whyyoulllike/ you can clearly tell that they are consumer oriented, and it suits them.

5) Purchasing the “All You Can Jet” pass requires that you sign up for Jet Blue’s frequent flier program. This essentially gives the company permission to market to you after the conclusion of your itinerary. If it were oriented towards business travelers, it seems like the loyalty program would be oriented towards becoming the business’s preferred airline rather then focusing on the actual passenger.

==

If Jet Blue’s goal is, as I believe, to generate publicity and to get more people to try out the airline, I think it will be very successful. The amount of press that this has generated is truly impressive; it is hard to put a dollar value on that.

I’ve been a content Jet Blue passenger for several years flying the AUS -> JFK route a number of times, but this promotion honestly changed my perception of the airline. It motivated me to actually spend hours analyzing their flight schedules to find interesting destinations. Even if I hadn’t booked the pass, the promotion created value for Jet Blue. I now know that they fly to Bogotá, Colombia among many other exciting destinations on Jet Blue. Can you realistically put a price on marketing that good?

A fully functional financial model needs to be modular so you can later adapt it to more detailed schedules if necessary. For example, we will initially project revenue by making a percentage growth assumption, however in the future you can (or arguably should) make a detailed revenue schedule based on they key factors (macroeconomic, microeconomic or both) that drive revenue growth. Many of the To accomplish this, you need:

1. Consistency – Is the value in thousands, millions, or ..? What does this color mean?
2. Clarity – Where is this cell getting its data? What does this cell do?
3. Repetition – Only enter any assumption once, and then reference it from other parts of the model.

Color Conversions

• Blue – These are assumptions you enter
• Green – These are direct references to one or more sheets
• Black – These are calculations that occur on the active page or references within the active page

Turn Iterations ON – The circular model will not calculate if iterations are turned off

1. Press ALT, T, O (in sequence, not at the same time)
2. Click on the tab titled Formulas (in Excel 2007 and later only) or Calculation (in Excel 2003 and prior)
3. Check the box for Enable Iterative Calculations (Excel 2007 and later only) or Iteration (in Excel 2003 and prior)
4. Set the “Maximum Iterations” field to 100 and the “Minimum Change” to 0.001 (both of these are the default values)

Don’t hard code values into formulas – always reference the inputs you entered.

• 
  For example, in cell B3 (shown above) you reference the 8% growth rate in cell B1 rather than entering 8% directly into the formula
• This ensures that you model remains accurate when you update these values later

Adjust page formatting at the beginning of this process to ensure it is duplicated consistently.

• I recommend:
  • Page
    • Landscape orientation
    • Fit to 1 page by 1 page (for short projections) or 50% normal size for longer projections
      
  • Margins
    • Top Margin: 1 inch
    • Bottom Margin: 0.5”
    • Left and Right Margins: 0.5”
    • Center Horizontally on Page
      
  • Header/Footer
    • No Header
    • Footer containing the file path and name, time and date
      
    • Footer contents should be in 9 point font and not be scaled with page
      

Some final tips:

• Use “Center Across Selection” instead of “Merge Cells” when formatting
• Never “Hide” cells. If you don’t want them displayed, group them by pressing CTRL + Shift + Right Arrow, or Shift + F2)
• Make extensive use of Cell Comments (right click on cell and “Insert Comment”) to note where the input or formula came from. This prevents “What was I thinking syndrome” the day after.
• Utilize Custom Number Types for the type of number that will be in the cell. This format ensures that the numbers and percents will all line up nicely:
  • For numbers: #,##0.0_);(#,##0.0)
  • For percents: 0.0%_);(0.0%)
    
  • In Excel 2007 and later, you may want to define this as a custom style and also include the color, so you would have:
    • Input – Number
    • Input – Percent
    • Referenced – Number
    • Referenced – Percent
    • Calculated – Number
    • Calculated – Percent
      – Select New Style:
  • When you need to hide a calculation for presentation purposes, use the custom number format ;;;
    • Don’t forget to leave a comment, so you don’t accidentally delete the cell in the future
    • This is better than setting the font color to be white because, when printed, white colored fonts print as black

I cannot urge you enough to keep up with the above recommendations. The time it will save you in the long run is incalculable.

Next: The Core Statements [not yet completed] (or go back to the beginning)

This assumes that you have a moderate level of experience understanding and utilizing corporate financial statements and using Excel. If you are not familiar with financial statements, here are some useful resources. If you are using a version of Excel earlier than Excel 2007, you will need to install the Data Analysis Toolpak to have access to some of the functions used.

Constructing an effective financial model takes a blend of skills, including accounting, corporate finance, and Excel, but most importantly knowledge of the company’s operations. For existing companies, you need to rely on historical trends to develop meaningful assumptions for future financial trends. My friend Taylor Davidson, has a great list about the information you need to start a financial model and I agree:

• What is the business? What is the product / service?
• How do you target, and acquire customers?
• What are the revenue streams? (prices, sales of products or services, advertising, usage fees, etc.)
• What costs will the business create? (items and estimates, employees, hosting, SG&A; fixed costs, variable costs, etc.)
• What timeline of development and product launch and market / customer adoption are you expecting?
• What do you think are the major drivers of revenue and costs?
• What do you know about the market? (# of potential customers, $ spent currently, market trends, growth, competitors, etc.)
• What lessons, revenue / cost models and performance / operational metrics exist from studying existing competitors and complementary and substitute products?

You must also fully understand why you are constructing this model as the assumptions you develop will need to be in line with that objective. A solid financial model must be reasonable and you must be able to defend your assumptions and the projected performance. If you cannot, you may as well save the hassle and invent the numbers now.

For simplicity’s sake this model tutorial is based upon an existing public company, but once you understand the process it can easily be modified for startup businesses, joint ventures, or any other type of business. Remember, businesses may be different but finance remains the same.

It will take about six hours to read all the posts and complete the exercises. It is important that you do not skip to the end. If you are just looking for a completed financial model, the finished model is available HERE, and some other examples can be found here and here.

Items are linked as they are posted, or search for the Financial Modeling Tutorial tag:

• Excel Best Practices
• The core statements
• Working capital schedule
• Depreciation Schedule
• Amortization Schedule
• Other Long Term Item Schedules
• Completion of Income Statement Logic
• Shareholder Equity Schedule
• Shares Outstanding Schedule
• Preparing for Debt and Interest
• Debt and Interest Schedule
• Troubleshooting your model
• Explaining the finished product
• DCF Analysis
• Proofing your model
• Creating scenarios

Next: Excel Best Practices

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