Let’s understand the Financial Modeling Certification concept by taking a real-world example of a multiplex.
What is Financial Modeling Certification?
Financial Modeling certification is wherein you work with historical data of companies and analyze the same to evaluate their performance. The performance being is based upon multiple relevant financial parameters. The analysis is then used to build financial models. These models are then utilized to predict future financial performance of the companies. By doing so, we can arrive at an estimate valuation of the companies analyzed.
Explained: Financial Modeling Certification Concept
1st December, 2017 was indeed a disappointing day for movie goers as the much awaited movie Padmaavat failed to hit the screens. Amid all the hullabaloo surrounding Padmaavat, one section that suffered the most are multiplexes. When the release of a big budget movie like this gets stalled indefinitely, revenue gets hit on various fronts and losses trickle down to numerous operational layers.
Movies are one of the biggest form of entertainment for us. The simplest and the best way to enjoy with loved ones. But have we ever thought that multiplexes, just like any other company doing the tight rope walk between profits and losses? Today, let us try to understand the revenue model of a multiplex in details.
How does a multiplex earn its revenue?
When we go for movies, do we only watch the movie on the screen? No. Innumerable advertisements about upcoming movies, established brands and local retailers are showcased during the movie. Apart from this, the food and beverage that we order during interval is also a source of revenue for the multiplexes. In the financial modeling certification language, let’s take the examples of PVR and INOX Leisure, two listed multiplexes, to elucidate our point.
As we can see that the Net Box Office contributes maximum revenue for a multiplex, around 50%-60%. This refers to the revenue generated from the sale of tickets for the movies net of the various taxes and distributor share. Before understanding the revenue calculation from box office, let’s familiarize ourselves with a few terms:
• Footfalls: Footfalls are the actual number of tickets sold or the number of viewers who have come to watch the movie.
• Gross Collections: The collections from sale of tickets before deduction of various taxes.
• Net Collections: The collections from sale of tickets after the deduction of GST
• Taxes: Initially the multiplexes had to pay state wise Entertainment taxes and VAT & Service tax on the Food and Beverage sold, however, after 1st of July, it has been replaced by GST. On ticket sales GST is 28%, while on Food and Beverage sale GST is levied at 18%. Further more there is also an Input GST which is at work.
• Distributor share: The Distributor of a movie has a claim in the proceeds of a movie. The amount of collections that goes to the distributor per week is called the Distributor share. The percentage share is high in the first week and reduces in the subsequent weeks.
Here’s an example for better understanding:
The Box office collections of a multiplex depends on various operational factors such as:
(1) Number of screens
(2) Conversion of single screens to multiplexes
(3) Expansion to other cities based on the situation of retail real estate
(4) The occupancy rate of theatres which is determined by the footfall or the actual ticket sales
(5) Average ticket prices
Food and beverage
Food and Beverage sold at the multiplexes contribute around 25% of the revenue for multiplexes. These branded outlets at multiplexes sell their products usually at a very high margin. Multiplexes aim to increase the F&B revenue by taking measures such as:
• Expanding the menu
• Deployment of latest technology to ease the buying process
• Introducing live counters
• Increased Point of sales distribution
Currently the F&B sales attracts 18% GST in lieu of the service tax and VAT that was previously levied.
Advertisements contributes 8% to 12% of the revenue of multiplexes. This includes in-cinema advertising as well as other promotional activities. In cinema advertising means the advertisements shown to us during the screening of the movie. With the advent of digitization, the advertisers can target their audience on the basis of geography, linguistics and social status. Other promotional activities such as various kiosks or placards set in the multiplex premises also account for advertising revenue.
Other sources of revenue
Apart from this, there are various other sources of revenue for the multiplexes as well. This means the money earned when the exhibitor (multiplex owner) is also the producer/ co-producer of the movie. Based on the terms of the agreement, this income can be (1) Theatrical or (2) Non-theatrical. Theatrical revenue refers to the income raised by distribution of the movie. In this case the exhibitor is only the distributor. Whereas non-theatrical revenue refers to the revenue from satellite rights, overseas rights, music or video rights.
A revenue model is one of the most challenging and crucial aspects of Financial Modelling. To learn more about financial modeling click here: http://www.proschoolonline.com/financial-modeling-course.