Description
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Compact 3-Statement Model
Page 1 of 6
Income Statement
All figures in USD thousands
Cash Flow Statemen
2023F
2024F
2025F
Revenue
COGS
Gross Profit
58,150
(45,540)
65,570
(47,230)
73,230
(49,250)
SG&A
Other
EBITDA
(6,120)
(1,940)
(7,310)
(2,150)
(8,250)
(2,250)
Depreciation
EBIT
(4,120)
(4,150)
(4,190)
Interest Expense
EBT
(5,930)
(6,110)
(6,180)
–
–
(120)
Current Tax
Deferred Tax
Total Tax
CASH FROM OPERATIONS
Net Income
Depreciation
Deferred Tax
Cash from Accounts Recei
Cash from Inventory
Cash from Accounts Payab
Subtotal
CASH FROM INVESTING
Capital Expenditure
Subtotal
CASH FROM FINANCING
Line of Credit Issue / (Repay
Term Loan Issue / (Repay)
Equity Issue / (Buyback)
Payment of Dividends
Subtotal
CASH BALANCE
Beginning
Change in Cash
Ending
Net Income
Compact 3-Statement Model
All figures in USD thousands
Page 2 of 6
Compact 3-Statement Model
Page 3 of 6
Balance Sheet
2023F
2024F
2025F
All figures in USD thousands
2022A
ASSETS
Cash
Accounts Receivable
Inventory
Property Plant & Equipment
Total Assets
5,000
6,000
2,000
65,000
LIABILITIES
Accounts Payable
Line of Credit
Term Loan
Deferred Taxes
Total Liabilities
3,000
5,000
20,000
1,000
EQUITY
Equity Capital
Retained Earnings
Shareholders’ Equity
34,000
15,000
Total Liabilities & Equity
Check
Compact 3-Statement Model
Page 4 of 6
–
Compact 3-Statement Model
Page 5 of 6
Compact 3-Statement Model
2023F
2024F
2025F
5,150
3,200
66,000
4,100
4,000
67,500
3,000
5,000
69,500
3,950
4,000
17,000
1,000
5,000
2,000
14,000
1,000
5,950
1,000
11,000
1,800
52,000
9,500
52,000
8,120
52,000
10,010
–
–
–
Page 6 of 6
3-Statement Modeling
Course Instructor
Creative. Methodical. Meticulous.
Duncan is fascinated with pedagogy and loves
course creation and design. He is an effective
communicator with extensive experience teaching
financial modeling, accounting, analysis & valuation.
Prior to teaching, Duncan held senior equity
research positions with top banks & brokerages. He
has solid analytical skills with an Engineering
degree, Master of Finance degree and a CFA
Charter.
Duncan
Duncan McKeen
Executive Vice President
Corporate Finance Institute®
Learning Objectives
Explore a framework and
guidelines for effective financial
modeling.
Analyze a company’s operations
and divide a financial model into
schedules.
Approach each schedule with a
consistent layout and structure.
Calculate key outputs within the
model schedules.
Finalize and review the financial
model, ensuring integrity.
Create and maintain a library of
schedules or building blocks.
Corporate Finance Institute®
Company Health Check
Regular Health Check-up
What does a regular health check-up involve?
Regular
Health
Check-up
Corporate Finance Institute®
Company
Health
Check-up
Regular Health Check-up
Weight
Heartrate
Regular
Regular
Health
Health
Check-up
Check-up
Blood pressure
Cholesterol
Corporate Finance Institute®
Regular Health Check-up
What business are you
in?
How are you managing
cash flow?
What assets do you
How do you generate
revenue?
own?
How are your costs
structured?
How have they been
financed?
Are you profitable?
Describe your capital
structure.
Corporate Finance Institute®
Are you cash flow
positive?
Company
Health
Check-up
How We Can Address All These Questions
We are going to start
by organizing all of
the company’s
figures.
Then we are going to
construct schedules
to share various
details about the
company.
Each of these
schedules may show
different aspects of
health (i.e., financial
statements).
Use these schedules to
get a more
wholesome view of
the health of the
company.
In order for these schedules to be helpful, we need to understand what they are showing and how to use them.
Corporate Finance Institute®
Overview of Financial Statements
What Do Financial Statements Show Us
Let’s look at the financial statements to understand exactly what they show us.
Income Statement
Revenues
Expenses
Profit or loss
Corporate Finance Institute®
What Do Financial Statements Show Us
Let’s look at the financial statements to understand exactly what they show us.
Income Statement
Revenues
Expenses
Profit or loss
Corporate Finance Institute®
What Do Financial Statements Show Us
Let’s look at the financial statements to understand exactly what they show us.
Income Statement
Revenues
Expenses
Profit or loss
Corporate Finance Institute®
What Do Financial Statements Show Us
Let’s look at the financial statements to understand exactly what they show us.
Cash Flow Statement
Operating
Investing
Financing
Corporate Finance Institute®
What Do Financial Statements Show Us
Let’s look at the financial statements to understand exactly what they show us.
Cash Flow Statement
Operating
Investing
Financing
Corporate Finance Institute®
What Do Financial Statements Show Us
Let’s look at the financial statements to understand exactly what they show us.
Cash Flow Statement
Operating
Investing
Financing
Corporate Finance Institute®
What Do Financial Statements Show Us
Let’s look at the financial statements to understand exactly what they show us.
Balance Sheet
Liabilities
Assets
Equity
Corporate Finance Institute®
What Do Financial Statements Show Us
Let’s look at the financial statements to understand exactly what they show us.
Balance Sheet
Liabilities
Assets
Equity
Corporate Finance Institute®
What Do Financial Statements Show Us
Let’s look at the financial statements to understand exactly what they show us.
Balance Sheet
Liabilities
Assets
Equity
Corporate Finance Institute®
Main Goal of Each Statement
Now that we have done a high-level review of common line items, we want to start thinking about the main goal of
each statement.
Income Statement
Provides a meaningful measure of profitability
Revenues
The income statement shows accrued costs and expenses in
the correct period for an accurate picture of profitability.
Expenses
Profit or loss
Corporate Finance Institute®
But how does the company manage cash flow?
Main Goal of Each Statement
Now that we have done a high-level review of common line items, we want to start thinking about the main goal of
each statement.
Cash Flow Statement
Assess the management of cash flow
Operating
Investing
Financing
Corporate Finance Institute®
The cash flow statement tracks the physical flow of cash
both in and out of the corporation.
Main Goal of Each Statement
Now that we have done a high-level review of common line items, we want to start thinking about the main goal of
each statement.
Balance Sheet
Review assets and how they are financed
Liabilities
Assets
Equity
Corporate Finance Institute®
The balance sheet will list the corporation’s assets and show
how they have been financed (e.g., debt, equity).
Main Goal of Each Statement
Now that we have done a high-level review of common line items, we want to start thinking about the main goal of
each statement.
Income Statement
Cash Flow Statement
Balance Sheet
Meaningful measure of
profitability
Assess the management
of cash flow
Review assets and how
they are financed
Corporate Finance Institute®
Are We Seeing a Period or a Point in Time
Balance
Sheet
Month 1…
…Month 12
Income
Statement
Corporate Finance Institute®
Cash Flow
Statement
Role of Finance Professionals
What Is Our Role as Finance Professionals
There are several steps we are going to be required to do:
Prepare reports to evaluate
business.
Add clear schedules to
support them.
Link the financial statements
together.
Confirm that they balance
correctly.
Review the model for
integrity.
Setup for presentation and
printing.
Corporate Finance Institute®
Order of Preparing the Statements
There are several steps we are going to be required to do:
Corporate Finance Institute®
Order of Preparing the Statements
There are several steps we are going to be required to do:
Corporate Finance Institute®
Order of Preparing the Statements
1.
2.
3.
Income Statement
Cash Flow Statement
Balance Sheet
Net Income
Cash
…
…
…
Net Income
Ending Cash
Corporate Finance Institute®
Role of Finance Professionals
Financial Modeling Guidelines
Free to download
Over 95 pages
Covers financial modeling principles &
standards
Corporate Finance Institute®
Financial Modeling Guidelines
Corporate Finance Institute®
The Role of Financial Models
There are two very important aspects of financial models.
1. Decision-Making
Financial models are important tools in
assisting us with complex decisions.
2. Communication
Financial models must be clear and
easy for others to understand.
Corporate Finance Institute®
Model designers and builders need to
put the audience first.
Decision-makers and stakeholders need
to quickly navigate to key information.
Reverse Model Design
Preferred Model Design
What is the model
used for?
Why do we need
it?
Corporate Finance Institute®
The health of the
company.
Our goal is to
assess and
communicate the
health of a
company.
Preferred Model Design
We prefer to design in the reverse order and start with the outputs, and we work backward to the inputs.
Inputs
Corporate Finance Institute®
Outputs
Preferred Model Design
We prefer to design in the reverse order and start with the outputs, and we work backward to the inputs.
Inputs
Drivers
Revenue
Costs
Income
Tax
Assets
Depreciation
Working
Capital
Equity
Debt
Statements
Outputs
Operational
Schedules
Corporate Finance Institute®
Preferred Model Design
We prefer to design in the reverse order and start with the outputs, and we work backward to the inputs.
Inputs
Focuses on audience needs
Prioritizes communication
Outputs
Corporate Finance Institute®
Ensures right level of detail
Designing for the Audience
Preferred Model Layout
Next, we prioritize the schedules from a communication perspective.
Cover Page
Corporate Finance Institute®
Outputs
Inputs
Model
Preferred Model Layout
Cover Page
Cover Page
•
Sets the tone for the
model
•
Communicates important
model information
Corporate Finance Institute®
Outputs
Inputs
Model
Preferred Model Layout
Outputs
Dashboard
Cover Page
Corporate Finance Institute®
•
Like an executive
summary
•
Most important
information right up front
Inputs
Model
Preferred Model Layout
Inputs
Drivers
Cover Page
Inputs
Outputs
•
Corporate Finance Institute®
Identifies the critical
inputs that drive the model
Model
Preferred Model Layout
Model
Statements
Cover Page
Outputs
Operational
Inputs
Structure
•
Corporate Finance Institute®
This forms the appendix
Preferred Model Layout
Presentation
Appendix
Cover Page
Outputs
Inputs
Model
Cover Page
Dashboard
Drivers
Statements
Inputs
Operational
Structure
Corporate Finance Institute®
Defining Model Drivers
Model Design: Drivers
Cover Page
Outputs
Inputs
Model
Cover Page
Dashboard
Drivers
Statements
Inputs
Operational
Structure
Corporate Finance Institute®
Model Design: Drivers
Cover Page
Outputs
Inputs
Model
Cover Page
Dashboard
Drivers
Statements
Inputs
Operational
Structure
Corporate Finance Institute®
Model Design: Drivers
Model drivers are volatile and have a significant impact
on model outputs.
We isolate the drivers so that we can test how the model
reacts to them.
Inputs
Drivers
We need to separate model drivers from other less
important inputs.
Inputs
Identifying the drivers requires detailed knowledge of
the business.
Corporate Finance Institute®
Overview of Schedules
Model Design: Operational Schedules
Cover Page
Outputs
Inputs
Model
Cover Page
Dashboard
Drivers
Statements
Inputs
Operational
Structure
Corporate Finance Institute®
Model Design: Operational Schedules
Cover Page
Outputs
Inputs
Model
Cover Page
Dashboard
Drivers
Statements
Inputs
Operational
Structure
Corporate Finance Institute®
Model Design: Operational Schedules
Operational schedules give us insight into the
foundational aspects of the business.
Model
Statements
Operational
Structure
Corporate Finance Institute®
It’s very difficult to change operational features of a
business.
Operational schedules are one of the key aspects that we
need to review.
Operational Schedules
Revenue Schedule
Working Capital Schedule
Asset Schedule
Helps us understand exactly
how the business generates
its revenue
Shows us how the working
capital items are moving
(e.g., producing or
consuming cash)
Helps us to track the PP&E
needed to complete the
balance sheet
Cost Schedule
Depreciation Schedule
Income Tax Schedule
Allows us to understand the
mix of fixed and variable
costs
Enables us to calculate
depreciation for the income
statement
Allows us to break out the
current and deferred
incomes taxes
Corporate Finance Institute®
Operational Schedules
Revenue Schedule
Working Capital Schedule
Asset Schedule
Shows us how the working
Helps us understand exactly
Helps us to track the PP&E
capital items are moving
how the business generates
needed to complete the
(e.g., producing or
its revenue Check out the Operational
balance
consuming
cash) Course to learn the
Modeling
best sheet
way to build all of these schedules.
Cost Schedule
Depreciation Schedule
Income Tax Schedule
Allows us to understand the
mix of fixed and variable
costs
Enables us to calculate
depreciation for the income
statement
Allows us to break out the
current and deferred
incomes taxes
Corporate Finance Institute®
Overview of Capital Structure
Model Design: Capital Structure
Cover Page
Outputs
Inputs
Model
Cover Page
Dashboard
Drivers
Statements
Inputs
Operational
Structure
Corporate Finance Institute®
Model Design: Capital Structure
Cover Page
Outputs
Inputs
Model
Cover Page
Dashboard
Drivers
Statements
Inputs
Operational
Structure
Corporate Finance Institute®
Model Design: Capital Structure
It’s very difficult to change operational features of a
business.
Model
Statements
Operational
Structure
Corporate Finance Institute®
Operational schedules are one of the key aspects that we
need to review.
Operational schedules give us insight into the
foundational aspects of the business.
What is a Capital Structure
Capital structure is simply the mix of debt and equity a company is using to finance its business.
100% Equity
Equity
Corporate Finance Institute®
The company is not using
any debt to finance its
operations.
What is a Capital Structure
Capital structure is simply the mix of debt and equity a company is using to finance its business.
WACC (Weighted Average Cost of Capital) is a concept we cover in a
lot more
Debtdetail in our DCF Evaluation Modeling course.
Adding Debt
Debt financing is usually a
cheaper form of capital
than equity.
Equity
Corporate Finance Institute®
What is a Capital Structure
Capital structure is simply the mix of debt and equity a company is using to finance its business.
Revolving Line of
Credit
Debt
Term Debt
Preferred Shares
Equity
Corporate Finance Institute®
Common Shares
Using Corkscrews
Approach to Modeling a Capital Structure
The capital structure can be one
of the most difficult parts of the
model.
Remember to break the
formulas down into small
components.
It is best to use a consistent and
logical structure for the capital
structure.
We prefer to build operational
schedules first and then add
capital structure.
This enables people to more
easily understand the model.
We use corkscrews to track
debt and equity.
Corporate Finance Institute®
Using Corkscrews
Term Debt Schedule
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Beginning Balance
20,000
18,000
16,000
14,000
12,000
Increase / (Decrease)
(2,000)
(2,000)
(2,000)
(2,000)
(2,000)
18,000
16,000
14,000
12,000
10,000
Interest Rate
6.0%
6.0%
6.0%
6.0%
6.0%
Interest Expense
1,140
1,020
900
780
660
All figures in USD thousands unless stated
LONG TERM DEBT
Ending Balance
20,000
In many situations, we can pull
this value directly from the
company’s balance sheet.
Corporate Finance Institute®
Optimal Order for Debt & Equity Schedules
We generally will default to the order of seniority for the schedules.
Debt Schedules
Include cash to get
interest income and
then calculate net
interest expense.
Corporate Finance Institute®
Equity Schedules
Equity schedules
usually include a
section for retained
earnings as well.
We may deviate from this order if
there is a capital structure with
discretionary debt repayments.
To learn more about discretionary
debt repayments, check out our LBO
Modeling course.
Error Detection & Excel Settings
Model Design: Financial Statements
Cover Page
Outputs
Inputs
Model
Cover Page
Dashboard
Drivers
Statements
Inputs
Operational
Structure
Corporate Finance Institute®
Model Design: Financial Statements
Cover Page
Outputs
Inputs
Model
Cover Page
Dashboard
Drivers
Statements
Inputs
Operational
Structure
Corporate Finance Institute®
Model Design: Financial Statements
We do all our complex calculations in the operational and
capital structure schedules.
Model
Statements
Operational
Structure
Corporate Finance Institute®
This means that our financial statements mostly just
include links to other schedules.
This systematic approach makes our models easier to link
and balance.
Error Detection System
Although it can be frustrating, an
unbalanced balance sheet is useful.
An unbalance signals there is an error
somewhere that needs to be addressed.
Balance Sheet
Assets = Liabilities + Equity
Balance sheets are useful in that they
work as an error detection system.
It is never recommended to link financial
statements, so they always balance.
Corporate Finance Institute®
Calculation Options in Excel
Excel can perform iterative or circular calculations.
Corporate Finance Institute®
Calculation Options in Excel
Excel can perform iterative or circular calculations.
Make sure that iterative calculations are enabled.
Corporate Finance Institute®
Calculation Options in Excel
Excel can perform iterative or circular calculations.
Make sure that iterative calculations are enabled.
Set the workbook calculations to automatic.
Corporate Finance Institute®
Revolver Overview
Revolving Line of Credit
A Revolving Line of Credit is
also called: Revolver, Line
of Credit, Operating Line,
or Bank Line
Even if a company doesn’t
have a revolver, one should
still be included in the
model
Since our model currently
has a negative cash balance,
we know it needs to get
cash from the revolver
A revolver is a flexible piece
of debt that can be used
when it’s needed by a
company
The revolver acts as a lender
of last resort if the model
needs cash
Cash needs to be paid back
as soon as the company is
able. This is called a cash
sweep mechanism
Corporate Finance Institute®
Overview of Circularity
Circularity
Circularity can be quite a controversial topic in the financial modeling
community.
Excel can actually do two types of calculations: linear calculations and
circular calculations.
In order to do circular calculations, we need to set a particular setting in the
software (see Error Detection & Excel Settings in Financial Statements).
Corporate Finance Institute®
Linear Calculations
Let’s think about linear calculations and use the example of the water cycle to demonstrate.
Precipitation
Reservoir
Condensation
Transpiration
Corporate Finance Institute®
Linear Calculations
Let’s think about linear calculations and use the example of the water cycle to demonstrate.
Reservoir
Corporate Finance Institute®
Precipitation
Condensation
Transpiration
Reservoir
Linear Calculations
Let’s think about linear calculations and use the example of the water cycle to demonstrate.
Reservoir
Corporate Finance Institute®
Precipitation
Condensation
Transpiration
Reservoir
Linear Calculations
Let’s think about linear calculations and use the example of the water cycle to demonstrate.
Reservoir
Corporate Finance Institute®
Precipitation
Condensation
Transpiration
Reservoir
Linear Calculations
Let’s think about linear calculations and use the example of the water cycle to demonstrate.
Reservoir
Corporate Finance Institute®
Precipitation
Condensation
Transpiration
Reservoir
Linear Calculations
Condensation
Precipitation
Transpiration
Reservoirs
Corporate Finance Institute®
Linear Calculations
Condensation
Precipitation
Transpiration
Reservoirs
Corporate Finance Institute®
Financial Model Circularity
Linear Calculations
Let’s think about where circularity occurs in a financial model.
Income Statement
Cashflow Statement
Corporate Finance Institute®
Net Interest
Cash
Two Circular Loops in This Model
Net Interest
Cash Loop
Income Statement
Cashflow Statement
Cash
Corporate Finance Institute®
Two Circular Loops in This Model
Net Interest
Revolver Loop
Cash Loop
Income Statement
Cashflow Statement
Revolver
Corporate Finance Institute®
Cash
Our View & Approach to Circularity
Advantages
Models can be more accurate when
they are circular in nature.
Model Obstacles
•
Circular models can crash if the circularity
is turned on.
•
Model users may not understand
circularity or how to control it.
•
Error messages may pop up for users
depending on calculation settings.
Corporate Finance Institute®
Our View
Model accuracy is the most important
aspect, and risks can be mitigated.
Educate the individuals building the models
about circularity.
Include a circularity switch on all circular
financial models.
Add very clear and prominent footnotes
about Excel settings that are needed.
Importance of Dashboards
Model Design: Financial Statements
Cover Page
Outputs
Inputs
Model
Cover Page
Dashboard
Drivers
Statements
Inputs
Operational
Structure
Corporate Finance Institute®
Model Design: Financial Statements
Cover Page
Outputs
Inputs
Model
Cover Page
Dashboard
Drivers
Statements
Inputs
Operational
Structure
Corporate Finance Institute®
Model Design: Financial Statements
The dashboard is critically important since the audience
will focus on it.
Outputs
Dashboard
Corporate Finance Institute®
Senior leaders may not load the model in Excel and will
likely focus on the dashboard.
We need to make sure that it clearly communicates all
important information.
Using Model Checks
Model Design: Financial Statements
Cover Page
Outputs
Inputs
Model
Cover Page
Dashboard
Drivers
Statements
Inputs
Operational
Structure
Corporate Finance Institute®
Model Design: Financial Statements
Cover Page
Outputs
Inputs
Model
Cover Page
Dashboard
Drivers
Statements
Inputs
Operational
Structure
Corporate Finance Institute®
Model Design: Financial Statements
The importance of the cover page should not be
overlooked in a model.
The cover is the first page the audience sees, and it helps
to establish credibility.
Cover Page
Cover Page
It positions the model as a formatted financial
presentation to the audience.
It also instills confidence in the stakeholders by showing a
summary of the model checks.
Corporate Finance Institute®
3-Statement Modeling
Course Instructor
Creative. Methodical. Meticulous.
Duncan is fascinated with pedagogy and loves
course creation and design. He is an effective
communicator with extensive experience teaching
financial modeling, accounting, analysis & valuation.
Prior to teaching, Duncan held senior equity
research positions with top banks & brokerages. He
has solid analytical skills with an Engineering
degree, Master of Finance degree and a CFA
Charter.
Duncan
Duncan McKeen
Executive Vice President
Corporate Finance Institute®
Learning Objectives
Explore a framework and
guidelines for effective financial
modeling.
Analyze a company’s operations
and divide a financial model into
schedules.
Approach each schedule with a
consistent layout and structure.
Calculate key outputs within the
model schedules.
Finalize and review the financial
model, ensuring integrity.
Create and maintain a library of
schedules or building blocks.
Corporate Finance Institute®
Company Health Check
Regular Health Check-up
What does a regular health check-up involve?
Regular
Health
Check-up
Corporate Finance Institute®
Company
Health
Check-up
Regular Health Check-up
Weight
Heartrate
Regular
Regular
Health
Health
Check-up
Check-up
Blood pressure
Cholesterol
Corporate Finance Institute®
Regular Health Check-up
What business are you
in?
How are you managing
cash flow?
What assets do you
How do you generate
revenue?
own?
How are your costs
structured?
How have they been
financed?
Are you profitable?
Describe your capital
structure.
Corporate Finance Institute®
Are you cash flow
positive?
Company
Health
Check-up
How We Can Address All These Questions
We are going to start
by organizing all of
the company’s
figures.
Then we are going to
construct schedules
to share various
details about the
company.
Each of these
schedules may show
different aspects of
health (i.e., financial
statements).
Use these schedules to
get a more
wholesome view of
the health of the
company.
In order for these schedules to be helpful, we need to understand what they are showing and how to use them.
Corporate Finance Institute®
Overview of Financial Statements
What Do Financial Statements Show Us
Let’s look at the financial statements to understand exactly what they show us.
Income Statement
Revenues
Expenses
Profit or loss
Corporate Finance Institute®
What Do Financial Statements Show Us
Let’s look at the financial statements to understand exactly what they show us.
Income Statement
Revenues
Expenses
Profit or loss
Corporate Finance Institute®
What Do Financial Statements Show Us
Let’s look at the financial statements to understand exactly what they show us.
Income Statement
Revenues
Expenses
Profit or loss
Corporate Finance Institute®
What Do Financial Statements Show Us
Let’s look at the financial statements to understand exactly what they show us.
Cash Flow Statement
Operating
Investing
Financing
Corporate Finance Institute®
What Do Financial Statements Show Us
Let’s look at the financial statements to understand exactly what they show us.
Cash Flow Statement
Operating
Investing
Financing
Corporate Finance Institute®
What Do Financial Statements Show Us
Let’s look at the financial statements to understand exactly what they show us.
Cash Flow Statement
Operating
Investing
Financing
Corporate Finance Institute®
What Do Financial Statements Show Us
Let’s look at the financial statements to understand exactly what they show us.
Balance Sheet
Liabilities
Assets
Equity
Corporate Finance Institute®
What Do Financial Statements Show Us
Let’s look at the financial statements to understand exactly what they show us.
Balance Sheet
Liabilities
Assets
Equity
Corporate Finance Institute®
What Do Financial Statements Show Us
Let’s look at the financial statements to understand exactly what they show us.
Balance Sheet
Liabilities
Assets
Equity
Corporate Finance Institute®
Main Goal of Each Statement
Now that we have done a high-level review of common line items, we want to start thinking about the main goal of
each statement.
Income Statement
Provides a meaningful measure of profitability
Revenues
The income statement shows accrued costs and expenses in
the correct period for an accurate picture of profitability.
Expenses
Profit or loss
Corporate Finance Institute®
But how does the company manage cash flow?
Main Goal of Each Statement
Now that we have done a high-level review of common line items, we want to start thinking about the main goal of
each statement.
Cash Flow Statement
Assess the management of cash flow
Operating
Investing
Financing
Corporate Finance Institute®
The cash flow statement tracks the physical flow of cash
both in and out of the corporation.
Main Goal of Each Statement
Now that we have done a high-level review of common line items, we want to start thinking about the main goal of
each statement.
Balance Sheet
Review assets and how they are financed
Liabilities
Assets
Equity
Corporate Finance Institute®
The balance sheet will list the corporation’s assets and show
how they have been financed (e.g., debt, equity).
Main Goal of Each Statement
Now that we have done a high-level review of common line items, we want to start thinking about the main goal of
each statement.
Income Statement
Cash Flow Statement
Balance Sheet
Meaningful measure of
profitability
Assess the management
of cash flow
Review assets and how
they are financed
Corporate Finance Institute®
Are We Seeing a Period or a Point in Time
Balance
Sheet
Month 1…
…Month 12
Income
Statement
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Cash Flow
Statement
Role of Finance Professionals
What Is Our Role as Finance Professionals
There are several steps we are going to be required to do:
Prepare reports to evaluate
business.
Add clear schedules to
support them.
Link the financial statements
together.
Confirm that they balance
correctly.
Review the model for
integrity.
Setup for presentation and
printing.
Corporate Finance Institute®
Order of Preparing the Statements
There are several steps we are going to be required to do:
Corporate Finance Institute®
Order of Preparing the Statements
There are several steps we are going to be required to do:
Corporate Finance Institute®
Order of Preparing the Statements
1.
2.
3.
Income Statement
Cash Flow Statement
Balance Sheet
Net Income
Cash
…
…
…
Net Income
Ending Cash
Corporate Finance Institute®
Role of Finance Professionals
Financial Modeling Guidelines
Free to download
Over 95 pages
Covers financial modeling principles &
standards
Corporate Finance Institute®
Financial Modeling Guidelines
Corporate Finance Institute®
The Role of Financial Models
There are two very important aspects of financial models.
1. Decision-Making
Financial models are important tools in
assisting us with complex decisions.
2. Communication
Financial models must be clear and
easy for others to understand.
Corporate Finance Institute®
Model designers and builders need to
put the audience first.
Decision-makers and stakeholders need
to quickly navigate to key information.
Reverse Model Design
Preferred Model Design
What is the model
used for?
Why do we need
it?
Corporate Finance Institute®
The health of the
company.
Our goal is to
assess and
communicate the
health of a
company.
Preferred Model Design
We prefer to design in the reverse order and start with the outputs, and we work backward to the inputs.
Inputs
Corporate Finance Institute®
Outputs
Preferred Model Design
We prefer to design in the reverse order and start with the outputs, and we work backward to the inputs.
Inputs
Drivers
Revenue
Costs
Income
Tax
Assets
Depreciation
Working
Capital
Equity
Debt
Statements
Outputs
Operational
Schedules
Corporate Finance Institute®
Preferred Model Design
We prefer to design in the reverse order and start with the outputs, and we work backward to the inputs.
Inputs
Focuses on audience needs
Prioritizes communication
Outputs
Corporate Finance Institute®
Ensures right level of detail
Designing for the Audience
Preferred Model Layout
Next, we prioritize the schedules from a communication perspective.
Cover Page
Corporate Finance Institute®
Outputs
Inputs
Model
Preferred Model Layout
Cover Page
Cover Page
•
Sets the tone for the
model
•
Communicates important
model information
Corporate Finance Institute®
Outputs
Inputs
Model
Preferred Model Layout
Outputs
Dashboard
Cover Page
Corporate Finance Institute®
•
Like an executive
summary
•
Most important
information right up front
Inputs
Model
Preferred Model Layout
Inputs
Drivers
Cover Page
Inputs
Outputs
•
Corporate Finance Institute®
Identifies the critical
inputs that drive the model
Model
Preferred Model Layout
Model
Statements
Cover Page
Outputs
Operational
Inputs
Structure
•
Corporate Finance Institute®
This forms the appendix
Preferred Model Layout
Presentation
Appendix
Cover Page
Outputs
Inputs
Model
Cover Page
Dashboard
Drivers
Statements
Inputs
Operational
Structure
Corporate Finance Institute®
Defining Model Drivers
Model Design: Drivers
Cover Page
Outputs
Inputs
Model
Cover Page
Dashboard
Drivers
Statements
Inputs
Operational
Structure
Corporate Finance Institute®
Model Design: Drivers
Cover Page
Outputs
Inputs
Model
Cover Page
Dashboard
Drivers
Statements
Inputs
Operational
Structure
Corporate Finance Institute®
Model Design: Drivers
Model drivers are volatile and have a significant impact
on model outputs.
We isolate the drivers so that we can test how the model
reacts to them.
Inputs
Drivers
We need to separate model drivers from other less
important inputs.
Inputs
Identifying the drivers requires detailed knowledge of
the business.
Corporate Finance Institute®
Overview of Schedules
Model Design: Operational Schedules
Cover Page
Outputs
Inputs
Model
Cover Page
Dashboard
Drivers
Statements
Inputs
Operational
Structure
Corporate Finance Institute®
Model Design: Operational Schedules
Cover Page
Outputs
Inputs
Model
Cover Page
Dashboard
Drivers
Statements
Inputs
Operational
Structure
Corporate Finance Institute®
Model Design: Operational Schedules
Operational schedules give us insight into the
foundational aspects of the business.
Model
Statements
Operational
Structure
Corporate Finance Institute®
It’s very difficult to change operational features of a
business.
Operational schedules are one of the key aspects that we
need to review.
Operational Schedul
