03 The 3-Statement Model
What are the utilities of a 3-Statement Model?
1. performance and health analysis
2. forecasting for decision making
3. building block for other models (e.g. DCF)
What do each of the 3 Statements show and what are its goals?
INCOME STATEMENT
1. revenues - expenses - P/L
2. measure of profitability
BALANCE SHEET
1. assets - liabilities - equity
2. assets and their financing
CASH FLOW STATEMENT
1. operating - investing - financing
2. management of cash flows
In what order do we produce the 3 financial statements?
How do they link together?
1. Income Statement (net income)
2. Cash Flow Statement (net income ... ending cash balance)
3. Balance Sheet (cash)
retained earnings Y1 = ...
= retained earnings Y0 + net income Y0 - dividends Y0
model layout (for the audience)
PRESENTATION
1. Cover Page
2. Outputs
3. Inputs
APPENDIX
1. Model
What are 'Operational Schedules' and which ones are there?
= Operational Schedules are supporting schedules, as part of the financial model, and give us insights to the foundational aspects of the business, and are hence difficult to change.
1. Revenue
2. Cost
3. Working Capital
4. Assets
5. Depreciation
6. Income tax
What is the optimal order for debt & equity schedules?
The order of seniority;
1. senior debt (revolver & loans)
2. subordinated debt (-)
3. equity (preferred & common)
Which Excel formula could/should you use in your Best/Base/Worst Case table?
=INDEX()
=CHOOSE()
What is the role of a financial model?
1. Communication
2. Decision-making