CHAPTER 3

Financial Statement Modelling

Chapter 3 focuses on the process of financial statement modelling. The process is as much art as science. It starts with the collection and analysis of historical financial statements of SteelCo for 2011, 2012, and 2013 and explains how to forecast the future of the business up until 2017 putting special emphasis on the key forecast drivers (e.g. the change of rate of historical revenues or the operating expenses as a percentage of revenues). The income statement is forecast using these drivers, excluding the interest payments. Then historic working capital parameters are used to forecast some of the most important accounts on the balance sheet (e.g. receivables, inventory, and payables). After forecasting all other accounts on the balance sheet, it is balanced by using debt as a plug and the interest payment is calculated by making use of Excel's circular reference feature. Finally, the cash flow statement is modelled using 2 consecutive balance sheets and an income statement.

3.1 INTRODUCTION – HOW FINANCIAL MODELS WORK

In Chapter 1 we examined the financial modelling process in terms of the definition of the problem we are trying to solve and the specifications of the model under discussion. In this chapter we will apply the third step of the process described in Chapter 1, which is to build the model, and the 4th step of the process, that is checking that the model produces rational results. In order to build a real life model we need ...

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