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3-Statement Model

Step-by-Step Guide to Understanding How to Build an 3-Statement Financial Model

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What is a 3-Statement Model?

The 3-Statement Model is an integrated model used to forecast the income statement, balance sheet, and cash flow statement of a company for purposes of projecting its forward-looking financial performance.

Table of Contents

How to Build a 3-Statement Model

How to format the 3-statement financial model, what is periodicity in 3-statement modeling, what is the structure of a 3-statement model, basic elements of an integrated 3-statement model, sec edgar: how to gather data for financial modeling, how to forecast the income statement, how to forecast the balance sheet, how to forecast the cash flow statement (cfs), how to create model plugs (cash and revolver), how to handle a circularity in excel, how to calculate shares outstanding and earnings per share (eps), how to perform scenario analysis in excel, how to conduct sensitivity analysis in excel, what skills are required in financial modeling, why does the 3-statement model matter.

While accounting enables us to understand a company’s historical financial statements, forecasting those financial statements enables us to explore how a company will perform under various assumptions, and visualize how a company’s decisions interact to impact the bottom line in the future.

• Operating Decisions → i.e. “Let’s reduce prices”
• Investing Decisions → i.e. “Let’s buy an additional machine”.
• Financing Decisions → i.e. “Let’s borrow a bit more”.

A well-built 3-statement financial model helps insiders (corporate development professionals, FP&A professionals ) and outsiders (institutional investors, sell side equity research , investment bankers and private equity ) see how the various activities of a firm work together, making it easier to see how decisions impact the overall performance of a business.

It is critical that a complex financial model like the 3-statement model adheres to consistent best practices. This makes both the task of modeling and auditing other people’s models far more transparent and useful.

We have written an Ultimate Guide to Financial Modeling Best Practices , but we’ll summarize some key takeaways here.

The most basic formatting rules are:

Color-code your model so that inputs are blue and formulas are black. The table below shows other color-coding best practices:

Format data consistently (for example, keep consistent unit scale, use 1 decimal place for numbers, 2 for per share data, 3 for share count ).

Avoid partial inputs that commingle cell references with hard numbers.

Maintain standard column widths and consistent header labels.

One of the first decisions in building a 3-statement financial model concerns the periodicity of the model.

Namely, what are the shortest periods the model will be partitioned into annual, quarterly, monthly, or weekly?

This will typically be determined by the purpose of the 3-statement financial model.

Below we’ve outlined some general rules of thumb:

• Annual Models →  Common when using the model to drive a DCF model valuation. This is because a DCF model needs at least 5 years of explicit forecasts before making terminal value. LBO models are often also annual models, as the investment horizon is around 5 years. An interesting wrinkle with annual models is the handling of the “stub period,” which captures the latest 3-, 6-, or 9-months of historical data).
• Quarterly Financial Models →  Common in equity research, credit, financial planning and analysis , mergers and acquisitions (accretion/dilution) models where near-term issues are a catalyst. These models often roll up into an annual buildup.
• Monthly Financial Models →  Common in restructurings and project finance where month-to-month liquidity tracking is critical. One thing to note is that the data required for a monthly buildup is usually unavailable to outside investors unless it is privately provided by management (companies typically don’t report monthly data). These models often roll up into a quarterly buildup.
• Weekly Financial Models →  Common in bankruptcies. The most common weekly model is called the thirteen-week cash flow model (TWCF). The TWCF is a required submission in a bankruptcy process to track cash and liquidity.

When models get large, adhering to a strict structure is critical.

The key rules of thumb to follow include the following:

• Use roll-forward schedules when forecasting balance sheet items.
• Aggregate inputs in one worksheet or one section of the model and separate them from calculations and outputs.
• Avoid linking files together.

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An integrated 3-statement model

3-statement models include a variety of schedules and outputs, but the core elements of a 3-statement model are, as you may have guessed, the income statement , balance sheet, and cash flow statement .

A key feature of an effective model is that it is “integrated,” which simply means that the 3-statement models are modeled in a way that accurately captures the relationship and linkages between the various line items across the financial statements.

An integrated model is powerful because it enables the user to change an assumption in one part of the model to see how it impacts all other parts of the model consistently and accurately.

Before firing up Excel to begin building the model, analysts need to gather the relevant reports and disclosures.

At a minimum, they will need to gather the company’s latest SEC filings, press releases and possibly equity research reports.

Data is much harder to find for private companies than for public companies, and reporting requirements vary across countries. We have compiled a guide on gathering historical data needed for financial modeling here .

The income statement illustrates a company’s profitability . All three statements are presented from left to right, with at least 3 years of historical results present to provide historical rations and growth rates on which forecasts are based.

Inputting the historical income statement data is the first step in building a 3-statement financial model.

The process involves either manual data entry from the given company’s 10K or press release or the use of an Excel plugin such as FactSet or Capital IQ to drop historical data directly into Excel.

Forecasting typically begins with a revenue forecast followed by the forecasting of various expenses. The net result is a forecast of the company’s income and earnings per share. The income statement covers a specified period such as a quarter or year.

For more on this, check out the complete income statement forecasting guide .

Income Statement Screenshot from the Wall Street Prep Premium Package Training Program

Unlike the income statement, which shows operating results over a period of time (a year or a quarter), the balance sheet is a snapshot of the company at the end of the reporting period. The balance sheet shows the company’s resources ( assets ) and funding for those resources ( liabilities and shareholder’s equity). Inputting historical balance sheet data is similar to inputting data in the income statement. The data is inputted either manually or through an Excel plugin.

In large part, the balance sheet is driven by the operating assumptions we make on the income statement. Revenues drive the operating assumptions in the income statement, and this continues to hold true in the balance sheet: Revenue and operating forecasts drive working capital items, capital expenditures , and a variety of other items. Think of the income statement as the horse and the balance sheet as the carriage. The income statement assumptions are driving the balance sheet forecasts.

Click here for a complete guide to forecasting the balance sheet

Balance Sheet Screenshot from the Wall Street Prep Premium Package Training Program

The final core element of the 3-statement model is the cash flow statement. Unlike on the income statement or the balance sheet, you aren’t actually forecasting anything explicitly on the cash flow statement and it isn’t necessary to input historical cash flow statement results before forecasting. That’s because the cash flow statement is a pure reconciliation of the year-over-year changes in the balance sheet.

Every individual line item on the cash flow statement should be referenced from elsewhere in the model (it should not be hardcoded) as it is a reconciliation. Constructing the cash flow statement correctly is critical to getting the balance sheet to balance.

Cash Flow Statement Screenshot from the Wall Street Prep Premium Package Training Program

A universal feature of a 3-statement model is that cash and a revolving credit line serve as model “plugs.” This simply means that a 3-statement model has an automatic way of ensuring that when the model projects a cash shortfall after all the line items are forecast, additional debt via a “revolver” account will automatically increase to finance the shortfall. Conversely, if the model projects a cash surplus, cash will accumulate by the amount of the surplus. While this seems fairly logical, modeling this can be tricky. Click here for a guide to forecasting the revolver and cash balance with a free excel template

Many financial models have to deal with a problem in Excel called circularity. A circularity in Excel occurs when one calculation either directly or indirectly depends on itself to arrive at an output. In the 3-statement model, a circularity can occur because of the model plugs described above. This makes Excel unstable and can create a variety of problems for those using the model. There are several elegant ways to deal with this issue. To learn more about how to deal with circularity, go to the “Circularity” section of our guide on financial modeling best practices.

For public companies, projecting earnings per share is key. Forecasting the numerator of EPS is described in detail in our income statement forecasting guide , but forecasting shares outstanding can be done in a variety of ways, ranging from simply keeping the historical share count constant to a more sophisticated analysis that takes into account forecasts for share repurchases and issuances. Click here for a guide to forecasting EPS .

The purpose of building a 3-statement financial model is to observe how various operating, financing and investing assumptions impact a company’s forecasts. Once the initial case is built, it is useful to see — using either equity research, management guidance, or other assumptions — how the forecasts change given changes in a variety of key model assumptions. To this end, financial models often have a drop-down list that provides the user with the option to select either the original case (often called “base case”) or a variety of other scenarios (“strong case,” “weak case,” “management case,” etc.), which is referred to as scenario analysis .

A close cousin of scenario analysis is sensitivity analysis . Any good 3-statement financial model (or a DCF model , LBO model , or M&A model, for that matter) will include the ability to toggle between various scenarios to see how the model’s outputs change, as well as something called sensitivity analysis. Sensitivity analysis is the process of isolating one (usually critical) model output to see how changes impact one or two key inputs.

For example, how would Apple’s 2020 EPS forecast change at various assumptions for 2020 revenue growth and gross profit margins ? Click here to learn how to build a sensitivity analysis into a 3-statement model .

Building a 3-statement financial model requires the combination of the following skills:

• Excel: Getting strong in Excel may seem daunting, but it’s actually the easiest skill on this list to develop. A general rule of thumb in finance is to avoid using the mouse and memorize some keyboard shortcuts. Accounting: This is the single most important (and least glamorous) part of getting strong in modeling. Understanding how the three financial statements are tied together and what each line item on the income statement, balance sheet and cash flow statement represents is the key to the conceptual understanding of how a 3-statement financial model works.
• Reading Financial Reports: Even though 3-statement financial models are designed to illuminate a firm’s future performance, setting up the model depends on a thorough understanding of what happened to the company in the past. For that, investment bankers and investors gather historical financial data . Whether you’re looking through SEC filings or quarterly press releases, or modeling a private company where you’re only provided piecemeal disclosures, finding the data you need will feel like a scavenger hunt. Your ability to navigate those reports and to find the exact data you are seeking can make a difference when building a model.
• Company and industry knowledge: One of the realities for new investment bankers is that they are often tasked with building a lot of models for industries and companies they don’t really know and don’t have time to learn. A 3-statement financial model’s assumptions about things like revenue growth and profit margins are critical to making a good forecast, so knowing the resources available to collect company and industry insights is very important. Quite often, investment bankers rely on sell side equity research to quickly get smart on the company and industry. Meanwhile, institutional investors (who, unlike investment bankers, have skin in the game) spend even more time getting to know the company, often through a lot of due diligence such as speaking with management and customers, going on-site visits, and trying out products themselves.
• Attention to detail: One wrong decimal place is all it takes to completely screw up a model. In investment banking, corporate finance, and equity research, the stakes are high and attention to detail is often the difference between getting promoted and getting fired.

At their core, all M&A, DCF, and LBO models depend on forecasts produced in the 3-statement model.

The output of a 3-statement model serves as the foundation for several types of financial models :

• Discounted Cash Flow (DCF) Modeling: In investment banking , private equity , and on the investment management side, practitioners value companies using a methodology called the DCF approach. This approach looks at a company’s future expected cash flows and discounts those cash flows to the present. While analysts sometimes rely on a “back of the envelope” approach when building the DCF, a rigorous DCF analysis requires a full 3-statement model to feed the cash flow forecasts.
• Mergers & Acquisitions (M&A) Modeling: To analyze the impact of an acquisition on a variety of key considerations for buyers and sellers, such as the acquirer’s profitability, accretion/dilution, capital structure, synergies post-acquisition, and the seller’s tax implications, 3-statement financial models for both companies need to be constructed and fused together.
• Leveraged Buyout (LBO) Modeling The only way to truly understand how a leveraged buyout (or a management buyout) or a corporate bankruptcy or restructuring will impact a company’s performance (and thus ultimately determine the potential returns to the financial sponsors and lenders involved in the buyout), is to construct a 3-statement financial model for the buyout candidate, and it must be flexible enough to handle the new leveraged capital structure.

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Financial modeling case studies: How to learn from real world examples of financial modeling

1. introduction to financial modeling, 2. forecasting revenue for a tech startup, 3. valuation of a real estate investment, 4. analyzing financial statements for a manufacturing company, 5. building a budget for a non-profit organization, 6. creating a financial model for a retail business expansion, 7. evaluating investment opportunities in the stock market, 8. projecting cash flow for a small business, 9. conclusion and key takeaways from financial modeling case studies.

## The Essence of financial modeling

financial modeling is the art and science of creating mathematical representations of financial situations. These models help us analyze, forecast, and make decisions based on data. Here are some key insights from different perspectives:

1. Purpose and Scope :

- Financial models serve various purposes, such as valuation, budgeting, risk assessment, and scenario analysis.

- They can be simple or complex, depending on the problem at hand. For instance:

- A startup might create a basic revenue projection model to attract investors.

- An investment bank might build an intricate discounted cash flow (DCF) model to value a company for an acquisition.

2. components of a Financial model :

- Assumptions : Every model starts with assumptions. These can relate to growth rates, interest rates, inflation, market conditions, and more.

- Data Sources : Reliable data is crucial. Financial statements, historical data, market indices, and economic indicators feed into the model.

- Structure : Models can be spreadsheet-based (Excel, Google Sheets) or coded (Python, R). The structure defines how inputs flow to outputs.

- Formulas and Functions : Formulas represent relationships (e.g., revenue = price × quantity). Functions (e.g., NPV, IRR) perform calculations.

- Sensitivity Analysis : Varying assumptions helps assess model sensitivity and robustness.

3. types of Financial models :

- Valuation Models :

- DCF: Estimates the present value of future cash flows .

- comparable Company analysis (Comps): Compares a company's metrics to peers'.

- Precedent Transactions: Analyzes historical M&A deals.

- Forecasting Models :

- Sales Forecast: Predicts future sales based on historical trends.

- Expense Forecast: Estimates costs (operating, capital, etc.).

- working Capital model : projects short-term liquidity needs.

- Risk Models :

- monte Carlo simulation : Quantifies uncertainty by running thousands of scenarios.

- credit Risk models : assess creditworthiness of borrowers .

- Portfolio Models :

- Markowitz's Efficient Frontier: Optimizes asset allocation.

- black-Litterman model : Combines market views with historical data.

4. Example: Building a DCF Model :

- Imagine valuing a tech startup. Steps include:

1. forecasting Cash flows : project future revenues , expenses, and taxes.

2. Discounting Cash Flows : Apply a discount rate (usually WACC) to calculate present value.

3. Terminal Value : Estimate the value beyond the explicit forecast period.

4. Sum of Present Values : Add up all discounted cash flows .

5. Sensitivity Analysis : Test different growth rates, discount rates, and terminal values.

5. Challenges and Best Practices :

- Garbage In, Garbage Out : Models are only as good as the data and assumptions.

- Overfitting : Avoid making models too complex to fit historical data perfectly.

- Scenario Planning : Consider best-case, worst-case, and base-case scenarios.

- Documentation : Document assumptions, formulas, and methodology.

- Model Auditing : Regularly review and validate models.

In summary, financial modeling empowers decision-makers to navigate uncertainty, allocate resources wisely , and plan for the future. Whether you're valuing a company, managing investments, or optimizing a portfolio, understanding the nuances of financial modeling is a superpower in the financial world.

Remember, the devil is in the details, so let's dive deeper into the intricacies of financial modeling!

# Example Python code snippet for calculating NPV

Def calculate_npv(cash_flows, discount_rate):

Npv = sum([cf / (1 + discount_rate) t for t, cf in enumerate(cash_flows)])

Cash_flows = [100, 150, 200, 250] # Cash flows for four years

Discount_rate = 0.1 # Discount rate (10%)

Result = calculate_npv(cash_flows, discount_rate)

Print(f"NPV: ${result:.

Introduction to Financial Modeling - Financial modeling case studies: How to learn from real world examples of financial modeling

1. The Founder's Optimism: balancing Ambition and realism

- Insight : Founders are often fueled by boundless optimism. They envision exponential growth, rapid user adoption, and hockey-stick revenue curves. While this enthusiasm is essential for entrepreneurial success , it must be tempered with realism.

- Example : Imagine a SaaS startup offering project management software . The founder believes that within a year, they'll have 10,000 paying customers. However, a more grounded approach involves analyzing market size, competitive landscape, and customer acquisition costs . A conservative estimate might project 2,000 customers in the first year.

2. Investor Expectations: Balancing Aggressiveness and Prudence

- Insight : Investors seek high returns and are willing to take calculated risks. They scrutinize revenue forecasts to assess growth potential and valuation.

- Example : A venture capitalist evaluating the same SaaS startup will consider market trends, competitive advantages, and scalability. If the founder's projection aligns with industry norms, it signals alignment. However, overly aggressive forecasts may raise eyebrows.

3. The Analyst's Rigor: Data-Driven Modeling

- Insight : Financial analysts employ data-driven models to forecast revenue. They consider historical performance, seasonality, customer acquisition channels , and pricing strategies.

- Example : The analyst builds a cohort-based model, tracking customer cohorts over time. By analyzing churn rates , expansion revenue, and customer lifetime value, they create a dynamic revenue projection. sensitivity analysis helps account for uncertainties.

4. Challenges and Mitigations: Navigating the Unknown

- Insight : Startups face uncertainties—market shifts, product pivots, and unforeseen events. Revenue forecasts must be adaptable.

- Example : The SaaS startup experiences unexpected churn due to a competitor's aggressive pricing. To mitigate, they diversify customer acquisition channels, invest in customer success, and adjust pricing tiers.

5. Scenario Planning: Preparing for the Unexpected

- Insight : scenario-based forecasting allows for flexibility. Founders and investors explore best-case, worst-case, and base-case scenarios.

- Example : In the worst-case scenario , the startup faces slower adoption and higher churn. They reduce burn rate , extend runway, and explore strategic partnerships . In the best-case scenario, they accelerate growth and raise additional capital .

6. Feedback Loop: Iterative Refinement

- Insight : Revenue forecasts evolve. Regular reviews, actual vs. Projected analyses, and feedback from sales teams refine the model.

- Example : The startup's actual revenue falls short in the first quarter. The founder revisits assumptions, recalibrates growth rates, and adjusts the forecast.

Remember, revenue forecasting isn't a crystal ball; it's a dynamic process. By combining optimism, data, and adaptability, tech startups can chart a course toward sustainable growth. Whether you're a founder dreaming big, an investor assessing risk, or an analyst crunching numbers, revenue forecasting remains at the heart of financial modeling.

Forecasting Revenue for a Tech Startup - Financial modeling case studies: How to learn from real world examples of financial modeling

## The importance of Real estate Valuation

valuing a real estate investment involves estimating its fair market value, which serves as the foundation for investment decisions. Here are some key points to consider:

1. Market Dynamics and Property-Specific Factors:

- real estate markets are influenced by macroeconomic trends, local supply and demand dynamics , interest rates, and investor sentiment.

- Property-specific factors include location, property type (residential, commercial, industrial), condition, and potential for future development.

2. Valuation Approaches:

- Income Approach: This method estimates value based on the property's income-generating potential. It's commonly used for income-producing properties like rental apartments, office buildings, and shopping centers.

- Example: calculating the net operating income (NOI) by subtracting operating expenses from rental income, and then applying a capitalization rate.

- sales Comparison approach : This approach compares the subject property to recently sold comparable properties (comps). It's useful for residential properties.

- Example: If similar houses in the neighborhood sold for $500,000, the subject property's value might be estimated around that range.

- Cost Approach: This method calculates the cost to replace the property with a similar one. It's relevant for unique properties or when comps are scarce.

- Example: Assessing the cost of constructing a similar building, adjusting for depreciation.

3. Discounted Cash Flow (DCF) Analysis:

- Widely used for commercial properties, DCF estimates the present value of future cash flows (rental income, resale proceeds) by discounting them to today's dollars.

- Example: Projecting rental income, expenses, and terminal value over a holding period and discounting them using an appropriate discount rate .

4. Challenges and Risks:

- Illiquidity: real estate investments are less liquid than stocks or bonds.

- Market Volatility: Property values can fluctuate due to economic cycles or unforeseen events.

- Property-Specific Risks: Environmental issues, tenant vacancies, and regulatory changes impact value.

5. Case Study Example: Residential Apartment Building

- Imagine you're evaluating a 10-unit apartment building in a growing neighborhood.

- Gather data on rental income, operating expenses, and recent sales of similar properties.

- Calculate NOI, estimate market cap rate , and apply it to the NOI to get an initial value.

- Adjust for property-specific factors (e.g., deferred maintenance, location).

- Consider potential rental growth and exit strategy (selling after 5 years).

- perform sensitivity analysis to account for different scenarios.

6. Conclusion:

- valuation is both art and science . It requires judgment, research, and a deep understanding of the market .

- Always consider multiple valuation methods and triangulate your estimate.

- Remember that real estate is a long-term investment; focus on fundamentals.

Remember, successful real estate investors combine quantitative analysis with intuition. Whether you're buying your first home or managing a large portfolio, mastering valuation techniques is essential.

Valuation of a Real Estate Investment - Financial modeling case studies: How to learn from real world examples of financial modeling

1. Introduction to Manufacturing Companies:

Manufacturing companies operate in diverse sectors, producing goods ranging from automobiles and electronics to textiles and machinery. Their financial health is influenced by production volumes, supply chain efficiency , raw material costs, and market demand. understanding their financial statements is crucial for investors, creditors, and management.

2. income Statement analysis :

- revenue and Cost of Goods sold (COGS): Manufacturing firms generate revenue from selling products . The top line (revenue) reflects sales, while COGS represents the direct costs incurred to produce those goods (raw materials, labor, and manufacturing overhead).

- gross Profit margin : Calculated as `(Revenue - COGS) / Revenue`, this metric indicates how efficiently the company produces goods. A higher margin suggests better cost control.

- Operating Expenses: These include selling, general, and administrative expenses (SG&A). Analyzing SG&A as a percentage of revenue helps assess operational efficiency .

3. balance Sheet insights :

- Inventory Management: Manufacturing companies often have substantial inventory. A high inventory turnover ratio (Cost of Goods Sold / Average Inventory) indicates efficient inventory management.

- Accounts Receivable (AR) and accounts payable (AP): Timely collection of AR and extended payment terms for AP impact cash flow . A low AR turnover or high days payable outstanding (DPO) may signal issues.

- Fixed Assets: Machinery, plants, and equipment are critical for manufacturing. Analyze the asset turnover ratio (Revenue / Average Fixed Assets) to assess asset utilization.

4. cash Flow statement Considerations:

- Operating Activities: Cash flow from operations reflects the company's ability to generate cash from core business activities. Positive operating cash flow is essential.

- Investing Activities: Capital expenditures (CAPEX) for machinery upgrades or expansion impact cash flow. Evaluate CAPEX relative to revenue.

- Financing Activities: Debt repayments, dividends, and equity issuance affect cash flow . A stable capital structure is desirable.

5. key Ratios and metrics :

- Return on Assets (ROA): ROA measures how efficiently the company uses its assets to generate profits. It's calculated as `Net Income / Average Total Assets`.

- debt-to-Equity ratio : Manufacturing firms often rely on debt financing. A high debt-to-equity ratio may indicate risk.

- Current Ratio: Assess short-term liquidity using `Current Assets / Current Liabilities`. A ratio above 1 indicates a healthy liquidity position.

6. Example Scenario: XYZ Manufacturing Co.

- XYZ produces industrial machinery. Its gross profit margin has improved due to cost-cutting measures .

- However, high inventory levels raise concerns. The company should optimize inventory turnover .

- XYZ's CAPEX for a new production line impacted cash flow but promises future growth.

analyzing financial statements for manufacturing companies requires a holistic approach. investors should consider industry-specific challenges, competitive dynamics, and macroeconomic factors. By combining quantitative analysis with qualitative insights, we gain a comprehensive understanding of a manufacturing firm's financial health. Remember, each case study provides unique lessons, and real-world examples enhance our financial modeling skills .

Analyzing Financial Statements for a Manufacturing Company - Financial modeling case studies: How to learn from real world examples of financial modeling

1. Understanding the Non-Profit Landscape:

Non-profit organizations exist to serve a social or humanitarian purpose rather than generate profits. Their financial health directly impacts their ability to fulfill their mission. Here are some key insights:

- Mission-Driven Goals: Non-profits prioritize their mission above all else. Their budgets should align with achieving that mission.

- diverse Funding sources : Non-profits rely on donations, grants, sponsorships, and program fees. Each funding source has its own requirements and restrictions.

- Transparency and Accountability: Non-profits must be transparent about their financials to maintain trust with donors and stakeholders.

2. Budget Components:

- Program Expenses: These include costs related to the organization's core programs or services. For example, if a non-profit runs an after-school tutoring program, expenses might include salaries for tutors, educational materials, and facility costs.

- Administrative Expenses: These cover overhead costs like rent, utilities, office supplies, and salaries of administrative staff.

- Fundraising Expenses: Non-profits need funds to sustain their operations. Fundraising expenses include marketing, events, and donor management.

- Capital Expenses: These are one-time investments (e.g., purchasing equipment or renovating facilities).

3. Budgeting Process:

- Start with the Mission: Understand the non-profit's mission and strategic goals. How will the budget support these objectives?

- Historical Data: Analyze past financials to identify trends and patterns . Consider seasonality and any major changes.

- Zero-Based Budgeting: Unlike for-profit businesses, non-profits often use zero-based budgeting. Each expense must be justified from scratch.

- Involving Stakeholders: Engage board members, staff, and volunteers in the budgeting process. Their insights are invaluable.

4. budgeting Challenges and solutions :

- Volatility of Funding: Non-profits face uncertainty due to fluctuating donations and grants. Solution: diversify funding sources and build reserves.

- Restricted vs. Unrestricted Funds: Some donations come with restrictions (e.g., for a specific program). Balancing restricted and unrestricted funds is crucial.

- Overhead Myth: Donors sometimes expect non-profits to have minimal overhead. Educate them about the importance of investing in infrastructure.

5. Example Scenario: XYZ Education Foundation:

- Mission: providing quality education to underprivileged children.

- Budget Highlights:

- Program Expenses: $300,000 (teacher salaries, textbooks, classroom materials)

- Administrative Expenses: $50,000 (office rent, utilities, admin staff)

- Fundraising Expenses: $20,000 (annual gala, donor outreach)

- Capital Expenses: $40,000 (new computers for classrooms)

- Challenges: Seasonal fluctuations in donations; need to balance program impact with administrative efficiency.

Remember, building a budget for a non-profit involves empathy, creativity, and adaptability. It's not just about numbers; it's about making a difference in the lives of others.

Building a Budget for a Non Profit Organization - Financial modeling case studies: How to learn from real world examples of financial modeling

1. The Decision to Expand: A Strategic Perspective

Expanding a retail business is a significant decision that requires careful consideration from multiple angles. Here are insights from different viewpoints:

- Business Strategy : Before diving into financial modeling, the retail management team must evaluate the strategic rationale for expansion. Questions to ponder include:

- Market Opportunity : Is there unmet demand in the target market? What are the growth prospects?

- Competitive Landscape : How intense is the competition? Are there barriers to entry?

- Brand Positioning : Will the expansion align with the existing brand image?

- Risk Assessment : What are the risks associated with expansion (e.g., cannibalization of existing stores, operational challenges)?

- Financial Perspective : Financial modeling comes into play once the strategic decision is made. Here's how it unfolds:

2. building the Financial model : Key Components

A well-constructed financial model for retail expansion includes the following components:

- Sales Forecasting :

- Historical Data : Analyze historical sales data to identify trends and seasonality.

- Market Research : Estimate future sales based on market size, demographics, and consumer behavior.

- Assumptions : Incorporate assumptions about foot traffic, conversion rates, and average transaction value.

- Example : Suppose a clothing retailer plans to open a new store in a bustling shopping mall. The model predicts sales based on foot traffic patterns and the store's product mix.

- Operating Expenses :

- Fixed Costs : Include rent, salaries, utilities, and other fixed expenses.

- Variable Costs : Consider inventory costs, marketing expenses, and commissions.

- Growth Factors : Adjust expenses for the expansion (e.g., additional staff, marketing campaigns).

- Example : The model accounts for increased rent and additional staffing costs for the new store.

- Capital Expenditures (CapEx) :

- Store Build-Out : Estimate costs for leasehold improvements, fixtures, and signage.

- Equipment : Include expenses for cash registers, shelving, and display units.

- Example : The model allocates funds for renovating the new store space and purchasing necessary equipment.

- cash Flow and Working capital :

- Cash Inflows : Consider sales receipts, loans, and equity injections.

- Cash Outflows : Account for expenses, loan repayments, and inventory purchases.

- Working Capital : Monitor inventory turnover, receivables, and payables.

- Example : The model ensures sufficient working capital to manage day-to-day operations .

3. sensitivity Analysis and Scenario planning

Financial models are inherently uncertain. Therefore, it's crucial to perform sensitivity analysis and scenario planning :

- Best Case : Optimistic assumptions (e.g., higher sales growth).

- Worst Case : Pessimistic scenarios (e.g., lower foot traffic).

- Base Case : Realistic projections.

- Example : The model assesses the impact of varying sales growth rates on profitability.

4. Decision metrics and Investment appraisal

Finally, evaluate the expansion using relevant metrics:

- Net Present Value (NPV) : Is the project financially viable?

- internal Rate of return (IRR) : What return does the investment offer?

- Payback Period : How quickly will the initial investment be recovered?

- Example : The model calculates NPV and IRR to guide the decision-makers .

In summary, creating a robust financial model for retail expansion involves strategic alignment, meticulous data analysis, and thoughtful assumptions. By considering various perspectives and using real-world examples, businesses can make informed decisions that drive growth.

*(Note: The above content is and creativity. For specific case studies or real-world examples , additional research would be necessary.

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## Understanding the Context

Before we dive into the specifics, let's set the stage. Imagine you're an individual investor looking to allocate your capital wisely in the stock market. You've done your research, identified potential investment opportunities , and now you need to make informed decisions. Here's where financial modeling comes into play.

### Insights from Different Perspectives

1. Fundamental Analysis vs. Technical Analysis:

- Fundamental analysis focuses on understanding a company's intrinsic value by examining its financial statements , industry position, management quality, and growth prospects. It involves metrics like price-to-earnings (P/E) ratio, earnings per share (EPS), and book value.

- Technical analysis , on the other hand, relies on historical price and volume data . Traders use charts, patterns, and indicators to predict future price movements . While fundamental analysis looks at the "what" (company performance), technical analysis focuses on the "when" (timing of trades).

2. Risk and Return Trade-off:

- Investors face a perpetual trade-off between risk and return . high-risk investments (e.g., small-cap stocks , emerging markets) tend to offer higher potential returns, but they also come with greater volatility.

- low-risk investments (e.g., blue-chip stocks , government bonds) provide stability but may yield lower returns. balancing risk and return is crucial.

3. Valuation Methods:

- Discounted Cash Flow (DCF) : This method estimates the present value of a company's future cash flows. It considers factors like growth rate, discount rate, and terminal value.

- Comparable Company Analysis (Comps) : Compare a company's valuation metrics (P/E, EV/EBITDA) to those of similar publicly traded companies .

- precedent Transactions analysis : Analyze historical M&A deals to assess valuation multiples.

4. Qualitative Factors:

- Beyond numbers, consider qualitative aspects. Is the company in a growing industry? Does it have a competitive advantage (e.g., patents, brand loyalty)?

- Management quality, corporate governance, and industry trends matter. For example, a tech company with visionary leadership may outperform its peers.

### In-Depth Exploration

Let's break down the evaluation process further:

1. Company Research and Industry Analysis :

- Understand the company's business model, revenue sources, and competitive landscape.

- Investigate industry trends, regulatory changes, and disruptive technologies.

2. financial Statement analysis :

- Scrutinize the income statement, balance sheet, and cash flow statement.

- calculate financial ratios (e.g., debt-to-equity, current ratio) to assess financial health.

3. Forecasting Future Performance :

- Use historical data to project future revenue , expenses, and earnings.

- Sensitivity analysis helps account for uncertainties.

4. Valuation Techniques :

- Apply DCF by estimating future cash flows and discounting them.

- Compare valuation multiples (P/E, P/B) with industry peers.

5. Risk Assessment :

- Identify risks (market risk, business risk, liquidity risk).

- Diversify your portfolio to mitigate specific risks.

### Examples

- Company X : A tech startup with disruptive AI technology. high growth potential but lacks profitability. Valuation based on expected future cash flows.

- Company Y : A stable utility company. Low growth but consistent dividends. Valuation using P/E ratio compared to industry average.

Remember, investing is both science and art. Quantitative models provide a framework, but intuition and judgment play a crucial role . evaluate investment opportunities holistically, considering all available information.

Happy investing!

Evaluating Investment Opportunities in the Stock Market - Financial modeling case studies: How to learn from real world examples of financial modeling

## understanding the Importance of Cash flow Projections

cash flow projections provide a forward-looking view of how money moves in and out of a business. Here are some key points to consider:

1. Liquidity Assessment : cash flow projections allow business owners and managers to assess the company's liquidity. By forecasting cash inflows (such as sales revenue, loans, or investments) and outflows (such as operating expenses, loan repayments, and capital expenditures), they can identify potential cash shortages or surpluses.

2. decision-Making tool : Entrepreneurs and financial analysts use cash flow projections to make critical decisions. For instance:

- When should the company invest in new equipment or expand its operations?

- Is the business generating enough cash to cover its obligations?

- Should the company seek external financing or rely on internal resources?

3. Scenario Analysis : Cash flow projections allow for scenario analysis. By adjusting assumptions (e.g., sales growth rate , payment terms, or inventory turnover), businesses can explore different outcomes. For example:

- What if sales increase by 20%? How does that impact cash flow?

- What if a major customer delays payment? How does it affect liquidity?

## Components of Cash Flow Projections

Let's break down the components of a typical cash flow projection :

1. Operating Activities :

- Cash Inflows : These include cash sales, collections from customers, and interest received.

- Cash Outflows : Operating expenses (salaries, rent, utilities), payments to suppliers, and taxes fall under this category.

2. Investing Activities :

- Cash Inflows : proceeds from asset sales (e.g., selling equipment or property).

- Cash Outflows : Capital expenditures (e.g., purchasing new machinery or renovating facilities).

3. Financing Activities :

- Cash Inflows : Borrowings (loans, lines of credit) and equity financing (issuing shares).

- Cash Outflows : Repaying debt and paying dividends to shareholders.

## Example Scenario

Consider a small retail business, "GreenLeaf Boutique," which sells organic skincare products. Here's a simplified cash flow projection for the next quarter:

- Cash Inflows :

- Sales revenue from in-store and online sales: $50,000

- Collections from credit sales: $10,000

- Cash Outflows :

- Rent: $5,000

- Salaries and wages: $15,000

- Inventory purchases: $20,000

- None (no asset sales)

- Purchasing new display shelves: $2,000

- None (no new loans or equity financing)

- Repaying a short-term loan : $3,000

## Conclusion

Cash flow projections are dynamic tools that evolve as the business environment changes. Regularly updating these projections helps businesses stay agile and make informed decisions. Whether you're a startup founder, a financial analyst, or an investor, understanding cash flow is crucial for sustainable growth. Remember that accurate projections require thoughtful assumptions and continuous monitoring.

Projecting Cash Flow for a Small Business - Financial modeling case studies: How to learn from real world examples of financial modeling

Financial modeling is both an art and a science . It involves constructing mathematical representations of financial situations to aid decision-making , risk assessment, and strategic planning. As we wrap up our exploration of financial modeling case studies, several critical takeaways emerge:

1. Holistic Approach to Modeling:

- effective financial models consider multiple dimensions, including revenue, costs, capital structure, and market dynamics. A holistic approach ensures that no critical aspect is overlooked.

- Example: When building a valuation model for a tech startup , we must account for growth rates, customer acquisition costs, churn rates, and competitive pressures.

2. sensitivity Analysis matters :

- Financial models are inherently uncertain due to variables like interest rates, exchange rates, and market volatility. Sensitivity analysis helps quantify the impact of these uncertainties.

- Example: In a project finance model for a renewable energy plant, sensitivity analysis reveals how changes in electricity prices or construction costs affect project viability.

3. Scenario Planning and Stress Testing:

- real-world scenarios rarely unfold as predicted. Financial models should incorporate scenario planning and stress testing to assess resilience .

- Example: A bank's credit risk model should simulate adverse economic scenarios (e.g., recession) to evaluate loan portfolio performance .

4. Assumptions Drive Outcomes:

- Every financial model relies on assumptions. Scrutinize these assumptions rigorously, as they significantly influence results.

- Example: In a discounted cash flow (DCF) model, the assumed discount rate profoundly impacts the calculated present value of future cash flows.

5. Model Simplicity vs. Complexity:

- Striking the right balance between simplicity and complexity is crucial. Overly complex models may be unwieldy, while overly simplistic ones may miss essential nuances.

- Example: A startup's revenue projection model can start with straightforward assumptions (e.g., linear growth) and gradually incorporate more sophisticated factors (seasonality, customer cohorts).

6. Model Validation and Backtesting:

- validate financial models against historical data or benchmark against industry standards . Backtesting ensures that models perform well in practice.

- Example: A quantitative trading model should be backtested using historical stock price data to assess its predictive power.

7. Communication and Visualization:

- Clear communication of model results is essential. Visualizations (charts, graphs) enhance understanding.

- Example: When presenting a budget model to stakeholders , use visual aids to highlight key drivers (revenue, expenses, margins).

8. Ethics and Assumptions:

- Models can inadvertently perpetuate biases or unethical practices. Be aware of assumptions related to social impact, environmental sustainability, and fairness.

- Example: A climate change risk model should consider ethical implications and potential harm caused by certain investments.

9. Iterative Refinement:

- Financial models are not static; they evolve with new data and insights. Regularly revisit and refine your models.

- Example: A real estate development model should adapt to changing market conditions, interest rates, and construction costs.

10. Learning from Failures:

- Even flawed models provide valuable lessons. Analyze failures, understand their root causes, and improve.

- Example: A bankruptcy prediction model that failed to predict a company's collapse teaches us about hidden risks and data limitations.

financial modeling is a continuous learning process. By studying real-world case studies , we gain practical wisdom that transcends textbooks. Remember that no model is perfect, but a well-constructed one equips decision-makers with better tools for navigating complex financial landscapes.

Conclusion and Key Takeaways from Financial Modeling Case Studies - Financial modeling case studies: How to learn from real world examples of financial modeling

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The Amazon Case Study (New Edition)

• What You'll Learn
• Career Programs
• What Students Say

The Amazon Case Study

Welcome to CFI’s advanced financial modeling course – a case study on how to value Amazon.com, Inc (AMZN).  This course is designed for professionals working in investment banking, corporate development, private equity, and other areas of corporate finance that deal with valuing companies and applying various methods of valuation.

Advanced Financial Modeling Course Objectives

This advanced financial modeling course has several objectives including:

• Use Amazon’s financial statements to build an integrated 3-statement financial forecast
• Learn how to structure an advanced valuation model effectively
• Set up all the assumptions and drivers required to build out the financial forecast and DCF model
• Create a 10-year forecast for Amazon’s business, including an income statement, balance sheet, cash flow statement, supporting schedules, and free cash flow to the firm (FCFF)
• Learn how to deal with advanced topics like segmented revenue, capital additions, finance leases, operating leases, and more
• Perform comparable company analysis (Comps) utilizing publicly available information
• Perform a Sum-Of-The-Parts (SOTP) valuation of Amazon, as well as consider precedent transactions, equity research price targets, and Amazon’s 52-week trading range
• Generate multiple operating scenarios to explore a range of outcomes and values for the business
• Perform detailed sensitivity analysis on key assumptions and assess the overall impact on equity value per share

Amazon (AMZN) Case Study

This course is built on a case study of Amazon, where students are tasked with building a financial modeling and performing comparable company analysis to value AMZN shares and make an investment recommendation.

Through the course of the transaction, students will learn:

• How to build a detailed financial forecast of Amazon
• How to apply various valuation methodologies to derive an implied value for Amazon
• How to develop an investment recommendation on the shares of Amazon
• How to create a dashboard and summary output that highlights the most important information from the model

Why Take CFI’s Advanced Financial Modeling Course?

This course is perfect for anyone who wants to learn how to build a detailed financial model for a public company, from the bottom up. The video-based lessons will teach you all the formulas and functions to calculate things like segmented revenue, marketable securities, accrued expenses, unearned revenue, stock-based compensation, long-term debt, finance and operating leases, and much more.

In addition to learning the detailed mechanics of how to build the financial model for Amazon, students will also learn how to think about intrinsic value, and develop an investment recommendation.

What’s Included in the Advanced Modeling Course?

This advanced financial modeling and valuation course include all of the following:

• Blank Amazon model template
• Completed Amazon model template (dashboard, DCF model, Comps model, WACC analysis, scenarios, etc.)
• 4+ hours of detailed video instruction
• Certificate of completion

Recommended Preparatory Courses

We recommend you complete the following courses or possess the equivalent knowledge before taking this course:

• Excel Fundamentals – Formulas for Finance
• DCF Valuation Modeling
• Comparable Valuation Analysis
• 3-Statement Modeling

This course is intended solely for educational and training purposes. The information contained herein does not constitute investment advice, or an offer to sell, or the solicitation of any offer to buy any securities of Amazon.com, Inc. (NasdaqGS: AMZN) or any other security.

This content in this course has not been approved or disapproved by (a) Amazon.com, Inc., (b) S&P Global Market Intelligence Inc., (c) any equity research analyst that covers Amazon.com, Inc., or (d) any securities regulator in any province or territory of Canada, the United States Securities and Exchange Commission or any other United States federal or state regulatory authority, and no such commission or authority has passed upon the merits, accuracy or adequacy of this content, nor is it intended that any will.

The information in this course does not constitute the provision of investment, tax, legal or other professional advice. As with all investments, there are associated risks and you could lose money investing – including, potentially, your entire investment. Prior to making any investment, a prospective investor should consult with its own investment, accounting, legal and tax advisers to evaluate independently the risks, consequences and suitability of that investment.

No reliance may be placed for any purpose on the information and opinions contained herein or their accuracy or completeness, and nothing contained herein may be relied upon in making any investment decision.

Approx 12.5h to complete

100% online and self-paced

What you'll learn

Introduction, building a financial forecast, implied value analysis, investment recommendation, course conclusion, qualified assessment, this course is part of the following programs.

Why stop here? Expand your skills and show your expertise with the professional certifications, specializations, and CPE credits you’re already on your way to earning.

Financial Modeling & Valuation Analyst (FMVA®) Certification

• Skills Learned Financial modeling and valuation, sensitivity analysis, strategy
• Career Prep Investment banking and equity research, FP&A, corporate development

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3 Statement Model

A dynamically integrated financial model developed by linking together a company’s three primary statements.

Matthew started his finance career working as an investment banking analyst for Falcon Capital Partners, a healthcare IT boutique, before moving on to  work for Raymond James  Financial, Inc in their specialty finance coverage group in Atlanta. Matthew then started in a role in corporate development at Babcock & Wilcox before moving to a corporate development associate role with Caesars Entertainment Corporation where he currently is. Matthew provides support to Caesars'  M&A  processes including evaluating inbound teasers/ CIMs  to identify possible acquisition targets, due diligence, constructing  financial models , corporate valuation, and interacting with potential acquisition targets.

Matthew has a Bachelor of Science in Accounting and Business Administration and a Bachelor of Arts in German from University of North Carolina.

Prior to becoming our CEO & Founder at Wall Street Oasis, Patrick spent three years as a Private Equity  Associate for Tailwind Capital  in New York and two years as an Investment Banking Analyst at Rothschild.

Patrick has an  MBA  in Entrepreneurial Management from The Wharton School and a BA in Economics from Williams College.

• What Is A Three-Statement Model?

3 Core Elements Of A Three-Statement Finance Model

• Understanding A Three-Statement Model
• How To Build A Three-Statement Model?

Free WSO Financial Modeling Templates

What Is a Three-Statement Model?

A three-statement model is a dynamically integrated financial model developed by linking together a company’s three primary statements. This is one of the most important models as it serves as a base for other complex models, such as the Leveraged Buyout (LBO) Model or the Discounted Cash Flow (DCF) Model .

It uses the numbers from the company’s historical financial statements as base inputs, makes some assumptions about the company’s future operations, and forecasts the figures in the three statements based on these inputs and assumptions.

This model projects the company’s financial health if certain decisions are made or if certain assumptions materialize in the future.

In this article, we will explain the three statements, what a three-statement model is, and how to build one.

Key Takeaways

• A three-statement model is a comprehensive financial modeling tool that integrates a company's three key financial statements: the income statement, balance sheet, and cash flow statement.
• The primary purpose of a three-statement model is to provide a dynamic and interconnected financial forecast that helps in decision-making, strategic planning, and valuation. It is crucial for investment analysis, budgeting, and corporate finance activities.
• The model relies on various assumptions and inputs, such as revenue growth rates, expense margins, working capital changes, capital expenditures, and financing activities.
• Changes in one statement automatically reflect in the other statements. For example, net income from the income statement affects the equity section of the balance sheet and the starting point for the cash flow statement.

The three financial statements are the income statement , the balance sheet , and the cash flow statement . The information in each is linked to the information in the other two statements.

These three statements are interconnected, and changes in one can affect the others. Together, they provide a comprehensive view of a company's financial health and performance.

The three statements are vital to gaining a complete understanding of a company’s performance. First, the income statement provides insight into income and expenses. The balance sheet focuses on managing capital. Finally, the cash flow statement illustrates how cash is generated and invested.

The top-performing companies are efficient in all three components of the three statements—their operations, capital allocation, and cash management. Efficiency in each of these areas is significant due to the interconnectedness of the three statements. 

Data from the financial statements is used to conduct further analyses and create forecasts to help make decisions for the future. Users may also create pro forma financial statements based on the analyses to see how various choices can affect the financial statements.

Income Statement

The income statement presents a company's earnings and profitability for a given period, such as a year or a quarter. It is also known as a “statement of operations,” “profit and loss account,” or “P&L account.”

It is generally prepared using the accrual system of accounting. It starts with revenue in the first line and, after deducting various direct and indirect expenses, arrives at the company’s net income. It is often the first place an analyst or investor looks to gauge a business's performance. 

Balance Sheet

Also known as the “statement of financial position,” the company’s balance sheet illustrates its financial position at a particular point in time. Unlike the income statement, it is not drawn for a period.

Instead, it shows the company’s sources of funds and its utilization of those funds at a particular point in time. The total funds raised from various sources (i.e., capital and liabilities) must always match the utilization of those funds (i.e., assets).

It displays the account balances of capital, liabilities, and assets at the end of a period so users can assess the changes in those balances against previous periods. The net earnings (loss) from the income statement are added in (subtracted from) retained earnings , which is part of equity/capital.

Cash Flow Statement

It is also known as a “statement of cash flows” or “funds flow statement.” Like the income statement, the cash flow statement is prepared for a period. However, unlike the income statement, it is prepared using the cash system of accounting .

Since the income statement is prepared using the accrual system , it does not tell us how the cash moves in or out of the business.

The purpose of the cash flow statement is to tell us about the inflows and outflows of cash over a period. It breaks down the inflows and outflows into three categories: cash flow from operating activities , investing activities , and financing activities .

The net cash flows for the period must equal the difference in the opening and the closing cash balances.

Understanding a three-statement model

A three-statement model takes a company’s financial statements – the balance sheet, the income statement, and the cash flow statement – and combines them into a single dynamically linked financial model .

Its purpose is to project what the financial statements may look like if the company makes certain decisions, given certain assumptions. Since the statements are dynamically linked in a 3-statement model, changes in one statement are automatically reflected in the other two statements.

It is the base on which other more complex financial models are constructed, such as discounted cash flow (DCF) models, leveraged buyout models, and merger models, among numerous others.

Most of what might seem complicated in a three-statement model is basic mathematics. Building and understanding the model becomes easier if the model developers and users are familiar with the fundamental relationships among the three statements.

Moreover, while simpler financial models use only one of these statements (the income statement or the cash flow statement), they often fail to show the entire picture.

The main benefit of using as comprehensive a financial model as the three-statement model is that users can use tools like what-if analysis and scenario analysis and get a bird’s eye view of how various decisions can affect the financial statements. This is crucial to making informed decisions.

The following video gives a brief overview of why the three statements are so important and why building financial models is a core skill in any high-paying job in finance.

How to build a three-statement model?

To put together a three-statement financial model, we begin with the income statement and the balance sheet. First, we start with the actual numbers from the previous period. Then, we move on to building forecasts based on some calculated model drivers (assumptions).

After building a forecasted income statement and a balance sheet, we create the cash flow statement. After these steps, we work towards linking the three statements. 

The steps to build a three-statement model are listed in detail below. Although you will be all set to construct a three-statement model with these steps, we firmly believe that a more hands-on approach will help you better understand the topic.

Hence, our finance experts have created a three-statement model template for you to experiment with.

Download WSO’s free three-statement model template below, along with other financial modeling templates! This template allows you to create your own 3 statement model for a company – specifically, the balance sheet, income statement, and statement of cash flows.

The template is plug-and-play, and you can enter your numbers or formulas to auto-populate output numbers. The template also includes other tabs for other elements of a financial model.

Sign up to receive a FREE swipe file containing a collection of quality financial modeling templates to help your finance skills and prepare for interviews.

Here, we explain the steps to building a three-statement model. Before starting, please ensure that the Iterations setting is disabled in Excel. This is to deal with the unavoidable circularity (when the output of a computation is also an input for it) in the model.

On the Windows version of Excel, users can go to File > Options > Formulas and deselect the “Enable iterative calculation” checkbox while Mac users can go to Preferences > Calculation and then disable the “Use iterative calculation” option.

Please check out this article by Microsoft on removing or allowing a circular reference .

1. Input Historical Data

First and foremost, input the actual numbers for the statement of operations and the statement of financial position. This task becomes easier if the data can be downloaded or copied from another source. Please note the tips below, which can make the process easier.

• Some formatting is highly recommended to ensure that you follow the best practices for financial modeling. It makes the data easy to follow for our eyes.
• In WSO’s guide to the best practices, we recommend following the widely used color palette: blue for hard-coded inputs and assumptions, black for formulas and referencing in the same sheet, green for formulas and referencing to other sheets, and red for external links to other files. 
• Use comments where necessary. They are generally inserted in the cell to the side of the relevant line item and are italicized.
• Use shortcuts if possible. One of the most used functions is Sum. Users can press “Alt + =” right under a list of numbers to calculate their sum.
• Ensure that the input is correctly entered. Users can run “balance checks” to verify the net income figure and whether the balance sheet tallies. Remember the fundamental equation: Equity (Capital) + Liabilities = Assets.

With the advent of Python and other programming languages in financial modeling, the use of Stocks APIs to retrieve data quickly is becoming increasingly common.  

2. Analyze Historical Data

Historical data is analyzed by evaluating trends, computing ratios, and statistical information. Model drivers are based on the results of these analyses. Generally used metrics include:

• Year-on-year (YoY) growth rates for revenue, gross profit , operating profit or earnings before interest and taxes (EBIT) , and net profit.
• Margins and ratios that affect them, like direct costs, financing costs, and non-cash expenses ( depreciation and amortization ).
• Balance sheet ratios like current ratio , receivables outstanding, inventory turnover, accounts payables days , operating cycle, and cash conversion cycle . In addition, users may also calculate ratios related to the company’s capital structure .

3. Determining Model Drivers

Model drivers (assumptions) guide the forecasts further. They are established on the results of the analyses of the historical data.

For example, users may use the ratios calculated in the previous step or assume how they might change in the coming years. Here are a few examples of critical assumptions that are generally used:

• Revenue growth rate: If a company’s revenue has been growing at a high rate in recent years, it may grow at declining rates going forward due to increased competition.
• Costs and margins:  It is reasonable to assume that a company will achieve economies of scale as it grows, so direct costs might decline, leading to improved gross margins. In addition, with increased revenues and reduced direct costs, the company may be able to allocate an increasing sum for research and development (R&D) expenses each year.
• Other indirect expenses may be taken as a percentage of sales. Although the capital expenditure ( CapEx ) requirements are usually forecasted using complex calculations, users may assume a fixed percentage of sales as a simple estimate. Unless changes in tax law are anticipated, historical effective tax rates are typically expected to apply in the future.

4. Projecting Income Statement

Once the inputs are in place and assumptions are determined, users have all they need to begin forecasting. The entire forecasting exercise starts with the income statement , starting from the sales and down to the EBITDA .

Although we have the inputs and the assumptions at this stage, building the income statement still requires supporting schedules for line items such as depreciation, taxes, and interest expense .

However, net financing costs (interest expense) are not linked to the income statement at this stage but rather at the end. It is because financing costs are connected to the other two statements, so incorporating them in the income statement at this stage is bound to produce circularity in the model. 

5. Forecasting Capital Assets and Financing Activity

Next, users must build supporting schedules to forecast metrics related to capital assets.

The closing balance for capital assets can be calculated by a simple formula:

Opening Balance + Capital Expenditures—Depreciation

There are multiple ways to account for depreciation, i.e., straight-line method, declining balance method, etc.

Users must also build the debt schedule to determine financing cost payments and principal repayments.

We can use this simple formula to arrive at the closing figures:

Opening balance + (-) increases (decreases) in the principal.

The interest may be calculated in various ways, i.e., based on the closing balance of debt, the opening balance, or an average of the two. Using an average is ideal, as there might be principal repayments throughout the year.

For a more intensive calculation, users may build a separate supporting schedule for financing costs altogether.

6. Projecting Balance Sheet

The balance sheet is slightly tougher to build. It can be built without cash, equity, and debt at this stage. These line items will be derived from the cash flow statement later.

For other items, average ratios from recent years are used (with or without adjustments based on assumptions) to determine closing balances during forecasting. These ratios may include days of accounts payable , inventory days, accounts receivable days, etc.

For instance, days payable may be computed for each of the recent years as average accounts payable ÷ cost of goods sold ( COGS ), which can be used to calculate the average of days accounts payable for the recent years. This number may be adjusted before it is used in the forecasted statements if necessary.

For example, to predict accounts payables for the coming years, use this formula: (adjusted) days accounts payable x expected COGS ÷ 365 days. Here are a few tips to help users at this stage.

• Unless users are expecting M&A transactions, goodwill should be unchanged going forward.
• Determining the assumptions first makes building the model and the error-checking process easy.
• The Trace Precedents tool in Excel can be beneficial in checking whether the formulas have been entered using the correct dependencies.

7. Building Cash Flow Statement

With the partially completed balance sheet and income statement, users can move on to creating the cash flow statement. A cash flow statement has three sections, each of which must be completed by linking the line items to the ones already calculated in the model.

We start with the period's net earnings and make all the adjustments necessary to convert them from the accrual system to the cash system of accounting to determine the cash flows from operating activities. We also adjust for items that might belong to investing or financing activities.

Here are some critical adjustments required to net earnings to ascertain the cash flows from operating, investing, and financing activities.

• Depreciation and amortization are non-cash expenses deducted from income to calculate net earnings. Therefore, these and other non-cash costs must be added back to the net income.
• An increase in current assets implies cash utilization, which needs to be deducted from operating activities. Conversely, a decrease in current assets means an increase in liquidity as the cash is no longer tied up in those assets. The opposite applies to current liabilities – an increase is due to not using up cash to pay them off, while a decrease is due to utilizing cash to pay them.
• Debt-related items like issuances and repayments can be derived from the debt schedule . While preparing the balance sheet, expected stock issuances and buybacks must also have been factored in beforehand. These are financing activities and will not affect cash flows from operating and investing activities.
• The net cash flows for the period are calculated as the sum of cash flows from operating, investing, and financing activities.

At this stage, the users will have completed projecting the three financial statements .

8. Linking The Statements

This is the concluding stage of building the three-statement model. A few items in the balance sheet were intentionally left out. Users can now build on them and link the three statements.

• Debt: Prior long-term debt is adjusted for expected issuances and repayments. It is worth noting that long-term debt becomes short-term debt as it nears its expected repayment.
• Equity: Shareholders’ equity is computed as - Opening balance + Expected issuances or buybacks (from the cash flow statement) + Net income (from the income statement) – Dividends (from the cash flow statement). 
• Cash: The closing balance for cash is calculated as - Opening balance + Net cash flow for the period.

Once these items are calculated, they will be plugged into the balance sheet. Please ensure that the balance checks do not indicate any errors.

9. Net Interest Expense

The puzzle is almost complete. The interest expense (or income) is the single item left to be plugged. Plugging in the net finance costs in the income statement will change the net earnings, further impacting the balance sheet through retained earnings and the cash flow statement through cash flow from operating activities.

Thus, financing costs affect all three statements, producing circularity. This is also known as iterative calculation. Excel (or other spreadsheet software) runs different numbers through the calculations to find the values that satisfy each of such analyses.

As the final piece of the puzzle, Iterations must be enabled in Excel. On the Windows version of Excel, users can go to File > Options > Formulas and select the “Enable iterative calculation” checkbox.

Users with the Mac version of Excel can go to Preferences > Calculation and enable “Use iterative calculation.” The net earnings figure should get updated in the income statement now, which should flow into the other two statements.

After the above steps, your three-statement model should be ready to help you make more informed decisions.

Check this page out for another  3 Statement model example .

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11 Financial Model Examples & Templates for 2024

insightsoftware is the most comprehensive provider of solutions for the Office of the CFO. We turn information into insights, empowering business leaders to strategically drive their organization.

Enterprises actively use financial modeling to guide their financial planning and strategic decision-making. Financial models offer data-driven, quantitative analysis that tells you where your company stands and where it’s heading.

That being said, one model can’t do it all. As a finance professional , you’ll need different types of financial analysis and modeling for different situations. This post will take you through the basics of financial modeling and provide you with eleven financial modeling examples that you can use to evaluate corporate decisions from a financial perspective.

What Is Financial Modeling?

Financial modeling involves combining key accounting, finance, and business metrics to build an abstract representation, or model, of a company’s financial situation. This exercise helps a company visualize its current financial position and predict future financial performance.

Financial modeling can be quite handy in a number of situations. It can help inform investment decisions, securities pricing, and plans for corporate transactions such as mergers, acquisitions, and divestitures.

But the most common use of a financial model is for making operational business decisions and performing financial analysis. Executives typically use financial models to make decisions regarding:

• Budgeting and forecasting
• Organic business growth
• Valuing the company
• Raising capital in the form of debt or equity
• Acquiring new assets or other businesses
• Prioritizing projects
• Distributing the organization’s financial resources
• Divesting or selling assets and business units
• Risk management

This may feel like an overwhelming number of topics that require financial models; however, most established companies have taken the time to create financial modeling Excel templates that expedite the decision-making process. But this begs the question – who develops all these financial model templates?

Understanding Financial Modeling

Financial modeling is a quantitative analysis used to forecast a company’s financial performance. By combining accounting, finance, and business metrics, financial models help decision-makers predict the impact of future events or decisions. This tool is pivotal for strategic planning, investment analysis, and financial planning.

What Is Financial Modeling Used For?

Financial modeling is instrumental for decision-making in investment banking, corporate development, equity research, and project finance. It aids in valuing businesses, making investment decisions, budgeting, and forecasting financial performance, thereby supporting strategic planning and operational efficiency.

Who Builds Financial Models?

With such a broad application, financial models are created and used by many different types of financial professionals, including but not limited to:

Accountants

Corporate development analysts, investment bankers, equity research analysts.

But in the context of the modern company, those involved in  financial planning and analysis  (FP&A) are the most likely to be building and using financial models that steer the direction of the company.

The FP&A team plays a crucial role within the office of the CFO. It’s in charge of the company’s financial planning. That means the FP&As are the people creating the budget and performing financial forecasting to help the CFO and other members of senior management understand the company’s financial situation.

Aside from budgeting and forecasting, the FP&A team is also tasked with decision-making support and special projects such as market research and process optimization.

Real-World Examples of Financial Modeling

In the real world, financial modeling is crucial for several key activities:

• Valuing Companies : During mergers and acquisitions, financial models help determine the fair value of companies.
• Project Viability : Assessing the potential success and financial impact of new projects.
• Budgeting and Forecasting : Creating detailed financial plans and projections to guide business decisions.
• Raising Capital : Supporting efforts to secure funding by demonstrating financial health and future potential.

Common models, such as discounted cash flow (DCF) analyses, are widely used in investment banking and equity research to evaluate the present value of future cash flows.

Financial Modeling Makes You A More Strategic Analyst

Companies operating in the twenty-first century are faced with a new set of unique challenges. We now live in a global economy that’s shaped by accelerating innovations in technology. As a result, companies must be agile—poised to make quick, strategic decisions based on the latest incoming data—if they hope to succeed.

And as a financial planner and analyst, you have the opportunity to directly impact your company’s share price. Just take a look at the role of the FP&A team.

To forecast a company’s financials, you must have a deep understanding of both the company’s historical performance as well as key trends and assumptions that might impact its future performance. This also requires an understanding of business operations and accounting.

FP&As frequently visit with nearly every team within an organization, including the treasury and accounting, sales, marketing, operations, and executive management teams. In this sense, the FP&A team acts as a central hub within the company that connects and relays information between the executive and operational teams.

But to play your part—and play it well—financial modeling is absolutely essential. It’s likely the most important weapon in your arsenal. Financial modeling is what gives you the insights you need to make data-driven decisions for your company.

What Information Should Be Included in a Financial Model?

A robust financial model includes historical financial data, assumptions about the future, projections of the income statement, balance sheet, cash flow statement, and supporting schedules like depreciation and amortization. It may also incorporate scenario and sensitivity analyses to explore different outcomes.

What Software is Best for Financial Modeling?

Excel remains the gold standard for financial modeling due to its flexibility, widespread availability, and advanced features. However, specialized software like Tidemark can help with building financial models.

What Types of Businesses Use Financial Modeling?

Financial modeling is used across various industries, including banking, real estate, technology, manufacturing, and healthcare. Any business engaged in financial planning, investment analysis, or seeking to evaluate strategic decisions can benefit from financial modeling.

How Is a Financial Model Validated?

Validating a financial model involves ensuring the accuracy of its inputs and logic. This can be done through back-testing against historical data, sensitivity analysis to understand the impact of assumptions, and peer or third-party review to identify any errors or oversights.

Building a Financial Model

So how do you build a financial model? Many finance professionals choose to build their own financial models from scratch using Excel. Building a financial model this way is no simple task. You’ll need to learn some basic Excel tips and tricks, such as using keyboard shortcuts to increase efficiency. And a little bit of programming knowledge doesn’t hurt, either.  Visual Basic for Applications  (VBA) is the programming language typically used for Excel and other Microsoft Office programs.

But building a useful financial model takes more than plugging and chugging data and equations. You’ll also need to think about the formatting, layout, and design of your model. For example, separating input (historical data and assumptions) from output (calculations) can help you avoid input mistakes and more easily scan for errors. And a well laid-out and intuitive design will help highlight the main message and key takeaways of your model.

11 Financial Modeling Examples

Financial modeling is an important tool. But one size doesn’t fit all when it comes to financial planning.

You must design your model with a specific question in mind. There are different types of models that FP&As can use depending on the problem they’re trying to solve. Let’s take a look this curated list of financial modeling examples:

1. Three-Statement Financial Model

The three-statement financial model integrates and forecasts a company’s three financial statements—the income statement, balance sheet, and cash-flow statement—into the future.

The three-statement model represents the real meat and potatoes when it comes to financial modeling. This model acts as a standard that gives a comprehensive overview of the company’s financial history, current standing, and future performance.

It also has predictive power. The three-statement financial model allows you to explore how your company will perform under multiple circumstances and visualize how different decisions can interact to impact the future of the company.

A Three-Statement Financial Model is a powerful financial tool that integrates three crucial financial statements of a company:

Income Statement

This statement reflects the company’s profitability over a specific period. It shows revenue earned, expenses incurred, and ultimately the net income (profit) or net loss.

Balance Sheet

This statement presents a snapshot of the company’s financial position at a specific point in time. It categorizes assets (what the company owns), liabilities (what the company owes), and shareholders’ equity (the company’s net worth).

Cash Flow Statement

This statement details the cash inflows and outflows of a company over a specific period. It categorizes these flows into operating activities (cash generated from core business), investing activities (cash used for investments), and financing activities (cash raised from debt or equity).

2. M&A Model

The merger and acquisition (M&A) model calculates the impact of a merger or acquisition on the earnings per share (EPS) of the newly formed company. This value can then be compared to the company’s current EPS. The M&A model is useful for helping a company decide whether a potential merger or acquisition will be beneficial to the company’s bottom line.

If the M&A model shows an increase in EPS, then the transaction is considered accretive, meaning it should result in growth. But if the M&A model shows a decrease in EPS, the transaction is considered dilutive, meaning it will reduce the company’s value. A sample M&A financial model for Excel can easily be found with a quick Google search.

Merger Model

A merger model is a complex financial tool used in the analysis of the financial viability of merging two companies. It involves the consolidation of the balance sheets, income statements, and cash flow statements of both companies into a single model. This model forecasts the financial outcomes of the merger, including synergies that may arise from cost savings or revenue enhancements. The primary goal is to assess whether the combined entity will create value for shareholders and to determine the impact on earnings per share (EPS), leverage ratios, and other key financial metrics.

Acquisition Model

The acquisition model analyzes the financial impact of merging two companies by consolidating their financial statements and forecasting the combined entity’s performance. By looking at the projected earnings per share (EPS), the model helps determine if the merger will be financially beneficial for the shareholders of the new company.

3. Forecasting Models

Forecasting is one of the most important tasks that the FP&A department takes care of on a regular basis. It is typically used to predict future revenues, expenses, and capital costs. Financial models used for forecasting are often compared to the actual budget to review performance in retrospect. Here are four financial model examples used for forecasting:

Straight-Line Model

This is the simplest forecasting model that exists. It makes use of historical data to estimate what will happen in the future. For example, if your company has experienced a 4% annual increase in revenue for the last three years, the straight-line model would forecast a 4% annual increase for the following year.

Moving Average Model

This is another simple forecasting model that can easily be created in Excel. However, its strength lies in its ability to smooth out data. Typically, companies use the moving average model to evaluate performance on a monthly basis and makes use of three-month and five-month moving averages.

Linear Regression Model

If you were to calculate a linear regression line by hand, it would take quite a bit of your time, and not be worth the effort. Luckily, Excel can do linear regression for you. This forecasting method is best used to compare the relationship between two different variables. A common example is advertising budget and revenue. If your advertising budget increases, you can expect your revenue to increase. A linear regression model will help you determine exactly how advertising and revenue correlate with each other, which can be used for forecasting.

Time Series Model

This is probably the most complicated method of forecasting in our list. Time series modeling attempts to identify patterns in historical data and uses these patterns for forecasting. Most modern approaches to time series forecasting make use of machine learning or specialized software like Tidemark .

4. DCF Model

A financial analyst may turn to the  discounted cash flow  (DCF) model when they need a way of determining valuation. One of the key attributes of the DCF model is that it calculates current value while taking into account predictions for how much money something will make in the future.

The DCF model can be used to value an entire company, but you can also use this model to value:

• Shares of a company
• A project or investment within a company
• A cost-saving initiative within a company
• Anything that has an impact on cash flow

It should be noted that while the DCF financial model can be used as a standalone tool for valuations, it can also be used in conjunction with other valuation metrics in more comprehensive models. For example, the capital budgeting model that we talk about later in this post will make use of the DCF model for some of its metrics.

5. CCA Model

The comparable company analysis (CCA) model is another way for a business to calculate its value. It’s a more basic valuation method than the DCF model.

The CCA financial model is based on the assumption that similar companies will have similar  valuation multiples . It uses metrics from other businesses with similar sizes and operations in the same industry. Here is a list of the most commonly used valuation multiples:

• EV/S – Enterprise Value to Sales
• P/E – Price to Earnings
• P/B – Price to Book
• P/S – Price to Sales

You can also download a free CCA sample financial model for Excel here.

While this financial modeling method is able to give you a ballpark estimation for the value of your company, it is not almighty. There are often instances in which a company’s valuation cannot be extracted purely from their financial data. However, it is a very good starting place to build a base case valuation.

If you are looking for more sample financial models in Excel , insightsoftware has a large number of sample reports that you can download. Some of these will be able to help you with your CCA modeling.

6. Asset and Liability Management (ALM)

Asset and liability financial models are primarily used by financial institutions (banks and insurance companies) and pension funds (corporate or public) to manage their financial objectives. For example, pension funds must be able to pay pensioners during any economic conditions, including a crisis like 2008. This is achieved through thorough risk management strategies that are continually reviewed. Most pension funds conduct a comprehensive review every three to five years. During this process, they use financial analysis and modeling to adjust their asset and liability management strategies to reduce portfolio sensitivity to economic conditions, interest rate changes, and foreign exchange rates.

ALM strategies are also employed by the FP&A departments of large corporations and conglomerates. These financial planning models are used to ensure the company remains solvent in the direst of economic situations.

7. Sum-of-the-parts Model

The sum-of-the-parts financial model allows large conglomerate organizations with many divisions to simplify their valuation. As the name suggests, the sum-of-the-parts model values each business unit, division, or subsidiary separately and then adds them all together.

This can sometimes make it difficult for the FP&A department as they are having to gather financial data from multiple entities and compile it into a single model. This is where standardized financial modeling Excel templates or specialized reporting software really help.

In most large conglomerates, the benefits of using the sum-of-the-parts models strongly outweighs the extra effort required. This financial model is a useful tool for determining the value of a company’s divisions in the event that one is sold off or spun off into a separate company.

8. Capital Budgeting Model

Every year the FP&A department is tasked with helping create the annual budget. Some people view this as being an extremely painful process due to all the fine tuning involved. However, a proper annual financial planning model that make use of quarterly figures and forecasting can greatly expedite the process. Because so many companies go through this process every year, insightsoftware has developed a budgeting software solution to streamline the process.

Most large companies will have a financial planning model in Excel or a budgeting software solution that they will use to evaluate prospective projects before they chose to pursue them. This financial analysis and modeling will vary by company but will almost always make use of the net present value (NPV), internal rate of return (IRR), and payback period calculations. These three financial performance metrics are best used when a company has several potential projects but can only pick one or two of them.

We won’t go into the details of these metrics or how they are modeled, but you ideally want the NPV to be greater than zero, IRR to be as large as possible, and the payback period to be as short as possible. If you want to learn more about these financial evaluation metrics, can check out our financial metrics post . It will provide you with the equations necessary for each calculation. You can also find a simple NPV and IRR financial model example here .

9. IPO Model

This might not be a financial model that your FP&A department needs to be familiar with, but they should be aware of its existence. Typically, investment banker on Wall Street have access to financial model templates that are built specifically for pricing IPOs.

The IPO pricing model has several different components that it incorporates. For example, it will make use of the comparable company analysis, looking at their P/E relative to industry peers. For up and coming tech. companies that have yet to turn a profit, investment bankers will look at prospective annual growth estimates. This model also takes into account previous funding round valuations, and what share price would be attractive to institutional investors that are subscribing to the IPO.

10. LBO Model

The leveraged buyout (LBO) model is used to analyze an acquisition that finances the cost mostly with debt. How much debt? Typically, a leveraged buyout is 90% debt and 10% equity. Due to this incredibly high debt-to-equity ratio, the bonds being issued are not investment grade – i.e. junk bonds. Some people consider LBOs to be an incredibly aggressive and risky move, but with great risk comes great reward.

The LBO model allows the buying company to properly evaluate the transaction so it can earn the highest possible risk-adjusted  internal rate of return  (IRR). As a rule of thumb, most companies will only consider an LBO when the IRR is in excess of 30% as this is the point at which the risk-to-reward becomes attractive.

11. Option Pricing Model

Most FP&A departments won’t be looking at the option pricing model unless they are somehow involved with a company that specifically trades/holds derivatives. Option pricing models are typically used by market makers and securities traders looking to turn a profit or hedge risk. These financial models are used to assign a price (premium) for the options contract based on statistics and probability (i.e. how likely the option will be in-the-money at expiration).

There are several different financial models that can be used to price options contracts. The most commonly used models are Black-Scholes, binomial tree, and Monte-Carlo simulations. Creating financial model templates for these is not difficult if you have good understanding of mathematics, and some Excel knowledge. In fact, you can find most of these financial model examples for Excel with a quick Google search.

Now that you are familiar with the best financial models to use when making data-driven decisions, let’s take a look at the best financial modeling tools that are available.

4 Things to Look for in a Financial Planning Solution

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Best Financial Modeling Tools in 2024

Financial modeling represents a key tool for your company’s FP&A team. A good financial model allows you to see the bigger picture and make strategic decisions based on the most up-to-date data. However, there’s no one-size-fits-all solution when it comes to financial modeling. Different situations call for different types of models. Because of this, you often see FP&A teams with folders full of Excel workbooks. Each Excel workbook representing a different financial modeling tool for a specific application.

There are, of course, shortcomings to using Excel for financial modeling. Shortcomings such as: are all of these workbooks user-friendly? Did one person create all the financial modeling Excel templates? What happens if they leave the company? Don’t get us wrong – we love Excel, but we also love robust financial models that you don’t have to spend days creating.

This is where financial modeling software comes into play. Advanced financial planning modeling software like  Tidemark  can help you take the grunt work out of model building. Tidemark brings speed, agility, accuracy, and automation to your financial planning process. That way, you can spend less time fiddling with formulas in Excel and more time thinking strategically about your company’s next step.

• Financial Modelers
• Valuation Specialists
• Financial Forecasting Experts
• Due Diligence Consultants
• Private Equity Consultants
• Equity Research Analysts
• Investment Analysts
• Corporate Finance Consultants

How to Build a 3-statement Model: Best Practices for Valuations and Projections

To value or build projections for a company accurately, you have to factor in working capital projections—and you can’t do that without investing in a three-statement financial model.

By Abdullah Karayumak, CFA

Abdullah is a financial modeling, valuations, and capital raising expert and Chartered Financial Analyst. He’s advised clients ranging from early-stage startups to multibillion-dollar enterprises, most recently for KPMG.

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Knowledge—correct, data-based, properly interpreted information—is indeed power, and the lack of it can cost businesses millions. In particular, accurate company valuations and projections of free cash flow available to equity holders are crucial, not just during mergers and acquisitions , but at all times if leaders and prospective investors are to understand a company’s current and future financial standing. Many companies use only a projecting income statement to forecast what’s coming, but that can lead to dramatically inaccurate projections and valuations. That's why I recommend using the gold standard financial model : a three-statement model incorporating the balance sheet , cash flow statement and income statement .

Why Accurate Financial Projections Are Essential

Financial projections are useful for business leaders who are planning and budgeting for the near term and forecasting their company’s performance under a variety of conditions. They also help identify investment needs and assist in valuing the business. For example, projected surpluses suggest new opportunities for reinvestment, where projected shortfalls may indicate a need for retrenchment or course changes. Conversely, investors use financial projections to challenge the assumptions behind a prospectus or business forecast.

Projections are also essential inputs to valuation formulas . Valuations are crucial for mergers and acquisitions, as well as for developing contingencies and to aid in decision analysis. When leaders are considering a major investment decision or change of direction, modeling the effect of those choices on future valuation may help guide the choice. Once executed, major enterprise decisions require accurate before-and-after valuations to assess the value of those changes.

The most common valuation technique is discounted cash flow (DCF). When DCF is used with just an income statement, as it often is, it uses income as a proxy for cash flow . This works well enough when working capital —the metric of liquidity that represents the difference between the company’s current assets and current liabilities—is neutral or its absolute value is small compared to cash flow based on income. But when working capital is high relative to income, this method can fail to identify significant cash inflows or outflows.

That’s because working capital can have significant effects on cash flow that the income statement doesn’t capture. As a valuation advisor for KPMG , I’ve created three-statement financial models for clients seeking to raise funds and value acquisition targets. My experience has taught me that performing DCF using all three statements provides the most accurate results and will serve you best, no matter what your goal is.

What the Income Statement Leaves Out

The biggest pitfall for financial analysts performing projections is treating the income statement as if it represents cash flow.

The income statement focuses solely on profit and loss. While you naturally tend to think the more profitable a company is, the better, there’s more to valuation than an isolated dollar value. First, not all sales are collected as cash. Some sales are made on credit and recorded as accounts receivable. Second, not all cost of goods sold (COGS) is cash outflow. Some of these costs will be covered by purchases that the business makes on credit. Because these transactions (changes in accounts receivable and accounts payable) aren’t recorded on the income statement, a forecast that relies only on this statement doesn’t give the full picture of the cash inflows and outflows of a business.

Three-statement models incorporate all the important facets of a business’s operations. These models project—along with other balance sheet items—forecasted balances of working capital elements such as accounts receivables, inventory, and prepaid expenses. Together, these influence the free cash flows available for the business’s operations. This matters because a company with high working capital demands can seem profitable on the surface but actually be in the red once the cash flows are laid bare.

How Building a 3-statement Financial Model Benefits Business Leaders

A company’s value isn’t always readily apparent to its leaders. I was once asked to build a three-statement financial model and valuation study for a greenfield aluminum recycling facility. The CEO was certain the facility was profitable, given the significant EBITDA margins reflected in the income statement. She was surprised to see that the valuation result came back below her expectations.

The facility was turning a high sales volume: Scrap aluminum was purchased with cash, recycled within the facility, and sold on two-month terms. Consequently, it took a lot of cash outflow to fund the working capital needs of the operations. This information didn’t appear in the income statement and could only be found in the cash flow statement , which details the movement of cash and cash equivalents in and out of a business.

Focusing only on the income statement and profitability would have resulted in the CEO missing this important aspect of her business. Drawing on the insights of a three-statement model, she was able to prepare for working capital cash outflows in the future by adding the startup working capital requirement as a project cost when asking for financing.

The implications here are clear: Even when leaders aren’t considering an exit, they need to know exactly how much their businesses are worth, how much they’re going to earn, and how much it will cost to operate them. Had I used a single-statement-based valuation that confirmed her biases, the CEO might have been in for a nasty shock down the road.

How Building a 3-statement Financial Model Benefits Investors and Buyers

Three-statement models are also useful for potential investors or purchasers doing due diligence . These models allow investors to look past profitability and assess the cash yield of a potential investment. Even when a company is profitable and growing, it may lose cash because of high working capital requirements. This is especially true for companies with low profit margins, high sales volume, and positive working capital projections. The most common example of this is industrial companies, since they often have large sums of cash tied up in working capital.

The opposite situation is also possible. A company may be earning a very slim margin but have negative working capital, in which case sales growth brings cash flow into the business. This is often the case for businesses in the retail sector and for utilities.

In both cases, it’s critical for investors to run working capital sensitivity analyses using the elements of the cash conversion cycle —days sales outstanding (DSO), days payable outstanding (DPO), and days inventory outstanding (DIO)—on the projections. These findings can lead to improvements in working capital management, which then allows the business to free up cash for investments. However, these analyses are only possible when the underlying financial model has the capacity to calculate future balance sheet items—in other words, a three-statement model.

I once conducted financial due diligence on an Eastern European building-chemicals company in an acquisition deal. Riding on the back of the booming construction sector, this target company was highly profitable. A one-statement model probably would have produced a healthy valuation. But when I built a three-statement model for the business, it became clear that it was polishing its profitability by loosening its trade terms—selling its products at a higher price, but giving customers more time to pay.

Although this tactic increased the company’s profitability, it forced the business to tie up a significant amount of cash in working capital, reducing liquidity. The cash outflow required to fund the working capital devalued the company significantly. This problem wasn’t identified until we created a three-statement model and looked closely at cash movements in the projections.

A 3-statement Model Example

To illustrate how single-statement DCF can lead to a significantly inaccurate result, I’ve created two alternative projections for a fictional company called Vermont Telecom. Telecom companies typically have high working capital requirements: They collect plan payments monthly or yearly, and those add up to billions of dollars and cover operational and capital expenditures. Any fluctuation in their operating cash cycle has a significant effect on their valuation and cash position. They usually borrow short-term funding to cover gaps in their cash cycle.

These excerpts from a discounted cash flow analysis show the dramatic difference between projecting present value of free cash flow in DCF using just an income statement and using a three-statement model that includes working capital.

Discounted Cash Flow Analysis: Present Value of Free Cash Flow Using Income Statement Only

As you can see, the single-statement approach shows no information for the increase in net working capital. But for Vermont Telecom, with its high working capital needs, that value is actually quite significant. Here’s what it looks like when you incorporate the working capital requirements of the business:

Discounted Cash Flow Analysis: Present Value of Free Cash Flow Using 3-statement Model

The increase in net working capital is -$98.5 million in 2022, which results in a multimillion-dollar difference in the final value of free cash flow in the three-statement model compared to the single-statement analysis.

Moving on to valuation, as you can see here, a single-statement DCF without working capital substantially overvalues the enterprise with a central projection value of $602 million based on weighted average cost of capital (WACC) at 15% and a terminal growth rate of 2.5%.

Enterprise Value Using Income Statement Only

When working capital is factored into the equation, the same assumptions result in a valuation of only $483 million—a substantial 22% difference.

Enterprise Value Using 3-statement Model

Best Practices for Handling Working Capital in a 3-statement Model

There are a variety of methods you can use to ensure that your financial model accurately projects the working capital lines. The approach I prefer is also the most common one: using days working capital —how many days it takes to convert working capital into revenue. Standard practice suggests we take the average of historical days working capital or use peer group averages .

Let's say you have the sales and cost of goods sold projected and you chose to use average days working capital. Combing this data, you can calculate 2023 working capital values in the balance sheet as follows:

• 2023 Accounts Receivable Balance Forecast = (DSO / 365) * (2023 Sales Forecast)
• 2023 Accounts Payable Balance Forecast = (DPO / 365) * (2023 COGS Forecast)
• 2023 Inventory Forecast = (DIO / 365) * (2023 COGS Forecast)

The sum of these three lines will let you arrive at your working capital projections for the coming year.

The Power of 3

As I’ve demonstrated, performing DCF valuation using just the income statement to approximate cash flow can lead to serious problems when the value of working capital, whether positive or negative, is significant. Developing a three-statement model rectifies these problems, and it provides a more nuanced and accurate view of the enterprise.

But there are additional benefits as well. Three-statement modeling enables other more advanced forms of analysis. For example, Harvard Business Review recommends combining DCF with real option analysis to achieve a median value when major investment decisions are being evaluated. Three-statement modeling also serves as the basis for models used for M&A, scenario planning, and sensitivity analysis .

It’s always empowering to have a full picture of your business, whether you’re seeking an exit or an investment, or you simply want to make informed choices about your company’s growth. Three-statement modeling is more time-consuming and requires more expertise to build, but in the long run, it’s well worth it.

Further Reading on the Toptal Blog:

• How to Build Your Startup’s Financial Model to Grab Investor Interest

Understanding the basics

What is a three-statement model.

A three-statement model is a financial model derived from a company’s balance sheet, cash flow statement, and income statement. It allows a business to track and project its performance over time. It frequently serves as the foundation upon which other analytical models are built.

Why is a company’s valuation important?

A valuation estimates the current and future worth of an asset—or in this case, a company. A company’s valuation comes into play when the business is facing a merger or acquisition, courting investors, or engaging in any other transaction that depends on how much the company is worth.

How does the income statement relate to cash flow?

The income statement records revenue, but it does not differentiate between cash and credit. For greater insight into a company’s cash position, it’s essential to refer to the cash flow statement.

Abdullah Karayumak, CFA

Istanbul, Turkey

Member since January 26, 2022

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Financial Modeling Examples

Published on :

21 Aug, 2024

Blog Author :

Edited by :

Aaron Crowe

Reviewed by :

Dheeraj Vaidya

Top 9 Examples of Financial Modeling

Financial modeling is used by the financial analysts for several purposes like cost and benefit analysis of a new proposed project or analyzing the impact of change in economic policy on stock’s performance or for the valuation of the business and its comparison with competitors in the market. Some of the examples of financial modeling include three statement modeling, DCF Modeling, Merger Modeling, IPO Modeling, LBO Modeling, Option Pricing Model etc.

Table of contents

#1 - three statement modeling, #2 - discounted cash flow (dcf) modeling, #3 - merger finance modeling, #4 - initial public offering (ipo) model, #5 - leveraged buyout (lbo) modeling, #6 - sum-of-the parts modeling, #7 - consolidation modeling, #8 - budgeting and forecasting modeling, #9 - option pricing model, recommended articles.

In this article, we discuss the top 9 financial modeling examples -

In the 3 statements model , the income statement, balance sheet, and cash flow statement all are linked together with the excel formulae, and this helps in the analysis of historical financial statements and forecasting future statements. Forecasting of financial statements will help financial analysts to understand how the company will perform after taking into consideration a variety of assumptions.

The DCF Valuation modeling is done taking three statement model as a base and is used to calculate the value of the business or the company’s net present value (NPV) of the future cash flow. The DCF modeling takes the projected cash flow from 3 statement model and discounts them to their present value after making necessary adjustments.

This type of modeling is used to analyze the merger and acquisition decision of two companies. A merger happens when two companies come together under mutual agreement, whereas an acquisition happens when one company overtakes others in return for some cash price.

This model looks into the market with the help of a comparable company’s analysis to understand how much the investors will be ready to pay for the company’s stock in an IPO.

A leveraged buyout is the acquisition of one company by another company with the help of borrowed funds. Leveraged buyout modeling helps in the determination of the value that the buyer would be ready to pay and the level of debt that would be needed to be raised. It also calculates the present and future cash flow of the company to be purchased.

This financial model is used to calculate the value of each division in the organization separately to determine its worth if any other company acquires it. The sum of the parts method is calculated through different types of analysis methods like discounted cash flow (DCF) model, asset-based valuation, market value, etc. Each part is then added together to derive the value of the sum of the part (SOTP).

Consolidated modeling is prepared by consolidating all 3 financial statements, i.e. income statement, balance sheet, and cash flow statement of different business units into one.

The financial analysts perform the budget modeling to determine the budget for the cost and income of the company for the upcoming time. Budgets are generally prepared on a monthly or quarterly basis. They depend upon historical income statement for input purposes. Whereas, the financial analyst does forecast modeling to prepare a forecast against the budget. Many times budget and forecasting modeling is done on the single tab together, and other times they are done separately.

The financial analysts use the option pricing model to determine the theoretical value of an option, i.e. the value of an option after taking all the known input under consideration. It helps financial analysts in deciding the fair value of an option. It is a mathematical model prepared based on mathematical formulas.

This has been a guide to top 9 examples of financial modeling including three statement modeling, DCF Modeling, Merger Modeling, LBO Modeling, IPO Modeling, Options Pricing Model etc. You can learn more about finance from the following articles –

• Financial Modeling Test
• Financial Modeling Benefits
• Coursera Financial Model
• Templates on Financial Modeling

Financial modeling case studies

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Grasp key concepts with this financial modelling case study

• Data & Technology

As a financial modeller, you have to explain very technical concepts to audiences with little to no background in finance. This is a unique skill, as it requires both technical expertise and soft skills . You have to ensure the client can grasp complex concepts, without going into an exhausting amount of detail; only then can you sell your solution. One of the best strategies to outline the key concepts and benefits is with this financial modelling case study , which we’ll outline here.

This particular case study is from the steel industry. It demonstrates how the modeller themselves has to spend a lot of time understanding the technical data and then translate this into layman’s terms. Concurrently, the modeller also has to understand the business context in order to make this translation comprehensible, and indeed, actionable. 

In essence, they need to have a robust understanding of the business and how it will be impacted by changes. This is the foundation of an effective business model, action plan, and risk analysis, which were delivered here for this major steel manufacturer. Before we get into this financial modelling case study , we’ll outline some key concepts.

Table of Contents

What is the purpose of financial modelling?

Financial modelling is about decision making. These projections enable personnel to make better decisions, primarily through having a deeper understanding of the business and how both internal and external factors may affect its operation . This includes forecasts for expected cash inflows and outflows and the implications of various funding options. A financial model will aid due diligence by estimating the financial impact of a particular activity, thus helping to manage risk. Financial models can also provide a benchmark for incremental performance reviews.

However, not all decisions are created equal and for each of these forecasts, there is a specific type of financial model. It is important to understand that financial modelling is not an exact science (albeit a very technical discipline) and the results obtained are not set in stone. Instead, financial modelling is a framework or a set of guidelines for decision-making as opposed to a crystal ball. But that’s not to say a good financial modeller can’t make some very accurate predictions. Often, calculating exact dollar and cent outcomes is not the key goal, but instead, exact predictions of the magnitude and direction of movements in the event of a change in assumptions or circumstances.

Why is financial modelling important in decision making?

To illustrate how financial modelling can enhance decision-making, it’s useful to outline the key types of models . With these introductions, you can get a more tangible sense of how financial modelling could benefit a business according to its specific circumstances. Below we’ll outline five principal groups.

• Profitability and price planning: These models are used to analyse how a company can deploy its resources in order to profit. For a retail business, for example, this may comprise identifying the optimal product mix or pricing strategy to maximise profitability. Such models are used for forecasts about the immediate future, as the variables tend to be too volatile to make long-term projections.
• Liquidity planning: Taking on debt is part of growing a business, but with debt, comes risk. Liquidity planning enables companies to keep a handle on their cash flow to track their solvency. This model will also take into account external factors like interest rates and currency fluctuations. The model can simulate extreme economic scenarios to test the company’s solvency. 
• Credit planning: Most businesses operate by offering clients credit. However, with credit comes risk and businesses need to decide how much credit they wish to extend. Financial modelling can help businesses make this call using information from credit rating agencies and publicly declared financials of clients, if they exist.
• Company valuation: This type of financial model requires complex analyses of several variables in order to estimate the value of a company. These models are often created by investment banks and private equity firms.
• Valuation of financial instruments: These models are used to value bonds, futures, options, and other types of financial instruments. These models are the backbone of technology-based trading as they automate complex calculations, such as fair value. Many of the most sophisticated of these algorithms are still in their infancy, but it’s not inconceivable that they may one day replace human traders.

This is but a sample of the types of financial models used by analysts. However, these outlines should illustrate in more specific terms the benefits of financial modelling and how they can help companies plan better business models and manage risk. Now, let’s have a look at this financial modelling case study to see these concepts in action.

A financial modelling case study from the steel industry 

A major steel manufacturer sought the services of a financial modeller to evaluate the different funding options to expand one of their facilities . There were several factors to be taken into account beyond extending the space; equipment needed to be commissioned and imported over an 18 month period. At the same time, the facility needed to conduct business as usual to ensure regular cash flow alongside this foreseen expense escalation.

There were various loans and loan tenors available, alongside an existing overdraft facility. The question for the company board was what would be the optimal mix of funding in order to minimise costs and avoid the need for refinancing or additional loans. To analyse the options and variables, they drafted a financial modeller to carry out liquidity planning. For the purposes of this financial modelling case study , we’ll describe the methodology used to create this type of model and the results achieved.

As a starting point, existing management accounts and budgeting gave an insight into the business as usual cash flow. Escalation dates and factors had to be applied in order to estimate the potential future cash flow situation. In addition, the expansion project capital requirements were estimated and foreign exchange implications analysed, and payment terms and dates determined.

Forecasts were calculated using opening account balances and the predicted changes to historic trends. These estimates had to take into account fluctuations in working capital and the new expansion capital outflows. These were overlaid on existing business cash flow models in order to determine the predicted monthly cash position.

Different loans with their specific interest rates and repayment profiles were then applied to this model to forecast a series of outcomes, expressed via the monthly cash position and the ending cash balance, plus the tax implications. From this analysis, a clear option emerged. This financing scenario was tested via sensitivity analysis, where key assumptions and possible changes to existing cash flows were applied.

The results

These financial modelling tools revealed a clear choice for financing. Further to this, the preferred solution was subject to a series of rigorous sensitivity analyses where key assumptions were applied and scenarios modelled. This allowed the board to quantify the risks in regard to foreign exchange rates, fluctuations in interest rates, changes to payment schedules, and changes in operational costs.

This enabled the board to make decisions that were informed as possible in regard to their choice of financing. Of course, these analyses aren’t cast iron – unexpected events like the pandemic are demonstrative of this – but they are an invaluable basis for decision making. Sure enough, in the wake of the pandemic, many financial modellers are incorporating disaster scenarios into their analyses, so that we can be better prepared for the next black swan event.

Find the right financial modeller

As this financial modelling case study demonstrates, mastering financial modelling requires exceptionally strong mathematical and analytical skills . They’ll need to be fully proficient in Excel and VBA, and as we move into the era of machine learning and AI, these essential skills will also need to be complemented by a strong understanding of programming languages.

Their skills as a business analyst need to translate business needs to financial requirements, and perhaps most crucially, they need to be able to communicate this information to key stakeholders. Certainly, financial modelling requires an excellent technical mind , but you have to be able to explain scenarios and their consequences in plain English (or whichever language you may be speaking).

Above all, it’s these soft skills that set apart a good financial modeller from an excellent one. The ability to understand the business, its requirements, stakeholders’ ambitions, and the magnitude of the impact of external events are critical to helping the business be better prepared for whatever the world economy throws at them. You need much more than just good excel or programming skills.

Source exceptional talent with Outvise

Certainly, going to financial modelling consulting firms is one route to finding an outstanding analytical mind. However, with consulting firms come consulting price tags. In light of this, what’s the most cost-effective way to find an outstanding financial modelling analyst? How can you guarantee good value for money, especially since the exercise is about effective financial management? 

Since the pandemic, promising and seasoned professionals alike have poured into the freelance market – all businesses need to do is connect with them. Outvise was created to forge links between the most talented freelance professionals and corporations. By creating a specialised, curated professional network, Outvise has facilitated companies to make the most effective, efficient use of freelance talent to drive their projects forward.

Discover financial modellers on the Outvise network and ready your organisation for anything.

Gerrit Eloff

Gerrit Eloff has been working in a multicultural and multinational environment for the majority of his career. A qualified actuary through the institute of actuaries in London with extensive experience working with Executive committee members, board members and shareholders, assisting them in defining strategy based on detailed data analysis and predictive financial models.

He has 20 years of broad financial modelling experience spanning across the full business planning cycle, from initial financial assessment, pricing strategies, business sensitivity analysis, valuations, funding structures to investor negotiation modelling.

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We built a detailed financing module with the detailed nursery by nursery forecasts, ensuring compliance with a variety of loan covenants and detailed insight into group performance.

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An ACA qualified financial modeller and former University lecturer, George’s financial modelling journey started at KPMG.

George has extensive accountancy and financial modelling experience, including engineering, treasury, rail, utilities, and education sectors with models built to process £bn scenarios.

ACCA and AFM-qualified financial modeller and accountant, Aleksandra’s progressive career began at Ernst & Young.

Aleksandra has a wealth of accountancy and financial modelling experience spanning private equity, housing, logistics, travel, retail, and education.

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The Growth Equity Case Study: Real-Life Example and Tutorial

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Let’s start with the elephant in the room: yes, we’ve covered the growth equity case study before, but I’m doing it again because I don’t think the previous examples were great.

They over-complicated the financial model (e.g., minutiae about issues like OID for debt issuances ) and did not accurately represent a 1- or 2-hour case study.

So, you can think of this example and tutorial as “Growth Equity Case Study: The Final Form.”

It combines the best examples I’ve received from students over the past 15 years and gives you a realistic idea of what to expect.

It’s an excerpt from our Venture Capital & Growth Equity Modeling course , so it’s not a step-by-step walkthrough – but it should still be quite helpful:

Video Table of Contents:

Types of growth equity case studies.

Growth equity firms are “in-between” venture capital and private equity firms .

They invest when companies already have revenue (like PE firms), but they do so by purchasing minority stakes , holding them, and selling in an IPO or M&A exit (like VC firms).

Since growth equity is halfway between VC and PE, interviews and case studies are also a blend.

So, you could receive a financial modeling case study – as in this example – but you could also potentially receive a “qualitative” case study:

• Do some market research on Company X and explain why you would or would not invest, the risk factors, etc.
• Pretend we’re conducting due diligence on Company Y, and you’re calling their top 5 customers. What would you ask them, and how would you structure each conversation?
• How would you screen the market and use your network to find potential investments? Walk us through your thought process.

These topics are interesting but difficult to demonstrate in a video tutorial or article, so we’ll focus on the financial modeling case here.

What to Expect in a Growth Equity Case Study: Procyon SA

You can get the PDF document describing the case study, the blank and complete Excel files, and the video tutorial below:

• Procyon SA – Growth Equity Case Study Prompt (PDF)
• Case Study Walkthrough and Explanation – Slides (PDF)
• Growth Equity Case Study – Blank Excel File (XL)
• Growth Equity Case Study – Complete Excel File (XL)
• 1:16: Part 1: What to Expect in a Growth Equity Case Study
• 3:51: Part 2: Historical Trends and Revenue
• 6:16: Part 3: Financial Statement Projections
• 7:45: Part 4: Sources & Uses and Ownership
• 10:06: Part 5: Exit Calculations and IRR
• 13:41: Part 6: Investment Recommendation
• 15:24: Recap and Summary

In short, we must project this SaaS company’s revenue and financial statements, model primary and secondary share purchases , make exit assumptions, and recommend for or against the deal.

Specifically, should we invest €60 million at a pre-money valuation of €1.2 billion and €50 million at a €800 million pre-money valuation if we’re targeting a 3.0x multiple and 30% IRR?

Will the company use that money to achieve its growth targets or flush it down the toilet?

I would sum up the differences between VC, GE, and PE case studies as follows:

You are unlikely to get a detailed cap table exercise in a GE case study, but you could get asked about primary vs. secondary purchases, liquidation preferences, and participating preferred (the first 2 of which are covered here).

Like an LBO modeling test , the 3-statement projections and entry/exit assumptions are important.

But the unique feature is that, unlike VC and PE case studies, growth equity case studies often require you to forecast customer-level revenue , factoring in renewal rates, upgrades, and downgrades.

Growth Equity Case Study, Step 1: Historical Trends and Revenue Projections

We’re given the number of new customers each year, so we can use that information and the historical trends to forecast revenue.

But they do not exactly “give us” the historical financials – only the customer-level data :

So, we need to use Excel functions like SUMIFS to determine the number of customers that existed in both periods and the revenue difference they represented for the “Upsells and Price Increases, Net of Downgrades” formula:

You can use similar formulas to get the Average Annual Contract Value (ACV), the Retention Rate (Renewal Rate), and other metrics.

Once we have these numbers, we can plug in the # of new customers the company expects to win each year and make reasonable forecasts for the Churn Rate and Price Increases to forecast revenue over 5 years:

It’s also worth forecasting the sales & marketing spending and customer acquisition costs (CAC) so we can calculate some standard SaaS metrics, such as the Customer Lifetime Value (LTV) and LTV / CAC Ratio:

Growth Equity Case Study, Step 2: Financial Statement Projections

As in most 3-statement models , the Income Statement is simple, especially since we now have the revenue and sales & marketing numbers.

We can look at the COGS and the Operating Expenses as percentages of Revenue and follow historical trends to forecast and link them to the Income Statement:

If our assumptions result in the company reaching “breakeven profitability” too early or too late, we might revisit them, but they seem reasonable here (for more, see our coverage of the breakeven formula ).

For reference, the case document said to expect profitability by the end of the 5 years.

The Balance Sheet and Cash Flow Statement forecasts use a similar approach: make most items simple percentages of Revenue, COGS, or OpEx.

We mostly follow trends and extend them here rather than using median figures, but you could use either approach, depending on the numbers:

After linking these items on the statements, we see an immediate problem on the Balance Sheet: Cash turns negative!

Procyon is spending aggressively on sales & marketing, resulting in negative Net Income , a declining Shareholders’ Equity, and a negative Cash position.

That’s problematic, so they need €60 million from our firm.

Growth Equity Case Study, Step 3: Sources & Uses and Ownership Summary

We can set up the Sources & Uses schedule as follows:

Although we invest €110 million total, the ownership calculations are not based on this simple €110 million.

Normally, in a VC deal, the ownership equals the amount invested / post-money valuation – but only for a primary share investment (i.e., new shares get created).

So, for the primary share purchase here, the ownership is:

60 / (60 + 1200) = 4.8%

But the secondary purchase does not create new shares , so we do not add the €50 million of capital to calculate the post-money valuation for use in the ownership calculation:

50 / 800 = 6.3%

We add these together to get the total ownership of ~11%.

And yes, maybe we should increase the €800 million pre-money valuation in the secondary purchase to reflect the €60 million of new primary shares…

…but it makes a small difference, and we don’t know the sequence of events here.

We wouldn’t do this if the secondary purchase occurred first because it still would have been an €800 million pre-money valuation.

But the bottom line is that you should not worry about this detail in a 90-minute case study.

After doing all this, we link in the €60 million of equity proceeds from the primary purchase on the Cash Flow Statement, which flips the Cash balance positive:

Growth Equity Case Study, Step 4: Exit Calculations

Now, for the moment of truth: Do we achieve a 30% IRR and 3.0x multiple of invested capital in this deal?

There are two main issues to resolve:

• Revenue Multiple – The initial deal was done at an 8.3x trailing revenue multiple and 4.4x forward revenue multiple. What do we use for the exit multiple here?
• Liquidation Preference – The case document says the €60 million primary purchase has a 2x liquidation preference, but the €50 million secondary purchase does not. In other words, if €120 million exceeds what the primary stake is worth upon exit, we’ll choose to take the €120 million instead.

The revenue multiple is simpler: it decreases substantially over time, falling from the 8 – 12x range to the 5 – 6x range upon exit.

The company’s Year-Over-Year (YoY) growth rate is between 30% and 50% in these years, down from the 100%+ rate at the time of the deal, so its multiple should decrease.

These numbers also align with the revenue multiples for the smaller SaaS comparable companies on the “Comps” tab.

The Investor Proceeds uses a complicated-looking Excel formula to factor in the liquidation preference:

The idea for the first part of the formula is simple: compare the €120 million to the value of this 4.8% stake upon exit and take whichever is greater – as long as it’s less than the Exit Equity Value.

The first part, in words, goes like this:

MIN(Exit Equity Value, MAX(Liquidation Preference, Primary Ownership))

And then we add the secondary proceeds – but only if the exit equity value is above this €120 million liquidation preference!

If not, we get nothing for this 6.3% stake because the exit proceeds cannot even cover the liquidation preference.

Here’s the second part in words:

+IF(Exit Equity Value > Liquidation Preference, Secondary Ownership * Exit Equity Value, 0)

This is not a robust formula that handles all cases correctly, but it’s fine for a 90-minute exercise to get a rough idea of the results.

Specifically, this formula doesn’t correctly handle the case where the Exit Equity Value is very low but still above €120 million (e.g., €150 million).

In this case, we should add a separate condition, take the Exit Equity Value, and subtract the €120 million to calculate the proceeds that get multiplied by this secondary stake percentage.

But we skipped it to save time, and it barely changes the results in normal exit ranges.

Growth Equity Case Study, Step 5: Investment Recommendation

Normally, you consider the outcomes in different cases to make an investment recommendation.

We’re close to the IRR targets but a bit short of the money-on-money multiple targets in this baseline scenario:

We also need to ask if the company’s business plan is believable based on metrics such as the LTV / CAC.

The ~4x LTV / CAC here is not crazy, and while the entry valuation is quite high, it’s not unreasonable if the company grows by 7x over 5 years.

In a downside case , where the company’s new customer numbers are cut in half, and the exit revenue multiples are only 3 – 4x, we still achieve a 1.5x multiple with mid-teens IRRs:

This isn’t a great result, but it’s still above the minimum targets in the case document.

So, overall, we would recommend investing in this company.

If we care more about the downside risk, we might negotiate for a greater primary share purchase or a higher liquidation preference.

But if we care more about the upside, we might shift more capital to the secondary purchase – as the valuation is lower, but it lacks the downside protection from the liquidation preference.

Bonuses and Other Points

There is a bonus section on cohort analysis here, but we don’t have time to cover it in this summary.

However, an upcoming video or Knowledge Base article might walk through the topic.

In addition to this cohort analysis, you could get asked to conduct market or industry research or benchmark this company against its peers.

There isn’t much to say about these mechanically; use resources like the Bessemer Cloud Index and Capital IQ and FactSet if you have them.

The #1 mistake people make with growth equity case studies is over-complicating them and losing sight of what matters – such as the key drivers and the returns in different outcomes.

But if you keep those in mind, growth equity case studies should be some of the easier ones in interviews.

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street . In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.

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Financial Modeling – Case Studies

Financial modeling is a critical tool in the world of finance and business, enabling professionals to make informed decisions, assess risks, and forecast future scenarios. Within this multifaceted discipline, the category of “Financial Modeling – Case Studies” stands as a valuable repository of real-world applications and insights.

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In summary, the Financial Modeling – Case Studies category offers a rich and dynamic collection of real-world examples that illuminate the power of financial modeling in solving complex financial problems. It serves as a vital resource for professionals, students, and anyone seeking to enhance their financial modeling expertise and better understand its practical applications in various industries. Explore these case studies to unlock the potential of financial modeling and gain a deeper understanding of its significance in today’s financial landscape.

Case Study: Enhancing Financial Projections for a Geospatial Service Firm

Case Study: Optimizing a Financial Advisory Firm Through Tailored Model

Case Study: Recruitment Efficiency with Custom CRM & Financial Modeling

Navigating Pricing and Costs Structure For Agribusiness – Case Study

Real Estate DCF Model: Elevating Geospatial Survey Services-Case Study

Financial Model For the Food and Beverage Manufacturing Industry-Case Study

Financial Model and Marketing Tool for Pet Seat Cover Business- Case Study

Blockchain Business Model and Pitch Deck – Case Study 

Blockchain Marketing Plan-Case Study

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 Healthy Frozen Meals Financial Model – Case Study

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From the website: “S3 Ventures is an early, expansion and growth stage venture firm with $325M under management.” S3 has a page on their website titled  Resources for Entrepreneurs , which contains some great information.

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Modeling the risk of financial losses due to tectonic earthquakes: Case study on damages to school buildings in a region in Indonesia

• Tampubolon, Dumaria Rulina
• Pratama, Randhy
• Gunawan, Agus Yodi

Indonesia is the largest archipelago consisting of approximately 17,000 islands and is at the meeting point of three big tectonic plates: the Eurasian (Sunda), Australian, and Pacific Plates. The occurrences of earthquakes may be caused by collisions between the earth's plates; active faults; volcanic eruptions; and other causes such as landslides, avalanches, and the collapse of heavy rocks. Earthquakes in Indonesia may cause large financial losses due to damages on buildings and infrastructures. For example, according to the data from Badan Nasional Penanggulangan Bencana (BNPB), the 2009 earthquake in Padang resulted in financial losses of approximately IDR 28.5 trillion; and the 2018 earthquake and tsunami in Central Sulawesi resulted in financial losses of approximately IDR 23.1 trillion. An Earthquake Catastrophe (CAT) Model may be used to model the risk of financial losses due to tectonic earthquakes. The purpose of this study is to model the risk of financial losses due to damages on school buildings in a region in Indonesia caused by tectonic earthquakes. The study focuses on the formation of an Event Loss Table (ELT) by utilizing the hazard, inventory, and the vulnerability modules in an Earthquake CAT model. In building the ELT, collective risk models are used. Based on the obtained ELT, multi-scenarios of the risk of financial losses are generated using a Monte-Carlo simulation. The topic discussed in this paper is part of a series of studies in building a State Financial Risk Model based on a Disaster Risk Financing, funded by Lembaga Pengelola Dana Pendidikan (LPDP), Indonesia Ministry of Finance.

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