A Step-by-Step Guide for P&L and Balance Sheet
When constructing a financial model, two critical milestones must be reached. In this chapter, we will meet the first one while the second milestone will be accomplished in the next.
Prior to our continued progression, I’d like to remind you of all the methods we’ve used in our economic modelling process. Should you have difficulty with any particular topic, it may be prudent to examine the pertinent chapter and read through it once more. If you have any questions, don’t hesitate to inquire.
We began the module by formatting an excel workbook into a layout suited for financial modelling. After indexing the columns and locking them in place, we made certain each column corresponded to the same year throughout the model, thus preserving its accuracy.
We thoroughly studied the annual report to confirm the accuracy of the statements; we then transferred the Profit and Loss and Balance Sheet figures from the past five years onto a prearranged excel sheet. The only numerical information entered by hand into the financial model were those two, while all remaining numbers were either estimated or derived.
We introduced an assumption sheet that included P&L and Balance Sheet assumptions. These assumptions were either based on growth rate or determined as a larger line item percentage.
Once the assumption sheet is in place, it’s time to construct the revenue model. This model will provide an insightful, detailed look at all of the factors that affect revenue.
In our model, ‘schedules’ were used as a concept. This notion essentially functions as an assumption, but dissecting it into its components allows us to gain more profound understanding.
This follows the principle that the closing balance of one year is the opening balance for the next.
We have been able to use the assumptions and timetables to forecast a balance sheet and profit & loss statement.
As you can see, the figures are interconnected from one sheet to the next, creating a cohesive system.
In this chapter, we will generate a five-year P&L and Balance sheet as part of our financial modelling expedition. It’s an important step forward.
– P&L Projection
We’ve reached an exhilarating point in our financial modelling trek. A financial modelling lover likened it to a wedding kitchen scene.
At a wedding kitchen, it is not uncommon to have someone chopping vegetables, someone grinding the masala, another frying items, and yet another mashing them. Eventually everything comes together in on
e pot for the final recipe.
Up to this point in our financial model, we’ve been dealing with individual components. Now it’s time for us to join everything together and integrate the model.