Historical in 3 statement model
Is it important to link CFS to balance sheet and income statement for the historical information? I will obviously link it for forecasted period. But for historicals, if i link it, the results don’t match entirely since the reported CFS has a lot of extra adjustments like gain on sale etc. so is this linking a must have or a nice to have?
Linking the Cash Flow Statement (CFS) to the Balance Sheet and Income Statement for historical periods is indeed important, even though it might seem like a challenging task due to discrepancies like gains on sale and other adjustments. Here's why it's more than just a nice to have:
Accuracy and Integrity: Ensuring that historical financial statements are linked maintains the integrity of the financial model. It verifies that the model accurately reflects the company's historical financial performance and position. This is crucial for analyzing trends over time and for the model to serve as a reliable basis for forecasting.
Understanding Adjustments: The process of linking historical statements forces you to account for and understand the various adjustments in the CFS, such as gains on sale. This deepens your understanding of the company's financial activities and how they impact cash flow, which is vital for accurate forecasting and analysis.
Consistency: Consistency in how historical and forecasted periods are treated in the model is key for comparability. If historical data is not linked and reconciled, it becomes challenging to compare historical performance with future projections accurately.
Error Detection: The process of linking and reconciling can help identify errors or anomalies in the historical data that might otherwise go unnoticed. This ensures the model's overall accuracy and reliability.
Investor and Analyst Expectations: Many investors and analysts expect financial models to have fully linked historical statements. It demonstrates thoroughness and can increase confidence in the model's forecasts.
While linking historical financial statements can be complex and time-consuming, especially when dealing with numerous adjustments, it is a critical step in building a robust financial model. It's not just a nice to have; it's a must-have for ensuring the model's accuracy, reliability, and usefulness for decision-making.
Sources: 21 Finance Interview Questions and Answers, 21 Finance Interview Questions and Answers, Investment Banking Interview Questions - 15 Answers to Land the Job, Investment Banking Interview Questions - 15 Answers to Land the Job, 1st Yr Banking Analyst Open for Questions
Would not waste your time. Change in cash is already baked in to historical b/s so no need to fill in historical CFs for modeling purposes
I think you might be overthinking it. I wouldn’t spend a ton of time on figuring out how to make your historical financials dynamic.
Maybe I do it backwards, but I start with a CIM or model, which tells me what management thinks is material for projections. Build out that model which will inform me of the template that I should use for historicals. You’ll see how the line items in your model correspond to financials and then undoubtedly you’ll have an ‘other’ bucket/plug that you’ll need to figure out, and maybe you adjust your model if it’s a material line item that you should be modeling (you’re kind of back testing your model to actuals). In my opinion this is much better than trying to build a full 3 statement model from the historicals because a lot of the line items are irrelevant, immaterial, and/or false precision. Obviously if your models sucks when backtesting, then you need to figure out why.
if you’re starting from scratch, I’d recommend building out a model as best you can before starting to spread financials. That’s going to at least force you to try to identify what’s material before you just start entering data into excel.
Thanks!
Do NOT try to reconcile Income Statement/Balance Sheet with your Cash Flow Statement in the historical period.
There are often a lot of adjustments that make this impossible (currency translation etc.)
I tried to make it work when I was doing case studies back in the day, and never once it worked.
Perferendis ducimus consequatur velit perspiciatis sapiente. Autem necessitatibus eius ut qui quasi voluptas amet ducimus. Et ea aut rerum culpa debitis consequatur.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...