How to build a Dynamic Financial Statement Model

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Permalink Reply by Sachidanand (Sacha) Singh on March 17, 2009 at 11:37am

Pretty scary, Toby.
But thanks a lot. I think I need to spend time to understand it.

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Permalink Reply by Toby O'Brien on March 17, 2009 at 5:59pm

Come on Sacha...it's only one page! ;-)

More seriously - this page represents the simple reality of the links that are required to create a truly dynamic financial statement model, whereby I can (for example) change a revenue forecast assumption in a single cell of the workbook, and have the logic flow through any dependent "modules" to appropriately change:
- Closing Operating Receivables;
- Tax Expense/Paid;
- Cash at Bank;
- NPAT;
- Retained Profit;
- Net Assets;
- DCF Valuation;
- etc

There is quite a bit of information to absorb on this page, but I guarantee that for anyone who is trying to learn how to build a dynamic financial statement model, it will save you a lot of time.

I note that not all financial statement models will require all of the "modules" in this diagram (in which case you would simply exclude them, and all of the links to and from those "modules").

Enjoy!

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Permalink Reply by Mukund Bhide on March 30, 2009 at 11:24pm

Hi Toby,
Great insights into financial statement implications,good for modellers,looking forward to sort out various relationships depicted & understand!
Thanks
mukund

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Permalink Reply by Husam Al Khalili on March 24, 2009 at 8:12am

I appreciate your efforts, it is clear and helpful.
Hope to learn from you more in the near future.

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Permalink Reply by Kofi Adusei Koduah-Sarpong on March 24, 2009 at 9:17am

I love the process flow and the modules. Excellent

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Permalink Reply by Babar Latif on March 30, 2009 at 10:12am

This's very useful.

Thanks for sharing.

Babar

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Permalink Reply by Bonolo Paul Nare on March 30, 2009 at 3:57pm

Interesting and comprehensive process flows. Thank you for making this available to us.

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Permalink Reply by VIPUL RAMGOPAL LOHIA on March 30, 2009 at 4:21pm

Thanks for it. but can u make little more illustrative.....

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Permalink Reply by Toby O'Brien on March 30, 2009 at 7:23pm

Hi Vipul - I certainly can make it more illustrative - how's this?

:-)

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Permalink Reply by Paul Zaman on September 18, 2009 at 12:21am

Great job. The art of financial valuation and business modelling is to focus upon the physicals. Volumes, unit costs, unit prices, cost of acquisition of a customer, cost of customer retention etc.

You map is excellent

Great job

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Permalink Reply by Toby O'Brien on March 30, 2009 at 11:42pm

Thanks everyone for your feedback.

@ Kofi: The "modular approach" is critical in my view. The key is understanding that almost any form of logic can exist within any module box, as long as:
(a) it uses the dynamic "links in from" other modules; and
(b) calculates the "links out to" other modules.

For example - to calculate "Revenue" (within the "Revenue" module box), I could just hard code a dollar amount for each time period, or I could create a really complicated method for calculating revenue using various geographic segments, customer numbers, products, prices, volumes and market share assumptions. Either way, I just need to link "Revenue" out to the Income Statement and Operating Receivables modules (etc) to make a dynamic financial statement model.

@ Everyone: It is also important to recognise that this diagram is not just for "complete 3-way financial statement models". You can also use this diagram for "part of business" or "part of financial statement" models. For example, the diagram shows how to construct just an "Income Statement", and in doing so, highlights which links/modules are not required to model just an Income Statement. Depending on your needs, you can simply include or exclude "modules" as required (acknowledging that any "dependent" module will be affected accordingly!). Also - the diagram is conceptual in nature. As such does not include everything that you might need to include. For instance, it does not include "Inventory" or "Prepayments". However, if you understand this diagram, you will be able to work out how to slot in other types of "modules" fairly easily.

Cheers

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Permalink Reply by Shafi on March 31, 2009 at 6:47am

Dear members,

I am trying to download the attached file to view the model but I can't do it. What shall I do to be able to open the attached file?

Kind regards.

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