Capital Expenditures and Depreciation

Capital Expenditures aka CapEx is the spending of money to buy or fix assets. CapEx is typically related to buildings, property, equipment. Many financial models are built to help determine growth and expansion plans that require spending money on equipment and other assets. Understanding the relationship between CapEx, deprecation, and the financial statement is a very important aspect of financial modeling.

In the current sample financial model, deprecation and CapEx are not forecasted to change. However as the business grows, additional equipment is needed.
In the new model, we CapEx spending in Years 5,6 and 8.
CapEx Forecast

Continue reading “Capital Expenditures and Depreciation”

How to Balance Your Balance Sheet

One of the hardest parts of building a financial model is getting the balance sheet to balance, meaning the basic equation of Assets = Liabilities + Shareholder’s Equity is true.

The balance sheet itself is not the problem, it is usually the cash flow statement that introduces the error.

Here are some tips to make sure your cash flow statement is correct to ensure you calculate the correct ending cash balance.

For a working model, start with the basic financial model.


Make sure you rebuild the historical cash flow statement with formulas, that’s the only way to ensure you’ve accounted for all numbers and everything will flow going forward.

All line items on the balance sheet must be used in the cash flow statement. Continue reading “How to Balance Your Balance Sheet”

How To Forecast The Income Statement

Forecasting the income statement is the first step to building

Rebuild the historicals

To forecast the income statement, you have to understand the historicals. So start by rebuilding the financial statements.  This means taking the given values and adding formulas where necessary.

If you want to give it a shot (highly recommended), you can download the values only version and rebuild the financial statements by adding in formulas for all three financial statements. Continue reading “How To Forecast The Income Statement”

Basic Financial Model


Embedded above is a basic working financial model for Sophie’s Bicycle Shop. You can download into Excel by clicking the link at the bottom of the embedded spreadsheet.

For a typical modeling assignment, start by reviewing the historical financials, then forecast the future, and finally build some different scenarios such as opening a new store, buying a competitor etc. (I haven’t thought all these out, so I’m open to suggestions).

I’m purposely left out some sub-calculations to keep the model simple, we will hopefully cover at a later time. Continue reading “Basic Financial Model”

Income Statement aka Profit Loss Statement

Income statement also know as a profit and loss statement is the main financial statement.
It covers revenues and expenses for the company.

- Cost of goods sold
= Gross profit

- Salary
- Rent
- Utilities

= Operating Income/(Loss) - aka EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

- Depreciation
- Amortization
= EBIT (Earnings before Interest and Taxes)

- Interest
= EBT (Earning before Taxes)

- Taxes
= Net Income aka Earnings

Operating Income is also known as EDITDA.
EBITDA is a very common term used when talking about a company especially for valuation.
EBITDA is a good proxy for overall health of the company without knowing the full details because it looks at the operating functions of the company and ignores the capital structure of the company.

For sake of simplicity, I’ve ignore dividends and stock expense and other usually immaterial line items.

This is just the basics, we’ll dive into more detail in later posts.

Check out our sample profit and loss statement below.  It is fully downloadable in Microsoft Excel.