Introduction to Financial Statement Modeling

How analysts turn a revenue forecast into a linked set of pro forma income statements, cash flow statements and balance sheets, and how behavioural biases, competition, inflation or deflation, and the choice of forecast horizon and terminal value assumptions shape that model.

1. 1. The model's structure and the revenue forecastA sales-based model starts with revenue, built from volume, price/mix and currency for each segment, and then derives almost every other line from that revenue forecast.Free13 min
2. 2. Operating costs, non-operating items and the pro forma income statementCosts are forecast with the driver that fits their behaviour: gross margin for COGS, a percentage of sales for variable overheads, absolute growth for fixed ones; interest, tax and share count then turn EBIT into EPS.14 min
3. 3. Forecasting the cash flow statement and balance sheetOnce the income statement is done, the cash flow statement needs only capex, D&A, working capital and financing assumptions, and the balance sheet is mostly a matter of linking: if every line is linked correctly, it balances.Video · 6 min15 min
4. 4. Behavioural biases in analyst forecastsFive biases (overconfidence, illusion of control, conservatism, representativeness and confirmation) distort forecasts, and each has a practical remedy built into the research process.13 min
5. 5. Competitive factors: Porter's five forces, prices and costsThe strength of the five competitive forces decides how much pricing power a company has over buyers and how much cost pressure it faces from suppliers, which feeds directly into forecast growth, margins and ROIC.13 min
6. 6. Forecasting sales and costs under inflation and deflationUnder inflation or deflation, revenue depends on how far and how fast a company can change its prices and what that does to volume, while costs depend on each input's share of the cost base and the company's ability to substitute, hedge or become more efficient.15 min
7. 7. Integrated cases: volume shocks, fixed and variable costs and assumption setsA forecast question turns a story (a tax change, an input price move, a capex plan) into numbers in a fixed order: price and volume first, then which costs move with volume, then the margin; each assumption must be tied to the line it drives.17 min
8. 8. The forecast horizon and long-term projectionsChoose an explicit forecast horizon long enough for the business to reach a normal, mid-cycle state, then base the terminal value on normalised cash flow and a realistic long-term growth rate, watching for inflection points.13 min