1. How to love models
Welcome to the course! You will learn about financial modeling with spreadsheets and to get us started, let's dive into simple models of business income.
2. What is a model?
Financial modeling has many definitions, but the basic task is to build a model. This model should be a representation of the real world, and this means that we might create documents with financial information from each year of business. With that information, we can use numbers, like stock prices, to examine trends across time or predict future values..
3. What is a model?
In this first lesson, we will focus on income statements and cash flows
4. Income statements
Income statements allow a business to track their income and expenses across years. They can be modeled in a lot of ways but traditionally include the following information. First are sales made to customers, either in goods or services, and the associated costs of those goods. EBIT or earnings before interest and taxes accounts for administrative costs and depreciation, which is the cost of the people in the business, and the decreasing value of assets over time. Taxes are imposed on the money made, and net income is calculated by subtracting expenses, including taxes, from profits made. Finally, dividends are money that is paid to shareholders on the net income.
5. Key components
Here's an example of an income sheet. You can see the key components mentioned previously, like EBIT sales, and cost of sales. The layout here is a suggestion, as business needs may dictate different information.
6. Formatting numbers
You will often see financial models formatted so that the expenses or negative numbers are in parentheses. You can easily convert your sheet into that format by highlighting the number cells, clicking format, number, and then selecting the financial option.
7. Adding up the bill
Because we formatted our expenses as negative numbers, we can now calculate our incomes and EBIT by simply totaling the values in the previous section above it. Therefore, for gross operating income, in B eight, you would type equals sum then open parentheses, highlight the numbers for sales and cost of sales in B six and B seven to sum them up and close parentheses. For EBIT, we will use the sum function to add gross operating income to the values in that section and so on for the rest of the income sheet.
8. Completing all the years
To complete our model, we will want to copy these formulas over for the rest of the years. You can copy and paste the first year's formula into each of the other years or use the fill handle, which is the small square at the bottom right of a cell. If you click on this square, you can drag and drop the formula to the adjacent cells.
9. Make your first model!
Let's practice these concepts by completing our first income sheet.