Linking the 3 Financial Statement

Walk me through the 3 Statement Projection Model (How you set it up, how everything flows through together)

The Revenue growth is the driver for everything else. Expense projections are based on the revenue. You make Balance Sheet projections based on your Income Statement. The Income Statement will track Revenue and Expenses, finishing with Net Income at the b

How far ahead do you project in a model like this?

Usually the answer is 5-10 years. If you go beyond 10 years, it gets very difficult to predict what is going to happen to a specific company. It is not viable because you do not have the data most of the time.
If you go below 5 years, it is difficult to u

How do you project Revenue for a company?

There are three ways to do this:
Method 1: What we used in our projection model, we assume a simple growth percentage each year.
Method 2: Make a Unit-by-Unit Revenue Build. In the example of Apple, looking at the iPhone, iPad, Laptops, iPod, and their ot

How do you make Expense Projections (Cost of Goods Sold, Operating Expenses, etc.)?

There are two ways:
Method 1: You can make simple percentage assumptions and tie each of the percentages as a percent of revenue (we did that).
Method 2: Create a Unit-by-Unit Employee Build. Look at say, the iPhone, and say it cost "$200" to make and shi

How do you project the items on a Balance Sheet (Accounts Receivable, Inventory, Amortization of Intangibles, Accounts Payable, Accrued Expenses, Short-Term Deferred Revenue, Long-Term Revenue)?

In 90% of cases, you link them to Revenue, COGS, Operating Expenses, whatever is most relative to it.

How do you project Capital Expenditures, Depreciation and Amortization, or just Depreciation on the Balance Sheet?

Two ways to do this:
Method 1: Create a simple percentage of revenue assumption.
Method 2: Create a PP&E Schedule. With this you split the PP&E into different assets and look at Land, Buidling, Equipment, Factories and so on, and figure out the depreciati

How do you project Amortization of Intangibles?

The easiest way is to go into a company's filings and pull it directly from there because they usually have it projected out.
If not, you can take the same approach as the PP&E Schedule and separate it into separate asset classes and amortize it over a pe

How do you project Interest Rates on Cash and Debt?

For Cash, you want to generally look at a LIBOR Curve or other sources to look at Interest Rate projections and look at the companies filings to look at historical cash interest rates.
For Debt Interest Rates, you still look at the LIBOR curves but you wo

How do you project the Effective Tax Rate?

You want to go off of the companies historical filings, you do this because often times companies have foreign subsidiaries or a special tax situation.

What do you do if there is an error or mistake in your model?

On the Balance Sheet, you want to verify that each item matches up with those on the Cash Flow Statement. If everything matches up, you want to go through and do a line by line audit, check your formulas to see that there is nothing obvious, look at the a

How do Deferred Tax Assets and Liabilities work?

A very commmon way in which they arise is when you record an item for Tax Purposes for Depreciation and you also record that same item with a different number for Book Purposes for Depreciation. This creates a temporary tax difference and over time, this

What do you actually use the projections for?

Most of the time you would use a 3 Financial Statement Projection model for your valuation, you would use it for an LBO Model, a Merger Model and often times when you are presenting a company and trying to sell it to buyers or potential buyers, if you are

What do you use the projections for if you are a buy side advisor?

Often times the projections you use will be for internal purposes only, you are not trying to sell it to anyone, they are just for your own references and potential merger scenarios and sellers.

What do you do if your projections are too high or too low?

Pretty simple, you would just split it into different cases. So you might do an upside case, a middle case, and a downside case. You could say for the Revenue Growth for Upside, Middle, and Downside, it would be 25%, 15%, or 10%, respectively.
Generally y