3-Statement Financial Model

What if mastering financial modelling could open up the potential of your business and lead you to new levels of success? How could understanding your financial future change the way you approach your goals?

Financial modelling is essential for business success. It allows organisations to develop and project company figures by creating mathematical models using historical data.

The 3-statement financial model is a foundational tool used in corporate finance and accounting to assess the financial performance and health of a company. It consists of three key financial statements - income statement, balance sheet and cash flow statement.

Together, these three statements provide a comprehensive view of a company's financial performance, its ability to generate profits from operations, its financial position at a given point in time and how it manages its cash flows.

Sample Case

Let's analyse Apple Inc.'s financial performance using the 3-statement financial model based on the figures provided in the 10-k form 2023:

Predicting financial figures for the following years typically involves using historical data and applying assumptions about future growth rates, trends and external factors.

Here’s a step-by-step guide on how to use the provided figures from Apple Inc. to forecast numbers for the following years:

1. Revenue Projections

Products and Services Growth Rates

Analyse historical growth rates for Products and Services. For example, from 2022 to 2023, the growth rate for Services was:

• Services Growth Rate = ((85,200−78,129) / 78,129)) × 100 ≈ 9.05%

Assume growth rates for Products and Services based on historical trends and market analysis. For instance, assume Products grow at 2% and Services at 10%.

Projecting Revenue for 2024

• Products Revenue 2024 = 298,085 × 1.02 ≈ 304,047 million

• Services Revenue 2024 = 85,200 × 1.10 ≈ 93,720 million

• Total Net Sales 2024 = 304,047 + 93,720 ≈ 397,767 million

2. Cost of Sales Projections

Historical Cost of Sales Percentage

Calculate the historical percentage of cost of sales to net sales for Products and Services.

• Products Cost Percentage 2023 = 189,282 / 298,085 ≈ 63.5%

• Services Cost Percentage 2023 = 24,855 / 85,200 ≈ 29.2%

Projecting Cost of Sales for 2024

• Products Cost of Sales 2024 = 304,047 × 0.635 ≈ 193,068 million

• Services Cost of Sales 2024 = 93,720 × 0.292 ≈ 27,367 million

• Total Cost of Sales 2024 = 193,068 + 27,367 ≈ 220,435 million

3. Gross Margin Projections

• Gross Margin 2024 = 397,767 − 220,435 ≈ 177,332 million

4. Operating Expenses Projections

Growth Rates for R&D and SG&A

Calculate historical growth rates. Assume R&D grows at 10% and SG&A at 2%.

• R&D Expenses 2024 = 29,915 x 1.10 ≈ 32,907 million

• SG&A Expenses 2024 = 24,932 x 1.02 ≈ 25,431 million

• Total Operating Expenses 2024 = 32,907+25,431 ≈ 58,338 million

5. Operating Income Projections

• Operating Income 2024 = 177,332 − 58,338 ≈ 118,994 million

6. Other Income/(Expense) and Taxes

Assume other income/(expense) remains similar and tax rate based on historical data. Let's assume other income/(expense) remains at ($565) million and the tax rate is 14.7%.

• Income Before Taxes 2024 = 118,994 − 565 ≈ 118,429 million

• Provision for Income Taxes 2024 = 118,429 × 0.147 ≈ 17,404 million

• Net Income 2024 = 118,429 − 17,404 ≈ 101,025 million

7. Balance Sheet Projections:

Current Assets and Liabilities

Assume a similar growth rate as net sales for current assets and a historical trend for liabilities. Assume a 3% growth rate for current assets.

• Total Current Assets 2024 = 143,566 × 1.03 ≈ 147,873 million

Non-Current Assets

Assume similar investments and depreciation as previous years.

• Total Non-Current Assets 2024 = 209,017 million (assuming it remains relatively stable)

Total Assets

• Total Assets 2024 = 147,873 + 209,017 ≈ 356,890 million

Liabilities

Assume current liabilities decrease slightly due to less commercial paper issuance.

• Total Current Liabilities 2024 = 145,308 × 0.97 ≈ 140,949 million

Non-Current Liabilities

• Assume stable or slight decrease.

• Total Non-Current Liabilities 2024 = 145,129 × 0.98 ≈ 142,226 million

Total Liabilities

• Total Liabilities 2024 = 140,949 + 142,226 ≈ 283,175 million

Shareholders' Equity

Retain the balance, adding net income and accounting for share repurchases and dividends.

• Total Shareholders’ Equity 2024 = 62,146 + 101,025 − 77,550 − 15,025 ≈ 70,596 million

Total Liabilities and Shareholders' Equity

• Total Liabilities and Shareholders’ Equity 2024 = 283,175 + 70,596≈353,771 million

8. Cash Flow Projections

Operating Activities

Assume similar cash flow from operations adjusted for projected net income.

• Cash from Operating Activities 2024 = 110,543 + (101,025 − 96,995) ≈ 114,573 million

Investing Activities

Assume similar patterns of marketable securities purchase and sales.

• Cash from/(used in) Investing Activities 2024 = 3,705 million

Financing Activities

Assume similar levels of repurchases and dividends, adjusting for new debt issuance or repayment.

• Cash used in Financing Activities 2024= (108,488 − 5,228 + 11,151) ≈ (102,565) million

Net Change in Cash

• Net Change in Cash 2024 = 114,573 + 3,705 − 102,565 ≈ 15,713 million

Cash, Cash Equivalents and Restricted Cash, Ending Balances

• Ending Cash 2024 = 30,737 + 15,713 ≈ 46,450 million

Using historical growth rates and reasonable assumptions, we can project Apple's financial figures for next year, including net sales, cost of sales, operating expenses, net income, balance sheet items and cash flows, though in a simplified manner.

Projections are becoming more complex as relevant data is used to reduce error rates and create more sophisticated models. Not only is historical data used but alternative data in financial modelling like social media metrics and geographical factors will greatly influence financial modelling, highlighting the role of non-traditional data.

In addition, financial models will become even more advanced by implementing real-time data updates, enabling companies to make more timely and informed decisions.

As you reflect on the power of financial modelling, how will you apply these insights to your own business strategy? What steps will you take to ensure that your financial projections not only guide your decisions but also inspire your team's vision for the future?

Remember, every successful projection begins with a clear understanding of your past and a vision for your future; harness this power to drive your business forward.