Welcome to the second course, which follows on from Financial Modelling Basics.
Here we're going to build an integrated model, also known as a 3 statement model, step by step.
Integrated models have Profit & Loss (or Income Statement), Balance Sheet and Cash Flow Statement reports, all based on input assumptions (and sometimes actuals). The reports should always work together so that they stay in balance and continue to reconcile. 

In these lessons, we'll show you how to do that.

Continuing on with the SCILS principles of best practice, we now look at:

Some of the most common errors in modelling are caused by something being the wrong sign. This causes an error double the size of the value being referenced, so it's important to eliminate these errors (if you are trying to calculate 10 + 2 but the sign is wrong causing 10 - 2, the error is 4 (8 instead of 12).

The best way to eliminate this type of error is to use a consistent sign convention. The one we recommend makes most of the calculations easy as you can just add things up, instead of working out whether you should be adding or subtracting.

In this lesson, we describe our sign convention and how to apply it. 

Now we're actually ready to start building a model.

In most cases we start with the Profit and Loss statement (Income statement), which describes the activity of an organisation.

This lesson covers the essentials of how to build a P&L forecast. We'll build on this as we go through subsequent lessons. 

One of the main reasons for building a model is to answer "what-if" questions. This means the calculations need to be flexible enough to update our forecasts whenever we change an input assumption.

An essential technique for achieving this flexibility is the use of Flags and Counters - we take a look at those in this lesson.

Now we get to the secret of integrated financial modelling!

This lesson covers control accounts (also called corkscrew accounts) - this sounds like a boring accounting concept, but in a model, these are at the heart of making the three statements work in unison.

The balance sheet is the second of our three statements. A balancing balance sheet is the key test of an integrated model and its something most people struggle with. 

We'll make it easy here, but building in the balance sheet at an early stage in the process. We'll make it balance straight away and keep it balancing as we go through the rest of the build - this eliminates most of the pain that modellers experience in trying to balance their balance shee

Now we have a balance sheet, we need to show our cash balance (or overdraft) and calculate how much interest we earn or pay on this. 

Receivables (also known as debtors) is the line on our balance sheet that tracks how much money we are owed by our customers.

Most businesses receive some of the cash from customers after they have delivered their goods or services (even if this is just a few days until the cash is received from a credit card company).

This lesson covers how we deal with this timing delay and how we keep the balance sheet balancing with this extra layer of detail.

In this lesson, we look at Inventory (normally physical stock of a product).

When we buy products (or raw materials) we exchange our money for the value of the inventory and this value is shown on the balance sheet. Here we give a simple approach to keeping track of the inventory we hold in our business.

Payables (also known as creditors) are people we owe money to because they sold us something - ie our suppliers.

We already dealt with a timing difference when we looked at receivables / debtors. Now we're going to apply similar logic to our payables / trade creditors.

At the top of the balance sheet, we find Fixed Assets.

These are 'assets' that we use in our business, rather than things that we buy in order to sell to our customers. This includes things as diverse as computers, furniture and wind turbines. 

In the last lesson, we built a balance sheet entry for fixed assets.

If you are an accountant, you will know what depreciation is, so dive right in to the lesson.

If you're not sure about depreciation, here's a really quick summary of the concept:

Because fixed assets are used in our business for a number of years, it doesn't make sense to charge the whole expense in the year we buy them, as our proft would be artificially reduced in this year and artificially high in later years, when we would be getting the use of the asset 'for free'.

We deal with this by spreading the cost of fixed assets over the length of time we can use the assets (the 'useful economic life') 

This section covers the basic concepts for handling debt financing of our business (ie taking out a loan). 

If we have borrowed money (debt), we'll need to pay interest on our loan and repay the amount we've borrowed. This is known as "Debt Service".

Here we look at the basic approach to modelling this. This basic approach can be built upon to cover all kinds of financing arrangements.