How to build a basic income statement model in excel
Building a basic P&L model is really quite simple. With a working knowledge of excel and how a company operates its business you can project future revenues and profitability.
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Things You'll Need
- microsoft excel, historical financial statements, basic understanding of key revenue and expense drivers.
Instructions
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Identify the top drivers of revenue. For example consider an online media business that has banner advertising as its sole source of revenue. The main drivers of revenue are traffic, number of sold ad spots per page, and CPM rates for sold inventory.
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Identify the top drivers of expense. Using the same example of an online media business the drivers of expense will generally be marketing and content and any additional operating expenses necessary to run the business. These may include things like personnel, rent, and basic office supplies.
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Decide on appropriate growth rates for your revenue drivers. Unless there are major changes planned for the business these growth rates should be in line with how the business has grown historically.
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Decide on how the business will be run going forward. Are you able to operate the business will fewer people or will more people be needed? Will you need to continue to market the business or can you rely on organic traffic and viral marketing? Will you need to pay for more content or can you get content free somewhere else?
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Project the revenue drivers forward based upon your revenue growth assumptions.
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Project the expense drivers forward based upon how you plan to operate the business going forward.
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Calculate your projected profitability by subtracting your expenses from your revenue.
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Tips & Warnings
Don't overcomplicate your model. Focus on the top 3 or 4 drivers of revenue and expense and build your first draft model based upon these variables. Once you have a basic model built you can iterate to look at different scenarios.
Always be able to defend your assumptions. Use comparable company or transaction performance whenever this data is available.
