 understanding the three financial statements. What are those three? What are those three financial statements? What exactly are they? How do we kind of interpret them and all of that? Yeah, so understanding those three statements, that's what we do first. Alright, let me ask you a question. Let me ask you a question. The, so we had a poll here and I have, I have some in the back end. So any, any in the back end, I'll just give you ideas of when you should drop the poll question. By the way, before that poll question, let's just jump straight into understanding three statement financials. What are they? Right. So if you look at my screen, look at my screen, everybody, you what you need to know about and how they are connected. How are those three statements connected? The first one, of course, is the balance sheet. This balance sheet is to me the most important of these statements because it tells you a story. It tells you a story, but only a story at a point in time. So it's like, you, you know how you tell everybody freeze, everybody freezes, you take a picture. That is the picture as that that's second for the business. That one second after you take that picture, things are going to change, right? Because businesses are not static, right? Things are happening. I can imagine a telco, if it was a telecommunications company, you can say, Hey, do you know what, every month we're going to take a picture of how we are. That picture, we're then going to review that picture against the picture we took last month to see how we are immediately take that picture. Let's say someone was, I was on a call, right? I was on a call at maybe 11, 1155 p.m. On the 31st of December, 2022. Now, as I was in that call, as a 12 midnight, I was still on that call. At 12 midnight, I may have talked for maybe one minute, 30 seconds. That one minute, 30 seconds was what the picture, when they took the picture of their business as a telco. As a 12 midnight, 31st December, that's when the picture was taken. I was speaking for, I spoke for 40 seconds and then maybe I entered the new year speaking. At that time that I entered the new year, that is for next year, not for this year. If you know what I mean, the picture won't include my entire call, so to say. So this is a precise picture taken at this point in time. And the best way I would like you to look at it is this. Businesses are broken into two. Assets and funding. Yeah, I know you hear liability, equity, just very simple. Assets and funding. You need assets to make money or you need funding to buy assets. Simple, right? All businesses are like that. And your assets just break it down into two boxes. Yeah, break it down into boxes. First box and second box and then your funding break into three. And this is how all businesses in the world are the same, same kind of structure, right? What are the assets? You have your fixed assets and your current assets, fixed assets and current assets. For your funding, you have OE. What's OE? So much type in the chat. Let me see their accountants. What do I mean by OE? By the way, these accountants like to call things, all sorts of names. F A means fixed assets, but they've changed it. They've now call it non-current assets. Accountants don't make up their mind. You non-accountants when you see financial statements and see non-current, used to be called fixed assets. Okay. C A is current assets. What's OE? Tell me, who knows OE? Yes, Solomon, correct. Owners' equity. Who knows another name for owners' equity? Owners' equity is also called equity. It's also called shareholders' equity. It's also called shareholders' funds. All sorts. So please, non-accountants, I apologize on behalf of accountants. We can't make up our minds. All of them mean the same thing. So when you open the financials in a company, you see owners' equity, shareholders' equity, equity, shareholders' funds, owners' funds. Yeah, so all of them mean the same thing. All right. So that's one way of funding with owners' funds. Another way of funding is LTL, which is long-term liabilities. And the last way to fund is current liabilities. So those are funding. Sometimes we call them equity and liability, but it is funding. So this is your balance sheet, number one of the financial statements. Right? The second is income statement. While your balance sheet takes a picture of what happened at a point in time, your income statement tells you what has happened over a period. Right? So you say income statement for the period, 1st of January 2022, 31st of August 2022. Right? It's a period. And during that period, what happened? There are only two main things that happened. Income came in, expenses went out. That's all. Income and expenses. And how do you think of it as you break it out into another big box for income, which is income, which is revenue. And then you have many boxes where they are taking expenses out. Now, the accountants, this is where they're saying, hey, we've made revenue. How do you make revenue? Well, you make revenue by using your assets wisely. Right? Using your assets wisely, then you make revenue. But then this cake called, I just like taking like a cake, that revenue is like a nice big cake. People eat out of that cake because you can't just make revenue out of thin air. You need things to make revenue. So your income is revenue. Right? And then you start slicing it. The first person to eat out of that cake, in fact, is the person that actually generated the cake called cost of sales. Now, this is a very special cost. If you don't, let me give you the simple example. Let's say a company like Glaxo Smith Klein or let's say, okay, let's even say simple FMCG. Let's say Cadbury, Cadbury. So they're making chocolate. If you want to make chocolate, you need to go get the cocoa, you need to get the sugar, you need to get the milk. And then those are raw materials that you used to make chocolate. You have the factory, right? And then you make chocolate. All those things that makes the chocolate is cost of sales. They are directly, yeah, makes that chocolate. Now, there are other expenses like who knows the MD salary, my salary, your salary. There's some support expenses, right? That you need, marketing, sales. So SGNA is selling general and admin expenses. Those are not directly related to making the chocolate. But you need to spend money on average and spend money on some salaries for people in the office, the accountants and stuff. So those are your SGNAs. They eat from the cake as well, right? Then you have people that funded the business, their revenue, how did you make it? How did you fund it? So if you look at the left-hand side, you see funding and those people that gave you a loan, you need to pay interest, right? So that's the funding side. You're paying the people that funded this whole thing, right? But the debt side of things. Then you have to pay government. Can someone tell me why you have to pay government? Type in the chat, why do we pay government? What do they do for you in the business? Can you type in the chat? We know cost of sales is raw materials. You need it. SGNA salaries of everybody, accountants, insurance, all the marketing, sales and stuff. Yeah, we know that. Interest, oh, they funded the business. Tax. Why do we pay tax? Tell me. Why do we pay tax? Everything in expenses needs to contribute to making that revenue, right? Social services. Thank you, Celestine. So you have security, right? So your military, security, roads, right? The roads, yeah. So those are the reasons you pay taxes, right? Because you need those social services. And also it's an obligation. You must pay, regardless of social services, you have to pay taxes. It's just an obligation, right? Okay. Who is the last person to actually eat from this cake called revenue? Who are we missing? Anybody have an idea? Well, the owners of the business, the owners of the business, typically you give them dividends, or they may decide, you know what, we'll leave the money in the business. That's called retained earnings. So whatever businesses you're running, this is how it's structured, right? This is how it's structured, right? Now there's another statement, cash flow statement. Let me ask a trivia question. Cash flow statement. Who here knows when it was mandated that cash flow statements must be in everybody's financial statements? You know, companies always publish their financials. Cash flow statement is actually very young. It only started, I don't know, when did it start? What year did they start using the cash flow statement? Who could type in the chat? And you may not leave the poll up, you can put the poll up for that. When did the financial accounting standards, don't use Google, no Google, no Google. If you don't know the answer, say I don't know. Don't use Google. When did the financial accounting standards board mandate the use of cash flow statements in financial reports? Who knows? Type in the chat, type in the chat, 2007, 1997, type in the chat. Anyone that use Google, don't type, please. Thank you. Let's see if you can answer it. If there's a poll up for that type, click on the poll. I can see the poll coming up. Everybody watch here, did the FASB, FASB is what's called, FASB is like the regulator, just the regulator for accountants, right? They are the ones that determine whether the accounting rules, the financial accounting reporting standards, right? Financial accounting standards board, sorry, the main standards board. So I can see 2007 looks like what people are thinking, 1997, 1997, 1997. Okay. The answer is 1987. So it's in 1987 that we were mandated, as all businesses in the world, were mandated to have the cash flow statement. So technically, it's not really three statement model, it's two statements model, balance sheet and income statement because cash is somewhere else here. Who can point out where cash is? Can you just type in the chat? See, all these things I've shown you here, right? Cash is somewhere in one of these things. Tell me where it is. Type in the chat. Where is cash in your balance sheet or income statement? Where is cash? Where is cash stored? Where is cash? Because cash flow is not really a financial stuff, it's just a report, right? Cash is in current assets. Who said that? Who's the first one saying that? Nice. Great. Yeah, so cash is down here in current assets, but cash is so important that we need to treat it specially, right? We really do need to treat it specially. We need to know that, look, how did cash flow throughout this business? Cash is like blood, you know, your body, your organs and stuff, but blood flows. Cash is blood flowing through the veins of the business. The moment cash stops flowing, no matter how wonderful, profitable the business is, the business will die. Yeah, the moment cash stops flowing. Imagine a business that says, hey, we're very profitable, but we don't have cash. Can we pay your salaries in the next six months? Won't pay your salaries for six months, please? Just, you know we're profitable, right? That's just a cash problem. Would you stick around for six months? I don't think so. I think you would leave and the business dies. So cash is split into three. Just the way we want to analyze it. We say cash can be used for operational activities. What you see in your income statement, those are operational activities, except for things like interest, tax, well, tax is kind of operational and dividends. Those interests and dividends, those are more financing, yeah, financing the business. Then you have cash flow for investment activities. Where do you invest? You invest in assets so that you can make a return and then cash for financing activities, right? So investing, financing, you can see that in asset and funding and then income expenses. Now, this single sheet I showed you here, this is all about three statements, financial modeling. This, understanding the linkages is the secret of being an excellent modeler. How are all of these things linked? So let's do an experiment. That's where drivers come in. So a driver is a clear understanding of drivers for your business. It's crucial if you want to be a top modeler. And what is a driver? What we're saying is what is driving what, right? So if you look at this, I'll clean it up. This is my financial model. Let's do an experiment here. Let's say Kpex. Kpex is capital expenditure. I want to ask you what line items in these three statements does Kpex touch? Now Kpex will touch directly some line items and then it will indirectly touch others. But tell me the direct things it touches right now. Type in the chat. Kpex, I'm spending, okay, let's assume I'm a coffee producer, right? Okay, so my Kpex is I want to produce one big factory that machines are going to produce a coffee. So I'm going to spend $2 million on this machine. What are these? What's it? What's it going to touch in these three statements? Type in the chat. All the things it's going to touch. Some people say FA. Is it only FA? Think does it touch anything in income statement? Does it touch anything in cash flow statement? Where does it touch? Tell me. FA, yes, I think that makes sense. It's going to touch FA. But then it's also going to touch cost of sales, right? Because at the end of the day, you're manufacturing this stuff, right? So there's a cost attached to it, those expense, and it's going to touch cash flow from investing. So those are the direct, that's directly where it's going to hit, right? Yeah, so this is a simple association by your assets, what do you buy the assets with all the raw materials and stuff, but the asset needs to be depreciated over time because that asset is a producing asset is going to be in cost of sales. And what cash did you use to buy the assets so that you are investing right in the assets cash flow from investing. All right, great. But then what are the other associations? It could be that, you know, when we buy it, if we played our cards, right, right? Buying this asset and doing things right will lead to profitability, which you mean we have retained earnings, which you mean we can give our shareholders some dividends because it's hitting cost of sales cost of sales also cash flow from operations. Right? Cost of sales is cash flow from operating the business. So it's going to hit cash flow from operations indirectly. Going further, but how did we even do, how did we fund this thing? Right? So look at this, look to the left, look all the way to the left, all the way to the left. See assets and funding. How did we fund? I would love to fund this with current liabilities. Do you know what current liabilities are? Let's assume I'm buying an asset and I could talk to some supplier that say and tell him, can you give me the asset I'll pay you next year? That would be wonderful. That means he's giving me an asset. I owe him money, but I'm not going to pay him. I'll pay him next year. He's giving me a small credit, right? Guess what? What interest rates do people charge for that kind of stuff? You go to the market, you want to buy something for $10. Sorry, can I pay you tomorrow? And then come tomorrow. Why are you going to pay that person tomorrow? $10, isn't it? Interest rate of what? Time in the chat. 0%. So most of your current liabilities, if you are funding from there, it's really a funding based on a promise. I promise to pay you when I get, when I have money. And it is almost free money. So that's like the cheapest form of funding. So you can see the funding side is the cheapest. So if we fund there, excellent. But there are other ways to fund, right? If you look up, you can also fund with what? Long-term liabilities. I can take a loan, a five-year loan and fund and of course they'll pay or pay interest. And if you look at my income statement, you can see that interest, there's interest there. So I'm hitting long-term liabilities and there's going to be interest. So you see that single buying of Kpex is hitting interest now, right? Because I took a loan to buy it, right? And also I could use equity to buy it, right? Or raise more equity. But that's funding. At the end of the day, doesn't this whole Kpex spending improve revenue figures? If we buy new assets, hopefully we're increasing production, right? So if we're increasing production, then we're increasing revenue. So the same Kpex is now hitting revenue. So at the end of the day, you have direct and indirect effects. At the end of the day, you have direct and indirect effects. You're hitting revenue. When you hit revenue, it means you're also going to hit a current asset called accounts receivable. Because when you sell to people, sometimes they don't pay as well. They say, hey, please, can I pay tomorrow? Can I pay next year? Can I pay next month? That means they owe you. Accountants call that accounts receivable. So you owe people accounts payable. So you can see it's now touching everywhere. So typically any transaction would generally hit, eventually hit everywhere, right? Finally, more revenue will lead to more profit and increased salaries. Hopefully, so increased salaries, SG and they will go up. And you can see that that is what modeling is all about. What is driving what? What is driving directly and what is driving indirectly, right? That's financial modeling, right? I have this visual that kind of summarizes everything we just talked about now, right? So you have financial statements, you have your balance sheet, your profit or loss account, your cash flow statement. And this is how they are all linked. And most businesses nearly every business is like this. That's really how it works, right? So that visual at the top, I also like this one. This is you're starting at a particular point in time in the balance sheet. You're taking another picture at that point in time. Your profit or loss is moving over time. And so is your cash moving over time. And that's how businesses run. Every business in the world runs like that. Quick trivia, quick trivia. Get ready to type in the chat. I want you to think about your profit or loss account. We also call it profit and loss. In the old school ways, I used to call it profit and loss. The accountants decided to change it to profit or loss. Which makes sense. You can have a profit and a loss. It's either a profit or a loss. Another balance sheet, who knows what they change it to. They change balance sheets to something else. Someone should type in the chat for us. Statements of what? Who can type in the chat? What's the new name for balance sheet? We're just confusing non-accountants. The new name for balance sheet is statement of who knows, who knows, who knows. So an account just with SFP. Confusion is even more enamly. Statement of financial position. Yes, that's what they call it. They can't make their minds of this accountants. Sorry. Okay. So I want you to think profit or loss is the thing that happens every day. Intra, I mean revenue and expenses. Balance sheet is your asset and funding. So I'm going to list out an asset, a balance sheet item. I want you to write down in the chat. How are they, how is that linked to the profit or loss? You know, we just did that exercise right now. Fixed assets. How is it linked to the profit and loss account? Tell me all the links. Just type type type. Let me give you one. Depreciation. When you buy a fixed asset, you're going to depreciate it over time. Yes. You're going to depreciate it over time. When you buy fixed assets, you're depreciating it over time. What does depreciation mean? Say, hey, I bought a car for 10 million, 10 million error. This car will last five years. So every year I'm going to take a piece of the cars, where the car's value is going down, isn't it? So I'm depreciating the car. So every year, 10 million over five years, 2 million, 2 million, 2 million, 2 million, and the car, then I have to replace the car or something. Right? So depreciation is one. Maintain and expense. You're maintaining the asset that goes to SG&A. Right? Yeah. It is interest income. Right? So interest income. In case your asset you bought is an investment. Right? If it's an investment, you bought shares, maybe you get an interest income. Right? Again, profit or loss on the sale. When you sell the asset, you probably make a profit or loss on the sale of the asset. Right? Same thing with current assets. How is it linked to P&L? Yeah. So as a modeler, when you're doing three statement modeling, you need to do this. You need to understand the linkages, the drivers of these line items. So current assets. How is it linked to your profit and loss account? How is it linked? I'll give you one. Sales. Current asset. What is sales? How is sales linked? Well, when you sell and someone doesn't pay you, that person owes you, and that is an asset called accounts receivable. So that's how sales is linked to current assets. Right? Yeah. Pretty straightforward like that. Yes. Current assets, someone said cost of sales. Nice. Cost of sales, inventory. Right? So stock. How do you cost of sales? Let's say you buy raw materials. You use some today, but you have some in the store. The one you have in the store is called stock or inventory. The one you are using is cost of sales. Right? So this is the way you think as a modeler. Right? You're thinking, what is linking? What's linking current liabilities? How is it linked? Oh, sales too. But sometimes you make a sale, but you can't call it a sale. Somebody says, hey, can you come and fix my, can you come to my house and fix all the furniture? The furniture is really bad. I need repairs. I need repairs. I need repairs. I need repairs. I need repairs. I need repairs. I need repairs. I need repairs. I'll pay you in advance. Then you'll pay the guy $200. What he says is going to take five days. You can't, that person that you pay $200 can call it a sale. Oh, I made a sale. No, you didn't make a sale. You need to fix my furniture first. You have to earn that revenue. Right? Now, yeah, I give you the money, but you have not earned it. You must come and do the work. So when you, when you have such things, we call it unearned revenue. So it's a liability. I owe you my work. When I go and do the work, then I can call it, oh, I made a sale. So very fine line called un-earned revenue. Right? Then you have cost of sales, trade payables. See, these are the linkages of how current liabilities links to P and L. Long-term liability. This is so easy, easy, easy. Everyone can type, including non-accountance. How does a long-term liability like a loan connect to your profit or loss account? Long-term liability. How does it give you an example? Long-term liability, a five-year loan. How does it connect? My name is David. Yes. Thank you. Interest. And not interest income. Interest expense. Interest expense. Because they are giving you a loan for free. You must pay interest and eventually pay back the loan itself. Yes. That's the link. Yes. Interest expense on the loan. Finally, the guys that own the business, how are they linked to the profit or loss account? Now, the accountants don't like writing it there, but it's actually there. Net profit. Who owns the net profit? When you make a profit as a business, the owners own that net profit. And they can decide what to do with that money. They can either decide to keep it in the business, and we call it retained earnings, or they pay to themselves as dividends. So you see this, this single sheet gives you a direct understanding of how everything is linked. And that is how you build models, right? So let me go to a model. Let me show you how you structure your model. How are we going to structure a great three statements model? So there are two ways to structure that spreadsheet. Let me show you the two ways. Let me go to spread sheet up. Let me show you a wall class model. Typically, you're going to build this kind of model if you do a financial modeling academy, or you do one of our courses like advanced financial modeler and stuff will polish you, make you a thoroughbred wall class financial modeler. If you do any exam, you'll pass, right? So this is how you structure models, right? One of the best sheets I like in models is something called a guide sheet. This guide sheet actually is a plan. It's like a detailed plan. And if you do a course, let's say an academy, you will learn how to build this very detailed plan. And this will now set you up for having a thoroughly built, well-built model at the end of the day. So here you have model details, model structure, navigation, model style guide, auditing tools, because it's important to be able to audit your model so that when there's an error somewhere in your model, when you put some silly stuff like this, it will just cry out, error, error, error, error. You can see this is a super well-structured model, right? So you have different sections. This thing to the left here is called outline. So your model reads like a book, right? Now, but this is just one of the sheets in the structure of your model. Let me tell you the difference where you could structure a model. There are two ways, really. Something called the horizontal model and the vertical model. So here's the horizontal model. Let's start with that. So your horizontal model basically means that your outputs are horizontal. When we say horizontal and vertical, we're really talking about your outputs. So if you look in here, we have the first two sheets, cover and guide. Cover and guide are info sheets, information, and provide information. Summary sheet is really an output, but it's a summary. Like your dashboard, you put your dashboard there, kind of summarizes everything. So for those of your executive presentations, you can use your summary sheet. Then you have inputs. Your inputs are three, mainly three. Your historical inputs. So your historical financials for the company, you can download, go to the auditor, give them your last three years of financials. Those are your historical numbers. Then you have your inputs. These are your core assumptions, right? They have the drivers. What are the drivers? Or what's driving revenue? Revenue is driven by price and quantity. That's the price of my product, $20. What's the price next year? Maybe it will grow by inflation. What's the price the year after? We have some technology we're going to probably implement, which will reduce the price. Or the competition is very hot. We need to reduce the price. There are many things that affect price. There are many things that drive price. What about quantity? Well, quantity can be driven by how big is our factory? What's the capacity? Are we using the capacity? Are we using the content? Are we importing our product, not producing it? All those are quantity. To get revenue, you need price times quantity. So drivers for price, drivers quantity. Those are all the things you do under inputs and assumptions. Really great. But your historicals too, you need to spend some time restructuring those historical numbers. Because guess where we got the financials from? We got them from the audits, from the accountants. And here is where modelers and accountants split. The accountant says the IFRS, IFRS is their Bible called International Financial Reporting Standards. IFRS says we must state the revenue as this, this and that. We must do this, we must do that. Which is all very nice. But when you're stating things as a modeler, you're stating them based on driver, not IFRS. So you're saying, hey, what is my interest expense? What drives interest expense? Interest expense is driven by the loan you took. If I took a loan of 10 million dollars, my interest rate is 10%. My interest expense is 10 million times 10%. Which is 1 million dollars. Simple. But it's not that simple for accountants. In IFRS they say if you buy derivative instruments and some other derivatives to reduce your risk on interest, you can basically set that off in your interest expense. So the interest expenses are so simply 10 million times 10%, 1 million. I had some derivative instruments and I made some profit on the derivative of 500,000. You now go and offset that your 1 million expense with derivative something, something derivative and then they will write interest expense 500,000. That is the big difference between a modular and an accountant. That 500,000 is not correct for the modular. What we should have written is interest expense separate line 10 million times 10%. Derivative gain or something an overline 500,000 because that derivative is driven by something else. Interest expense is driven by something else. As a modular, you must separate driver from IFRS, from whatever the accountant say they are structuring their financials. That's the big difference. So you are going to take this historical financials. In fact, let me show you some historical financials. Let me go to Apple. Let's have a look at Apple. Look at Apple's financials. Look at Apple's financial statements. Yes, can you see it? And we have condense consolidated balance sheet on audited. You can see current assets. As I said, current assets, cash, marketable securities, those are things that basically you have treasury bills and stuff you can take to the market and they can sell very quickly. They are almost like cash, accounts receivable, vendor non-trade receivable story, then you have non-current assets. This is the new name. Type in the chat. Non-current assets was called what before? Type, type, type. Type in the chat. Non-current assets. I told you the accountants have changed the names, right? Confusing us. I still call it what? Fixed assets. Fixed assets. That's what it was called before. Non-current is fixed, right? So these are the non-current, the long-term assets that take a longer term. Then you have current liabilities, then you have non-current liabilities, which is what? Long-term liabilities. And then you have shareholders equity, which I told you already is owners equity, shareholders funds equity. So this is the same structure, right? The profit or loss, same thing, net profit and all the things cost of sales, operating expenses. So we typically have the same structure for every business. Yes? But let me go to maybe a Nigerian company here. This is Nestle. Nestle, Nigeria PLC. When you are a modular and you go look at the financials of a company, the financials of Nestle is hiding somewhere, where are they? Okay. It's coming up. So if you go to the financials, you need to go and check do these financials are they, can I use these financials in building my model, right? Do they tell me what drives each? So let me use an experiment, just one small experiment. What you will do when you're building your model is you need to restructure these financials based on drivers. What's driving things? Right? So if I go to the, let me go to the PLL. Okay, look at the PLL. This is Nestle, yes. Where is interest interest? Okay, see finance income and fancy finance cost. So finance cost is typically what? Interest expense, finance income, maybe is interest income. And you see something called notes. So when they give you financials, they have notes. This is where they explain how they did this magic. So notes 10 tells us about finance cost. What did I tell you about interest expense? I said interest expense for a model is simply the loan times the interest rate. That's all. The question for the model is this accountant, when this accountant tells me finance cost, is this really loan multiplied by interest rate? You need to go find out. And if you find out again, you know the driver of that, then because you know the driver, you can say this driver is going to drive it all the way into the future, so year 20, 2021, to June 23, June fourth- to June five, it's got to drive it. Right? So if you go to note 10, you have to now go to the financial叫 the accountants called notes 10. So you have to go look for note 10 and read this. So this is what you do as a modeling. And one of the most important parts of building three-statement model is restructuring your financials. You need to restructure. That is the most, one of the most important parts. So here I'm traveling to no 10, where is no 10? No 10 up here. Okay, yeah, no 10 somewhere below there. So anyway, let's go to no 10, let's see what it is. And I'll leave you to decide, is interest expense driving, is interest rate driving this? So if you have a look at this. All right. So you have interest expense on financial liabilities, net foreign exchange loss, and then finance expense. So see this finance expense, this is what was in the balance. This one was in the financials, right? If you look, you see interest income, income is fine, but look at expense. Interest expense on financial liability, then we have something called net foreign exchange loss. Is foreign exchange driven by interest rate? Yes or no? Type in the chat. Foreign exchange, when you make a loss when your Naira crashes, is that driven by interest rate? Did you take a loan or something? How's that driven by interest rate? Is it yes or no? Is foreign exchange loss driven by interest rate? Just type yes or no in the chat. Is interest expense on a loan? Yeah, no, it's not. Foreign exchange loss is Naira crashed. I mean, today it was 400, Naira to the dollar. Tomorrow it became 600. What can you do? If you had a dollar loan, you're in trouble. If you have a dollar loan, you're in trouble. That's where they link the big dollar loan, right? But your interest rate will remain the same. Interest rate times the loan. So this is where modellers and accountants kind of part ways. We as modellers need to know what drives every single line item. Every line item you need to know. What is driving this? What is driving this? What is driving this? And you need to have very clear answers to that question. Once you have clear answers to that question, then you can build it, right? So that's where your calculations come in. So look at this. This is your horizontal model, right? Horizontal. The horizontal because your P and L, your balance sheet, your cash flow, your analysis, all your outputs are in separate sheets. That's what we'll call a horizontal model. But there's another kind of model structure, vertical model. I like the vertical model when it comes to writing exams. I give you a secret. You want to write your exams fast. I'm gonna tell you about the exams very soon. You should build a vertical model because it's faster because all your outputs are in one single sheet. Your outputs, your calculations all in one sheet. But this one I'm showing you here, this is a horizontal model. C P and L balance sheet in another sheet, cash flow in another sheet, analysis sheet in another sheet, your valuation in another sheet, right? Your scenarios, these are your inputs, historicals, inputs and scenarios. These are your calculations where you have all your schedules, all your schedules are your calculations. And then you put the balances from your schedules, you link them to your balance sheet. I'm gonna give you detailed steps for how you build a model from scratch, a checklist, right? So this is a world-class model. You have outlines. You can see how beautiful it will look. You can just click on the outlines here and see the different sections of the model. It reads like a book, very, very nice and neat. Okay, let's jump back to our deck. So here I've told you about the two layouts. You have the horizontal layout and the vertical layout. That's how you structure your financial model. I've shown you some bits already there. And look at Apple that I was showing you, for example. If you want to understand what's happening in the business, what I advise you do is you build this thing called the five box balance sheet. And then you play it like a record tape over time. This is Apple's financial year 2020, 2020 financials. How did you get that? All you do is go to the financials, right? Go to the balance sheet and pick just those total numbers, current assets. This is it, one, two, one, four, six, five. What is fixed assets? Two, one, five, six, nine, three. One, this is one number. This is another number. What's the other number? Current liabilities, 106 billion, right? Non-current liabilities, 161 billion. Equity, 697, 69.1 billion. They will always balance because your total liability and equity will always be called to your total assets. When you pick those five numbers, go plot them and you see this. This is what will appear. Then play this over time. Look at this. This is Apple in 2021. This is Apple in 2020. You then need to ask yourself, what happened? How did it change? What happened? If I compare Apple 2021 with another industry, like this one, Nestle, you can see they're completely different, right? Now, I'm not showing you numbers. This is how you interpret financials. You tell a story with this over time and then with this over time. And then when you project your business going forward, you need to explain what's going on here. Oh, it seems we took more loans. It seems our long-term liabilities has increased. We've changed the way we're funding. Who approved this? Why are we having more fixed assets and current assets? What kind of business is this? Those are all the stories that come. That's why modeling is such a wonderful thing. You'll be able to see, okay, historically, how have we structured our business? And then in the future, how we structure in our business. What's the strategy here, right? That's the beauty of financial modeling. Here, I have a nice schematic to explain revenue and profit determination. Of course, I'm not going in detail here. This is when you do the course itself. How many of you would like this? Type in the chat. Would you like me to send you this? Type in the chat. All these beautiful visualizations. You're going to read it. Type in the chat. Yes or no? Would you like me to send you these visuals? I'll show you some nice visuals and stuff. Are you interested in getting them? Okay, I can't see any. Yes, so no, I guess you don't want it. Yeah. Yes, no? I'm sure you definitely want. You want these visuals, yes? So yeah, I'm going to share. I'm going to share a lot of this with you. Don't worry. Just give me a sneak peek. This is part of your gift at the end. I'm going to give you to download all sorts of wonderful things, right? Including this is a cost classification methodology, right? So you need to determine, okay, how am I determining cost? Am I using variability to determine cost? Am I using whether it's direct or indirect? Am I using managerial decision or control to determine my cost? Some costs are based on managerial control and decision. For example, the manager may decide, I'm going to fund the business with a loan, or no, I'm going to fund the business by asking shareholders to bring money. Those are managerial decisions and control, right? And then you have, okay, I'm not going to buy, we're not going to have a factory to build this thing. We're going to import from our sister company in Kotonok or another company in Brussels, right? So that's them, they've shifted their costs from a fixed cost because the factory, if you buy a factory, if you build a factory, you're going to be heavily, heavy fixed costs. They've now moved it to more variable costs as they buy their paying variable costs. So they've changed the cost structure of their operations. So understanding cost classification is super, super important as a modeler, all right? Great. Now, how do you build a model by yourself step by step? How do you do that? Okay, I'm going to give you something to help you do that. How to build a three-statement model? Let me give you a summary of it. First, build the model structure. So did you see that structure, horizontal structure, vertical structure, build the structure, build your guide sheet, detailed structure. Step one. Step two, get and restructure your historical financial statement. This is where the big work is. You get your historical financials and you go in detail. Let me show you how detailed you can go. You take your historical financials. Look at this. Can you see this is from row nine to row 245. First, we started with the financial statements per audit. This was just a copy and paste from the audited accounts. Just copy, paste, copy and paste. Just like you saw Apple's audited accounts, copy, paste, copy the PNL, paste, copy the balance sheet, paste, right? That's all. You can do five-year financial summary and paste. You just copy and paste. That's all this one is. Then after you copy and paste, what do you do next? Financial statement, you now restructure. This is where the big work is. You're saying, do you know what? That thing they call finance cost and PNL. No, no, no, we need to split it into two. One is actually interest expense. The other one is foreign exchange laws that are driven by different things. You are restructuring based on drivers. So you restructure your balance sheet. You restructure your balance sheet. You're restructuring, right? You're restructuring balance sheets. Take this simple example here. I'm restructuring SG&E. I have my marketing distribution and expenses, administrative expenses, SG&E per audit. This is what the auditors gave me as SG&E. Based on drivers, I'm now splitting this into depreciation of land and building, motor vehicles, furniture and fittings, IT equipment, capital, work in progress. I'm removing all of that to now give myself a clean SG&E that doesn't include all of this because I'm going to have a separate line for depreciation. Those are the things you do when you are restructuring your financials so that at the end of the day, when you get your final financials, they will be restructured in the modeling terms, not accounting terms. So you have profit or loss restrated, balance sheet restated, and then of course it's important to put your audit check to be sure everything is right. This is modeling, this sheet here. Every other thing becomes easy when you restructure properly. What I see is a lot of modelers don't pay attention to this because it's not so easy, right? Get your restructuring done, right? That's number two. Number three, build your drivers and base assumptions. So now you're saying, okay, I've restructured. What's driving each line? That's now your input. You're building out your inputs, your drivers and base assumptions. Then you build out your computation sheets. Once you've built your drivers, you know what's driving what? Okay, go compute it. Compute for the next five years, for the next 10 years, for whatever it is you're building, based on what you've said the drivers are, right? Then build out your computation sheet and your profit or loss account. Since you've finished building your computation sheet, you built a template for your computations, do all your computations and then extract your profit or loss. Your profit or loss will take you probably to in 10 minutes, five minutes to extract once you've done the heavy lifting. All you're doing is linking, linking, linking, your profit or loss account comes out for year one. Next step, complete year one balance sheet and cash flow statement. Again, that's all just linking, linking, linking, really nothing much to do if you've done all the other things right. Then what do you do when you do your balance sheet? Does it balance? You have to ask yourself, does it balance, right? Your cash flow statement is actually like a reconciliation. You're gonna take cash from your cash flow statement and say, hey, cash and cash flow. Is it exactly the same as what I expect as cash in my balance sheet? If it's not the same, then you haven't balanced. So interesting bit there. Once you've built for year one, you now replicate for all the years you want to build. You don't build year one, year two, year three. Always build only year one and then just drag year one to the right. There's something called left to right consistency models. I should confidently do this. Look at this. I'm gonna extract this whole thing. This is my model, right? If I go to my calculations, she can expand this. These are all my calculations. I should be able to just highlight this like this. I can confidently delete this too, for example, right? And know fully well that when I drag this to the right, it will be correct. Let me control R because every calculation for year one should be equal to the calculation for year two, year three, year four, year five. There's something called left to right consistency. That's the golden rule for modeling. Left to right consistency. Never build a model for more than year one. Build the first period and then just drag it to the right. Just drag it to, maybe it's 10 year model. I'll say build year one, drag it to the right, build year 10. That's a good modeler. That's how you build models. Build year one first, right? Then replicate. Last stage, plug in your deliberate circularity. So sometimes there's something called a circular reference. There's something where you are referring to yourself. Let me give you an example. So there's a model I built for a client. The client said, I would like you to calculate interest expense for the next two years of this model. That is year one and year two. And then, but I want to fund it in here in currently I want to fund it right now. So I want you to tell me, okay, what's interest expense lesson for the next three years? $220,000. But I want you to put that $220,000 in year one. But guess what? If I fund $220,000 in year one, doesn't that change what my interest expense will be in the future? Because if I bring $220,000 in year one, that $220,000 is gonna be interest on it as well. So it's going to change the funding that I'm trying to fund in year one. So it's kind of confusing. How can I take something in year three and bring it to year one? And that year one is gonna affect year three. That's what we call a circular problem. It's a circular problem. There's a way to solve it in the model. So you solve that circular at the last thing. And this is your steps. This is your steps. Now I have something for you. I have this as a checklist, right? So these are the build the structure of your model. This is a detailed checklist. Then you have impart your historical balance sheet. Then you have also a checklist. So this is your detailed checklist. Would you like this? Would you like to have this detailed checklist on how to build a model? Type yes or no in the chat. Let me know if I should send this to you. Yes or no? Yes or no? Who wants this detailed checklist of building a model? So you come here and tick, just click. Once you do any step, click tick x, x, x. So you can always use this, right? To be sure that you've built a solid, solid model. Right? So we use this in all our top courses that we do. Yeah, I know some of you would want that. That's great. Okay, so your gift is coming soon. I'm going to give you that. I'm going to give you the checklist to build your model from scratch. I'm going to give you all those six really super laminates. So those beautiful visualizations and summarizes things. I'm going to give you six of them at the end. Right? But who also would like to be a world-class financial modeler? Type in the chat. Would you like me to show you the wonderful thing that's just happening very soon to make you a world-class modeler? Do you think you like that? Is that something you want to do? Is that something you want to do? Or maybe you're not interested. You can do it on your own. So let me ask you. You could try to build or learn this whole thing. I've been doing this for 20, 21, 26, 27 years. You could do like me and learn it on your own and stuff. Or I could just give you the secret of how to do this thing properly from scratch, right? So it's either option one. You do it on your own. Maybe next year you still need some help or you go through a system. A proper structure system. So is it one or two for you? Tell me. You want to do it on your own or you want me to show you a 100% system that has worked for me for what, 20 years? And then you can get an accreditation. You can then go and do the exam. There's a financial modeling institute exam and you will pass. As in if you follow the process, you will pass. Yeah, which one would you like? One or two? Okay, some people like two. Nobody wants one. Want a guide? Okay, great. I wish I had this guide. I want to have wasted like 10 years learning almost most of these things on my own. But this is what it's called. It's called the Financial Modeling Academy. The Financial Modeling Academy. This is being launched. It's just been launched, soft launch. We have partnered with the Financial Modeling Institute. And I'll like you guys to hear from Ian right now. Ian is in the Financial Modeling Institute. I'm going to play a short, too many video. Listen to him. There's a big announcement for Deborah on consulting. Listen. So you're thinking about pursuing the Advanced Financial Modeler or AFM accreditation. That's excellent news because Financial Modeling has become one of the most important skill sets for finance, accounting, and other business professionals. In order to attain the AFM accreditation, you will need to demonstrate on the four hour exam that you can build an integrated three-stage statement model of a company from scratch. This includes building up a company's income statement, cash flow statement, and balance sheet, along with all of the necessary supporting schedules like a revenue schedule, depreciation schedule, working capital, and others. The Advanced Financial Modeler or AFM accreditation. That's excellent news because Financial Modeling has become one of the most important skill sets for finance, accounting, and other business professionals. In order to attain the AFM accreditation, you will need to demonstrate on the four hour exam that you can build an integrated three-stage statement model of a company from scratch.