Sample Finance Paper on Financial Modelling

In the finance world, a three-statement model is used to links income statement, cash flow and balance sheet statements into one connected but dynamic financial model.  These models form the foundation of building more advanced financial models like discounted cash flow, merger models among other financial models. In so doing, it becomes easy to visualize performance and be able to conduct projections. The reason is because, data and values are put on a single excel worksheet. When accurate data is available and assumptions holds constant, this offers a good view of the overall company performance and therefore give ability to guarantee the forecasted values. In this case, we will be analyzing Amazon three statement model approach as provided in the site.

Justification

CFI highly recommends using single worksheet layout for the following reasons:

  • Ease of navigation
  • Eliminates the risk of mis-linking formulas
  • Improves organization by use of cell grouping
  • More room for consolidation of multi-business entities is created

The steps required to model a three-statement structure includes the following;

  • Historical data capture-This is data picked form previous financial period
  • Assumption identification- This will involve metrics like assumed revenue growth, capital expenditure among others. These will act as the drivers of the forecast in the Amazon three model process.
  • Projection the income – This is done by forecasting revenue and building gross profits using the supporting schedules.
  • Asset Forecasting- This step involves capital assets, by taking previous financial period closing balance plus capital expenditure and less depreciation.
  • Financial activity forecasting- This done through building debt schedule to enable determination of interest expense on the income statement. It is calculated as a result of previous period’s closing balance plus change in principle.
  • Balance sheet forecasting- This is calculated by involving factors such as working capital and inventory turns.
  • Finish the cash flow statement- This step involves linking that have been computed above.

Analysis

From the information availed in the report, it is clear that Amazon intends to model a three statement. However, the assumption that are being made in this scenario may be difficult to hold. This is due to the fact that dynamism is a common factor in any business environment. It is worth noting that projection relies on the ability to get the initial figures right and the subsequent understanding of the environment. This will enable creation of a three-statement model that will stand the test of times.

The fact that Amazons three statement Model assumes that debt behaviors will remain unchanged is a serious mistake. Government policies change due to market changes, debtors become unable to pay their debt obligation and other debt factors. The fact that the model fails to consider that makes the model to become unpractical. Debts also should be categorized according to their risk in a normal financial statement. However, this has been ignored the current scenario. This means that it will not be possible to achieve required status in terms of debt management and prediction.

Following this model patterns, it is clear that historical data is key to creating of the base point form where the projection are initiated. Historical data is important to any organization and its key to determining the future of any organization financial patterns. However, according to (Buljubasic, Elvisa and Sanel, n.a), in business there are other factors that should be introduced as coefficient to offset various forces that will definitely affect revenue patterns In real sense, historical data is good while we can be able to accurately determine future environmental conditions and factor hem in our forecasting process, otherwise, it will be difficult to determine the true position of Amazon Inc.

Consequently, the company is said to rely on Restricted Stock units to pay its employees. This forms a basis that can hurt the future shareholders or can benefit the company. It goes without saying that share holders are the owners of any business and this ownership is depicted by owning shares in the entity as a way of investing. This method of paying employees opens the door for all employees to be shareholders either in the long term or short term basis.

As such, there can be increase capital injection that can boost the business performance which is a positive outcome. On the other hand, this seems like forced shareholding as employees are normally paid through their salary in monetary values or directly. This may increase the number of shareholders to limits beyond profitable levels and cause an uproar and hence business closure. It is therefore advisable to use other means of employee payment to avoid such cases. Amazon having chosen to use this method puts it at risk of internal wrangles that can jeopardize its reputation and hence business performance and revenue realization.

Therefore, my understanding of the case is that thee is shortage of liquid cash in the company accounts and this projects a worrying situation. Otherwise, it could be due to its global reach and therefore encouraging investors from different parts of the world to own the company. It could be a live saver in some cases due to increased customer loyalty and popularity, this is a positive result effected from by model.

In so doing, the company will be operating in blockchain manner which has been phenomena in the modern world of online trading. These platforms have offered numerous individuals’ chances to invest and earn wealth, however, it has proved to be challenging to determine accurately future performance due to the associated risk in online trading platforms. These ae factors that will be impossible to actor in accurately in any projection of an entity future business desires. The three-statement model of Amazon inc therefore is faced with numerous challenges that ae impossible to eliminate and therefore results will be false and misinforming.

Breakeven scenarios

A beak even point in business is where the total amount of cash inflow equals the total number of cash outflows. This means that the entity is capable of maintaining itself and therefore any additional revenue will be calculated as profit. In the case of Amazon, it is easier to achieve a break even point mostly because most of the cash outflow is directly dictated by an initiating cash inflow. It is therefore clear that Amazon three statement model has shown that the company has surpassed the break-even point.

Probabilistic risk

This is a situation concerned with modelling the possibility and impacts of a negative events financial results of an entity. In the case of Amazon, there is a high probability that these risks will occur and affect investment. By the fact that it is an online platform, cases have emerged where the platform has been hacked and information stolen. it would mean that there is high chances that there will be cases of insecurity which will affect business and credibility of the entity and therefore affect projected revenue realization.

Key variables other terms relating to financial models

In majority of the financial models available today, the concept is to find the total of the entity and be able to project future performances. In these cases, the terms that keep on appear includes mergers, debt schedules, income statements among others. The result of the above is to achieve a situation whereby the entity net wort is known and hence means to remedy any shortcoming or keep up with the current trend.

 

Merger Model (M&A)

This is an advanced way of evaluating the proforma dilution of an acquisition or merger. In the case of Amazon, this can assist in cases where the entity wants to absorb another upcoming competitor. It can also be used to market Amazons in order to get more strategic partners or when intending to change ownership as more opportunities continue being available.

This model mainly focuses on the entities pre-tax income and then calculate the issued synergies, interest on cash, shares issued, interest paid on new debt, and then compute the results of aggregate earnings per share. This enables to the comparison of the shares to evaluate whether the deal will turn to be accretive or dilutive. The model also enables the comparison of and future usage of desirable features of the statements that may include cost saving techniques. This can be achieved through leveraging on economics of scale.

The model also allows to factor in depreciation and amortization figures which are helpful in mergers and acquisitions. In general, the model gives room to locate erroneous figures and learn from both statements so that a decision can be made based on information. This can save a company like amazon a great amount of cost. This is why the model is recommended in such cases as it allows a deeper look at synergies and attach cost on them in both statements as they get compared. The result is likely to be a streamlined process whereby the actual value of the two entities is determined for negotiation. It is clear from the model that, any hidden or non-clear entry will be analyzed along the process hence guarantee quality of purpose.

Conclusion

From the ancient times, it is known that business establishment is as a result of god strategy and ability to respond to occurrences and changing environments. However, it normal for entities to ignore important factors while intending to project their performance and predict future revenue realization. This has brought significant level of failures in the business world and may have not been able to dissect the actual cause. Therefore, in the case of Amazon, it is risky and almost impossible to conduct an effective forecast that can be relied upon in making decisions.

 

Work Cited

Buljubasic, Elvisa, and Sanel Halilbegovic. “Detection of Financial Statement Fraud Using Beneish Model.”, 2017, corporatefinanceinstitute.com/resources/knowledge/modeling/3-statement-model/. Accessed 25 June 2019.