CHAPTER 8 Modeling Financial Statements Perhaps the most widely used financial models are the pro forma income statement and balance sheet. Most companies use deterministic versions of these models for planning, and they are a natural place to start when constructing a Crystal Ball model. | 8 Modeling Financial Statements Perhaps the most widely used financial models are the pro forma income statement and balance sheet. Most companies use deterministic versions of these models for planning and they are a natural place to start when constructing a Crystal Ball model. Especially when decision makers are first exposed to risk analysis with Crystal Ball it is best to make your stochastic models resemble as much as possible the deterministic models to which decision makers in your company are already accustomed. In this chapter we start with deterministic pro forma statements from Chapter 6 of Sengupta 2004 which is an excellent source for more information on constructing deterministic financial models in Excel. In this chapter we will focus on using Crystal Ball with an existing deterministic model just as you might do on the job. We walk through use of the basic tools to get you started. As you gain experience you will be tempted to make your models far more complex than those presented here. However do not add complexity just for its own sake. It is far better to start with a simple model and add complexity only if necessary to help make a sound decision. DETERMINISTIC MODEL Figure shows the historical income statement for 1999-2002 for the Vitex Corporation example from Chapter 6 of Sengupta 2004 . Figure shows the balance sheets for 1999-2002 for the Vitex Corporation. Our job is to project these measures forward using historical data and input from management about the future uncertainty. We begin thinking about the uncertain future by looking to the past. While it is always true that there are no guarantees the future will resemble the past historical data are often the best information you will have available. Furthermore if you do have available to you a better source of information about what portends for your company s fortunes then you can easily incorporate it in a Crystal Ball model using the methodology described here. Figure .
