Do the Financials in Your Model Link Together?

We can take it for granted because it should happen automatically with financial packages but in doing the financial model it may not necessarily be the case. So you need to ask yourself do your financial statements in your financial model link together and make sense. Here are a few ways that they could be out of sync:

1. The cash balance and the cash flow does not tie out to the cash on the balance sheet. This is usually a sign that there’s some activity that’s not being captured on the cash flow statement. Or, perhaps, the cash number on the balance sheet is being generated in a different way.

2. The income per the income statement does not tie out to the retained earnings change on the balance sheet. This could be a sign that maybe some numbers on the income statement may not be rolling together properly or there’s an error in the income statement rollup on the balance sheet.

3. Any balance sheet accounts may be inconsistent with their income statement counterparts. Are accounts receivable consistent with that you’d expect with sales? Is inventory consistent with what you see in cost of sales? Does accounts payable match trends in cost of sales and certain operating expenses? Does accrued payroll flow with the compensation expense? Do interest payable and taxes payable coincide with those expenses?

So before you say your model is done make sure these numbers tie out and link together. One way to do this can be to have proof numbers at the bottom of your statement that don’t print out on the statement but are used as a checkpoint to make sure that your numbers agree.