Blog · Territory, capacity and quota planning · Finance and FP&A teams
Financial modeling connects business assumptions to planned profit, financial position and cash. Work through a linked example, prove that the statements balance and compare the plan with actual ledger results.
Financial modeling connects operating assumptions to financial results: what the business expects to sell, spend, own and owe, and how much cash remains. A useful financial model makes those connections visible so finance can change an assumption, compare alternatives and explain why actual results differ from the plan.
The basic statements answer different questions. The SEC's financial statements guide distinguishes the income statement's performance over a period, the balance sheet's position at a date and the cash flow statement's cash movements. Connecting them prevents a profitable plan from hiding a cash shortage.
Collect these source rows:
| Source | Required fields | What it establishes |
|---|---|---|
| Sales export | Month, product, units, net price | Revenue drivers |
| Cost ledger | Month, account, product, amount | Unit costs and operating expenses |
| Receivables report | Customer, invoice, due date, unpaid amount | Collection assumptions and closing receivables |
| Fixed-asset schedule | Opening net value, additions, depreciation | Capital spending and asset balances |
| Trial balance | Account, opening balance, closing balance | Statement totals and opening position |
Use consistent currency, account mapping and periods. Finance approves the structure; operating owners supply assumptions. Record each assumption's source and approval date.
Revenue = Units sold × Net price per unit
Operating profit = Revenue − Cost of goods sold − Cash operating expenses − Depreciation
Cash change, in this simplified example = Operating profit + Depreciation − Capital spending − Increase in receivables
Assets = Liabilities + Equity
This cash formula assumes no interest, taxes, inventory changes, payables changes, financing or distributions. Add schedules for material movements. Depreciation reduces profit without a current cash payment; equipment purchases use cash without immediately expensing their full cost.
The SBA's business planning guidance calls for projected income statements, balance sheets, cash flows and capital expenditure budgets, with more first-year detail. Link their assumptions instead of preparing independent totals.
Consider an illustrative US industrial supplier. Its opening cash is $100,000, receivables are $50,000 and net equipment is $200,000. Liabilities are $100,000 and equity is $250,000. The company has no inventory movement in this simplified month.
All amounts below are exact; the example requires no rounding.
| Input or calculated result | Calculation | Plan (USD unless units) | Actual (USD unless units) |
|---|---|---|---|
| Units sold | Sales rows | 1,000 | 900 |
| Net price per unit | Sales rows | 200 | 200 |
| Cost per unit | Cost rows | 110 | 115 |
| Revenue | Units × Price | 200,000 | 180,000 |
| Cost of goods sold | Units × Unit cost | 110,000 | 103,500 |
| Gross profit | Revenue − Cost of goods sold | 90,000 | 76,500 |
| Cash operating expenses | Expense rows | 60,000 | 62,000 |
| Depreciation | Fixed-asset schedule | 5,000 | 5,000 |
| Operating profit | Gross profit − Expenses − Depreciation | 25,000 | 9,500 |
| Capital spending | Asset additions | 10,000 | 10,000 |
| Increase in receivables | Closing less opening | 15,000 | 18,000 |
| Cash change | Profit + Depreciation − Capital spending − Receivables increase | 5,000 | -13,500 |
| Closing cash | Opening cash + Cash change | 105,000 | 86,500 |
The business earned $9,500 but used $13,500 of cash. Equipment purchases and receivables explain the difference. Check the customer aging before treating the receivables increase as a collection problem.
Closing equipment equals opening equipment plus additions less depreciation. Equity increases by profit, with no tax, distributions or other movements. Liabilities stay unchanged.
| Balance sheet line | Opening (USD) | Planned close (USD) | Actual close (USD) |
|---|---|---|---|
| Cash | 100,000 | 105,000 | 86,500 |
| Receivables | 50,000 | 65,000 | 68,000 |
| Net equipment | 200,000 | 205,000 | 205,000 |
| Total assets | 350,000 | 375,000 | 359,500 |
| Liabilities | 100,000 | 100,000 | 100,000 |
| Equity | 250,000 | 275,000 | 259,500 |
| Assets less liabilities and equity | 0 | 0 | 0 |
Each check must be zero. Also tie actual closing cash to the bank reconciliation and the statement accounts to the trial balance. Financial data reconciliation covers the source-matching work behind those checks.
Actual operating profit is $15,500 below plan. Keep the approved plan fixed and bridge the difference using an explicit calculation order:
| Step | Calculation | Profit effect (USD) |
|---|---|---|
| Lower volume at planned unit contribution | (900 − 1,000) × (200 − 110) | -9,000 |
| Higher unit cost on actual volume | 900 × (110 − 115) | -4,500 |
| Higher operating expenses | 60,000 − 62,000 | -2,000 |
| Total operating profit variance | Sum of effects | -15,500 |
The proof is $25,000 − $15,500 = $9,500. Closing cash misses plan by another $3,000 because receivables increased more than expected: the total cash gap is $18,500.
These findings support financial decisions about price, purchasing and collections. Predictive analytics addresses estimating future outcomes; this workbook shows supplied assumptions and their consequences. See AI financial modeling for the role of explanation tools.
Bring your financial workbook and a sample of your own ledger export; Covirage maps the columns, and its tools compute and check the supplied plan against actual figures. The external AI model explains the results with every figure traced to its rows. Create a free Covirage account, which takes about a minute, then set up your business and bring your files.
See Covirage for finance teams for the supporting finance workflow.
A useful financial model has documented assumptions, calculations, financial statements and checks. Supporting schedules explain items such as payroll, receivables, debt and capital spending. Keep actual results separate from assumptions so a new forecast does not overwrite the approved plan.
A budget records an approved financial plan for a defined period. A financial model describes the relationships that produce financial results. A budget can be one output of a financial model, alongside alternative scenarios and later forecasts.
Check that opening balances tie to the ledger, statements reconcile and assumptions have named owners and evidence. Then test changed inputs and compare calculated results with actual outcomes. Balanced statements prove arithmetic consistency; they do not prove that commercial assumptions will happen.