A sound foundation is the first step toward an accurate financial model. A good model is often built on three basic financial statements: the income statement, balance sheet, and cash flow statement. This three-statement model provides a complete picture of financial performance. Start with a description of the purpose of the model: is it for internal budgeting, investment evaluation, or debt financing? This will aid in deciding the level of detail of the model and its time horizon, for example, forecast over one year versus projection over five years.
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