Why is there ACTUALLY a circular reference in a financial model in Excel?
Ok guys, could get confusing:
When I forecast interest income/expense, for the income part I use the average cash balance times the expected return.
I get the following part:
Cash balance is a derived from cash flow.
Cash flow is derived from net income.
Net income is derived from interest income/expense.
BUT:
In my integrated models, income actually never affects cash flow, because I calculate cash flow in my models starting with net income but then substracting it again when taking into account the change in total shareholders' equity. Because net income is already part of shareholders' equity, so I clean it out.
The effect is that if net income falls, cash flow stays the same of course.
But why is there a circular reference, if net income does not even affect cash flow and thus does not affect the cash balance?
Ya know what I mean?
Additonal question: Why do we actually care about interest income/expenses if it does not have any influence on the net income and a later DCF whatsoever?
You shouldn’t be backing out the change in equity. Try googling how to calculate cash flow
I know how to calculate cash flow lol.
It doesn't appear that you do.
I'm not sure I do understand. How can your balance sheet balance if you don't add net income to NewCo Shareholders' Equity? And if net income goes down, it has to have implications on your cash flow, as net income is the starting point for your operating cash flow.
Because companies also do some stuff during the period like putting in more equity or taking it out etc.
So if a company changes its equity from 500 to 550 but the net income was 100 you know that 50 was taken out.
Because this has to he hardcoded, I avoid it.
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