Before we start modeling, we have to make sure that you have the iteration setting turned off. Our first three steps involve getting the model ready for forecasting. Step one is input any historical data for the income statement and balance sheets. We need to go and get our bank's income setting balance sheet that's been published, publicly available information, and copy in the historical data. Step two is then calculate ratios and statistics on that historical data and that may help you with step three, deciding any forecast assumptions for the company.
We now move on to step four, and this is where things are slightly different if you've ever forecasted a non-financial institutions company. We start here by building the forecast balance sheet. Now, why do we have to do that for a bank? Well, if we think what drives the income statement for a bank, it is the assets and liabilities of the bank. Well, the assets are made up of loans that have been made to individuals. On those loans the bank will earn interest income, or revenue. So that is an income statement line. But if we're going to get that, we need to work out the assets or the loans figure first. What about the costs for the bank? Well, the bank has deposits, i.e. individuals have deposited savings in the bank. The bank then pays them interest. That's a cost for the bank. So in order for us to get our costs on the income statement, again, we need to work out our balance sheet liability of those deposits. So we build the forecast balance sheet, except for equity and interbank deposits and loans. Step five is you then balance the balance sheet including those interbank deposits and loans.
Step six, forecast the income statements and the only thing that you've got left to do now is equity on the balance sheet. So step seven, we forecast our equity and then step eight, link equity into the balance sheet and deal with a circular reference that will be resulting from that.
