Before starting our LBO model, we need to remember to have the iteration setting turned off. We don't want any accidental circulars So steps one, two and three are all focused on creating a forecast operating model Step one build a forecast income statement (except for interest) Two, create any key balance sheet operating items so you don't need a full balance sheet here at all And step three, build the cash flow available for debt service Now that's the real reason that we've come up with the income statement and any balance sheet items We need to pay down debt and we'll do that by calculating the cash flow available for debt service Now step four is to calculate those debt repayments and we're going to use a cash sweep mechanism This means we're going to use all cash available to pay down debt However if you do want to hold onto a cushion of cash, that could be put in Step five is then to calculate interest expense on the debt And step six, link that interest expense to the income statement and cash flow statement Now that interest expense is now going to reduce your cash flow available for debt service in step three So we have created a circular here, that's okay What we'll now do in step seven is turn the iterations on and re-calculate the model