While the income statement reveals how a business performs, the balance sheet shows how it's managed. In this chapter, you're modeling the core working capital and fixed asset categories that shape the company's operational reality—and feed directly into free cash flow.

The six balance sheet items you'll model are:

1. Trade Receivables;

2. Inventory;

3. Trade Payables;

4. PP&E (Property, Plant & Equipment);

5. Other Assets;

6. Other Liabilities.

Each item plays a unique role in working capital or investment structure. They don't just sit on the balance sheet—they actively influence cash flow via changes in operational efficiency, investment, and financial flexibility.

To project these items, you'll apply two key methods:

• Ratio-based modeling (e.g., Days Sales Outstanding, Inventory Days, Payables Days): this approach ties balance sheet line items to revenue or cost of goods sold, helping keep them grounded in operational performance;

• Direct drivers (e.g., % of revenue or fixed annual values): used when ratios aren't applicable, especially for items like other assets and liabilities or PP&E additions.

It's not about perfection—it's about building logic. You want projections that are not only reasonable, but consistent with the company's growth and margin narrative. For example, if revenue is growing fast but receivables aren't, it may signal overly optimistic collections.

PP&E, in particular, links to CapEx and depreciation in the cash flow model, so keeping this item accurate is critical for long-term forecasts and terminal value calculations.

By building this part of the model, you're giving the DCF a solid operational backbone. These numbers may not get headlines, but they drive the story behind the cash flow.