Learn about the fundamental components and benefits of a three-statement financial model, which includes the income statement, balance sheet, and cash flow statement, and explore the steps required to construct one.
A 3 statement model links the income statement, balance sheet, and cash flow statement into one dynamically connected financial model.
3 statement models are the foundation on which more advanced financial models are built, such as discounted cash flow (DCF) models, merger models, leveraged buyout (LBO) models, and various other types of financial models.
There are two common approaches to structuring a 3 statement model: single worksheet and multi-worksheet. While both approaches are acceptable.
Advantages of a single worksheet model includes easy navigation (don’t have to switch between tabs). However, if the model is complex sometimes you would want to build it on several worksheets, so it wouldn’t take thousands of rows and it would be easier to navigate in that case scenario.
You can see an example of a single worksheet 3 statement financial model here.
There are several steps required to build a three statement model. Let me walk you through them:
- Input historical financial information into Excel
- Determine the assumptions that will drive the forecast
- Build Supporting schedules for working capital, debt, depreciation and retained earnings
- Forecast the income statement, BS and CFS
In the next videos, we will walk you through each of the above steps to build a 3 statement model.