In finance, a three-statement financial model is an essential tool for analysts, investors, and businesses. This comprehensive guide breaks down the process of building a robust three-statement financial model in Excel, equipping you with the skills to forecast financial performance with confidence.
A three-statement financial model brings together three key financial statements: the income statement, the balance sheet, and the cash flow statement. This model provides a comprehensive view of a company’s financial health and performance.
A financial model quantifies a company’s financial picture, allowing users to project future performance based on historical data and assumptions. The main objective? To evaluate how different scenarios might impact a company and guide strategic choices—and a 3-statement model is often the tool of choice.
The income statement, also known as the profit and loss statement, captures a company’s revenues, costs, and expenses over a specific period. It ultimately reveals net profit or loss, indicating the company’s financial performance.
The cash flow statement details the inflows and outflows of cash, highlighting a company’s ability to fund operations, pay debts, and invest in future growth. It covers three areas: operating activities, investing activities, and financing activities.
The balance sheet provides a snapshot of a company’s financial position at a specific point in time. It includes assets, liabilities, and shareholders’ equity, offering insights into what the company owns and owes.
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The Forecasting is the process of estimating future financial outcomes based on historical data, trends, and assumptions. Accurate forecasts are crucial for making informed business decisions and planning for future growth.
The three-statement model links the income statement, balance sheet, and cash flow statement, ensuring consistency and accuracy across all financial projections. Each statement is interconnected, reflecting changes and assumptions in the other statements.
Serves as the foundation for building a three-statement model. Analyzing past performance helps in making realistic assumptions and creating accurate forecasts.
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Taking a specialized modelling course can provide you with the necessary skills and techniques to build sophisticated financial models in Excel. You’ll also learn to create a 3-statement model from scratch. These courses cover topics such as advanced formulas, scenario analysis, and sensitivity analysis, including how to forecast the income statement.
To forecast the cash flow statement, start by projecting the income statement and balance sheet. The cash flow statement will be derived from these projections, ensuring consistency and accuracy.
Ensure that the cash flow statement is linked to the income statement and balance sheet to create a cohesive three statement model. This involves using formulas to pull data from these statements, reflecting changes in real-time and maintaining accuracy.
Begin by forecasting revenues, cost of goods sold (COGS), and operating expenses. Use historical data and industry benchmarks to make realistic assumptions. Calculate gross profit, operating profit, and net profit based on these projections.
| Year | 2023 | 2024 | 2025 | 2026 |
|---|---|---|---|---|
| Revenues | $500,000 | $550,000 | $605,000 | $665,500 |
| COGS | $300,000 | $330,000 | $363,000 | $399,300 |
| Gross Profit | $200,000 | $220,000 | $242,000 | $266,200 |
| Operating Expenses | $100,000 | $110,000 | $121,000 | $133,100 |
| Operating Profit | $100,000 | $110,000 | $121,000 | $133,100 |
| Net Profit | $80,000 | $88,000 | $96,800 | $106,480 |
Link the income statement to the balance sheet by incorporating key items such as retained earnings, which will be affected by net profit. Ensure that changes in revenue and expenses are reflected in the balance sheet items like accounts receivable and payable.
| Year | 2023 | 2024 | 2025 | 2026 | |
|---|---|---|---|---|---|
| Assets | Cash | $50,000 | $55,000 | $60,500 | $66,550 |
| Accounts Receivable | $25,000 | $27,500 | $30,250 | $33,275 | |
| Inventory | $20,000 | $22,000 | $24,200 | $26,620 | |
| Total Assets | $95,000 | $104,500 | $114,950 | $126,445 | |
| Liabilities | Accounts Payable | $15,000 | $16,500 | $18,150 | $19,965 |
| Long-term Debt | $40,000 | $44,000 | $48,400 | $53,240 | |
| Total Liabilities | $55,000 | $60,500 | $66,550 | $73,205 | |
| Equity | Retained Earnings | $40,000 | $44,000 | $48,400 | $53,240 |
| Total Equity | $40,000 | $44,000 | $48,400 | $53,240 | |
| Total Liabilities and Equity | $95,000 | $104,500 | $114,950 | $126,445 |
This involves ensuring that all links and formulas are correctly set up. This guarantees that changes in one statement are automatically reflected in the others, maintaining consistency.
The cash flow statement is built by linking it to the income statement and balance sheet. Ensure that all sections (operating, investing, and financing activities) are accurately projected and linked.
| Year | 2023 | 2024 | 2025 | 2026 |
| Net Income | $80,000 | $88,000 | $96,800 | $106,480 |
| Depreciation | $5,000 | $5,500 | $6,050 | $6,655 |
| Changes in Working Capital | $2,000 | $2,200 | $2,420 | $2,662 |
| Cash from Operating Activities | $87,000 | $95,700 | $105,270 | $115,797 |
| Capital Expenditures | $10,000 | $11,000 | $12,100 | $13,310 |
| Cash from Investing Activities | -$10,000 | -$11,000 | -$12,100 | -$13,310 |
| Debt Issued / (Repaid) | $5,000 | $5,500 | $6,050 | $6,655 |
| Dividends Paid | $3,000 | $3,300 | $3,630 | $3,993 |
| Cash from Financing Activities | $2,000 | $2,200 | $2,420 | $2,662 |
| Net Change in Cash | $79,000 | $86,900 | $95,590 | $105,149 |
| Opening Cash Balance | $50,000 | $129,000 | $215,900 | $311,490 |
| Closing Cash Balance | $129,000 | $215,900 | $311,490 | $416,639 |
Building a three-statement financial model is an essential skill for financial analysts, investors, and business professionals alike. At the heart of this model is the income statement forecast, which, when integrated with the balance sheet and cash flow statement, forms a complete picture of a company’s financial health and future potential.
Mastering this process offers invaluable insights into performance metrics and prospective growth. To refine your modelling precision and efficiency, make use of Excel shortcuts, and consider investing in a modelling course to elevate your expertise.
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