Delve into the intricacies of financial modeling with a 3 statement model, a critical foundation for advanced financial models like discounted cash flow, merger models, and leveraged buyout models. Understand the advantages of single worksheet and multi-worksheet approaches, and the steps involved in building a 3 statement model.
Key Insights
- A 3 statement model dynamically links the income statement, balance sheet, and cash flow statement, serving as the base for more advanced financial models.
- More complex financial models built on a 3 statement model include discounted cash flow (DCF) models, merger models, and leveraged buyout (LBO) models.
- 3 statement models can be structured using a single worksheet or multi-worksheet approach, with each having its own advantages.
- A single worksheet model offers easy navigation but can be challenging to navigate if the model is complex.
- Building a 3 statement model involves several steps, including inputting historical financial information into Excel, determining the forecast-driving assumptions, building supporting schedules, and forecasting the income statement, balance sheet, and cash flow statement.
- Examples and comprehensive walkthroughs of constructing a 3 statement model are available for further learning and practice.
The 3 Statements
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Income Statement
Revenue down to net income — performance over a period.
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Balance Sheet
Assets, liabilities, equity at a point in time — must balance.
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Cash Flow Statement
Operating, investing, financing — reconciles net income to cash change.
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How They Link
Net income flows to retained earnings; cash flow ties to balance sheet cash.
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.
Video Transcription:
Full Video Transcript
A three statement model links the income statement, balance sheet, and cash flow statement into one dynamically connected financial model. Three statement models are the foundation upon which more advanced financial models are built, such as discounted cash flow or DCF models, merger models, leveraged buyout (LBO) models, and various other types of financial models.
Model Structure Approaches
There are two common approaches to structuring a three statement model: single worksheet and multi-worksheet. While both approaches are acceptable, advantages of a single worksheet model include easy navigation as you 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 three statement financial model here.
Steps to Build a Three Statement Model
There are several steps required to build a three statement model. Let me walk you through them. First, you would want to input historical information from financial statements of the company and calculate the totals, and to calculate cash flow statement based on historical numbers and some other supporting schedules.
After that, you would build some assumptions for historical years and then assumptions for projected years. The next step would be to build supporting schedules to complete income statement, balance sheet, and cash flow statement in the next three steps.
Ensuring Model Accuracy
After completing all the schedules, you want to make sure that your balance sheet is balancing, meaning that your total assets equals total liabilities plus shareholders' equity. In the next videos, we will walk you through each of the above steps to build a three statement model.
