What is a 3 Statement Model?


 
 

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, CFI strongly recommends using a single worksheet structure (with grouping), for several reasons that are outlined below.


Advantages of a single worksheet model includes the following:
•    Easier to navigate (don’t have to switch between tabs)
•    Less risk of mis-linking formulas (all time periods are in the same column)
•    More organized with the use of grouping cells
•    Allow more room for consolidating multi-business companies


There are several steps required to build a three statement model, including:
1.    Input historical financial information into Excel
2.    Determine the assumptions that will drive the forecast
3.    Forecast the income statement
4.    Forecast capital assets
5.    Forecast financing activity
6.    Forecast the balance sheet
7.    Complete the cash flow statement


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