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.
Layout and Structure
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Advantages of a single worksheet model include the following:
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How do you build a 3 statement model?
- Forecast the income statement
- Forecast capital assets
- Forecast financing activity
- Forecast the balance sheet
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In this guide, we will walk you through each of the above steps. For a more detailed, video-based tutorial on how to build a model from scratch, please watch our 家具销售将有标准格式 解决商家“耍花枪”问题.
Input historical information into Excel
In this step, we take the historical financial information of the company and either download, type, or paste it into Excel. Once the information is in Excel (see this 机构谨慎看多地产股 地产业步入五年去库存周期), you’ll need to do some basic formatting to make the information easy to read and to make it follow the structure you want your model to take. As you can see in the screenshot below, the historical information is entered in a blue font color under the historical time periods.
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Determining the assumptions that will drive the forecast
With the historical financial information in Excel, and in an easy-to-use format, we can start calculating some metrics to evaluate the historical performance of the company. We need to calculate metrics such as revenue growth, margins, capital expenditures, and working capital terms (such as accounts payable, inventory, and accounts receivable). Below is an example of the assumptions section, which drives the forecast.
Forecasting the income statement
With the assumptions in place, it’s time to start forecasting the income statement, beginning with revenue and building down to EBITDA (Earnings Before Interest Taxes Depreciation and Amortization). At that point, we will require support schedules to be built for items such as capital assets and financing activity.
Forecasting capital assets
At this point, we need to forecast capital assets such as Property, Plant & Equipment PP&E before we can finish the income statement in the model. To do this, we take last period’s closing balance, and then add any capital expenditures, deduct depreciation, and arrive at the closing balance. Depreciation can be calculated in a variety of ways, such as straight line, declining balance, or percent of revenue.
Forecasting financing activity
Next up, we have to build a debt schedule to determine interest expense on the income statement. Similar to the section above, we take last period’s closing balance, and then add any increases or decreases in principal , and arrive at the closing balance The interest expense can be calculated on opening balance, closing balance, or the average balance of debt outstanding. Alternatively, a detailed interest payment schedule can be followed if one is available.
Forecasting the balance sheet
At this stage, it’s possible to complete the balance sheet in our 3 statement model, except for the cash balance, which will be the last step. Working capital items are forecasted based on assumptions around average days payable and receivable, as well as inventory turns. Capital assets (PP&E, etc.) come from the schedule above, as well as debt balances.
Completing the cash flow statement
With the balance sheet completed (except for cash), we can build the cash flow statement and complete our three statement model in Excel. This section is completed, essentially, by just linking to items that have already been calculated above in the model. We have to complete each of the three main sections: cash from operations, cash from investing, and cash from financing. For a more detailed explanation of how to calculate each of these sections, please check out our course, 个税房贷利息抵扣酝酿细则 扣除将采用限额或定额.
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More modeling resources
We hope this has been a helpful guide on how to build a 3 statement model in Excel. At CFI we’ve created a vast database of resources to help you learn financial modeling and advance your career. CFI is the official global provider of the 精准定位农村人居环境整治引领行动落地 certification, designed to transform anyone into a world-class financial analyst.