What Is The 3 Statement Model? - Vena Solutions (2024)

Accounting allows us to comprehend an organization's historical financial statements. However, forecasts based on those financial statements let us analyze how a firm will perform under various assumption types. We can do this using a three-statement financial model.

These statements enablefinancial experts and industry insidersto visualize an organization's operational and financial decisions. That includes:

  • FP&A professionals
  • Corporate development professionals
  • Investment bankers
  • Institutional investors
  • Sell-side equity research
  • Private equity

Well-built three-statement financial models enable these professionals to see how various business activities work together to impact the future bottom line. These statements can be used everywhere from financial reporting, to financial closing. That makes it easier to see how these corporate financial decisions affect overall business performance.

Key Takeaways:

  • A three-statement financial model is an integrated model that forecasts an organization's income statements, balance sheets and cash flow statements.
  • The three core elements (income statements, balance sheets and cash flow statements) require that you gather data ahead of performing any financial modeling.
  • There are several steps to building a three-statement financial model, including key steps like inputting historical data, defining parameters and conducting your forecasting.

What Is a Three-Statement Model?

A three-statement financial model, also called the 3 statement model is anintegrated model that forecastsan organization's income statements, balance sheets and cash flow statements. It is the foundation on which we can build additional (and more advanced) models. These includemerger models, DCF models, leveraged buyout (LBO) models andvarious other financial model types, including those seen in the chart below.

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Source: Corporate Finance Institute

3 Core Elements of a Three-Statement Finance Model

These integrated models are powerful tools because they allow you to modify assumptions in one part of the model to see how it accurately and consistently influences the other areas of the model. Yet, before you begin, you must gather the necessary data points before conducting financial modeling.

At a minimum, you must gather an organization's most current SEC filings, equity research reports and possibly press releases. Information can be more difficult to locate for private companies than for public ones. Financial reporting requirements differ in other countries.

A three-statement model includes various outputs and schedules. Yet, these three key elements accurately capture the association of the multiple line items across the financial statements.

1. Income Statement

Income statements depict a business's profitability. These statements are formatted from left to right, with no less than three years of historical results. That provides historical ratios and growth rates based on our forecasts.

Inputting data from historical income statements is the first step in creating three-statement financial models. The process includes manual data entry from either a press release or the 10K. You can also use an Excel plugin to drop historical data directly into your program.

Financial planning and forecasting normally start with a revenue forecast preceded by various expense forecasting. The net result predicts the company's earnings per share and overall income.

These statements cover a specified segment, such as a quarterly or annual period. For more information, check out how we can helpincome statement forecasting with our revenue planning software, or try creating one yourself with our free income statement template.

2. Balance Sheet

Income statements display operating results over a specified time. However, the balance sheet is unlike the income statement. It is a company snapshot after any given reporting period.

This sheet exhibits the organization's assets and resources and the funding for those resources, such as a shareholder's equity and liabilities. Entering historical balance sheet data is like inputting income statement data. You do this either manually or using a plugin for Excel.

Revenues are what drive the operating assumptions. The operating assumptions drive the balance sheet you make based on the income statement.

Furthermore, operating and revenue forecasts drive capital expenditures, working capital items and various other items. Think of the balance sheet as the cart and the income statement as the mule.

In this sample below, see a financial statement model for Apple, formatted using a standard Excel document. Excel is an excellent tool for creating reports.

However, there are better solutions to assist organizations with their FP&A processes. We recommend integratinga system powered by Excelbut with additional features that ensure accurate forecasting.

Source: Wall Street Prep

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Agile Scenario Modeling Mitigates Risk

See how the decisions you make today will affect your bottom line tomorrow, with Vena.

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3. Cash Flow Statement

Lastly, we will look at the three-statement financial model's final core element: the cash flow statement. Entering results from historical cash flow statements is unnecessary before forecasting. That is due to a year-over-year pure reconciliation of the changes in the balance sheet from the cash flow statement.

We should reference each individual line item of the cash flow statement from elsewhere within the financial model. When we construct the cash flow statement correctly, the balance sheet will balance.

To generate a forecasted cash flow statement, a cash flow proof should be created. You can create this by using the change between the current and forecasted balance sheet accounts. The ending cash flow statement balance should reconcile with the forecasted cash balance on the balance sheet.

How To Build a Three-Statement Financial Model In 7 Easy Steps

You must take several steps to build a three-statement financial model. Some experts argue which steps are a top priority. A few industry leaders will claim there are only five steps in this process.

However, we recommend that you take these seven steps:

1. Enter historical financial data into an Excel-formatted platform

2. Define the predictions that drive forecasting

3. Predict the income statement

4. Predict capital investments and assets

5. Predict financing activity

6. Predict the balance sheet

7. Complete a cash flow statement

Your Best Source for Three-Statement Modeling

Plan for any scenario.

At Vena, we offer an entire FP&A ecosystem that allows you to create three-statement financial models you can run daily, weekly, monthly, quarterly and annually. We use Excel to format our platform, making it user-friendly and easy to integrate.

Our financial modeling software allows you to quickly analyze the impact of your business decisions to help you plan with confidence.

We offer the best source for three-statement modeling at Vena. Our software includes a Power BI integration, ad-hoc reporting tools, and executive-level reporting templates so that you can drive real-life growth by creating real-time reports.

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What Is The 3 Statement Model? - Vena Solutions (2024)

FAQs

What Is The 3 Statement Model? - Vena Solutions? ›

A three-statement financial model is an integrated model that forecasts an organization's income statements, balance sheets and cash flow statements. The three core elements (income statements, balance sheets and cash flow statements) require that you gather data ahead of performing any financial modeling.

What is the 3-statement model summary? ›

What is a 3-Statement Model? The 3-Statement Model is an integrated model used to forecast the income statement, balance sheet, and cash flow statement of a company for purposes of projecting its forward-looking financial performance.

What is the 3-statement model practice? ›

A three-statement model links the income statement, the balance sheet and the cash flow statement of a company, providing a dynamic framework to help evaluate different scenarios. It is the foundation upon which all thorough financial analysis is built.

What is the 3 way cash flow model? ›

A three-way forecast, also known as the 3 financial statements is a financial model combining three key reports into one consolidated forecast. It links your Profit & Loss (income statement), balance sheet and cashflow projections together so you can forecast your future cash position and financial health.

What are the three components of the cash flow statement? ›

The three main components of a cash flow statement are cash flow from operations, cash flow from investing, and cash flow from financing. The two different accounting methods, accrual accounting and cash accounting, determine how a cash flow statement is presented.

What are the four key statements? ›

For-profit businesses use four primary types of financial statement: the balance sheet, the income statement, the statement of cash flow, and the statement of retained earnings.

What is 3 way budgeting? ›

What is a 3-way budget? A 3-way budget is a strategic financial plan that aligns three essential financial statements: the P&L, the Balance Sheet, and the Cash Flow Statement. It is typically set once a year.

What is the difference between DCF and 3 statement model? ›

In a DCF model, similar to the 3-statement models above, you start by projecting the company's revenue, expenses, and cash flow line items. Unlike 3-statement models, however, you do not need the full Income Statement, Balance Sheet, or Cash Flow Statement.

What are the 3 types of cash flows with examples? ›

There are three cash flow types that companies should track and analyze to determine the liquidity and solvency of the business: cash flow from operating activities, cash flow from investing activities and cash flow from financing activities. All three are included on a company's cash flow statement.

How to understand cash flow statement? ›

The cash flow statement provides information about a company's cash receipts and cash payments during an accounting period. The cash-based information provided by the cash flow statement contrasts with the accrual-based information from the income statement.

How to calculate cash flow statement? ›

Summary. Net Cash Flow = Total Cash Inflows – Total Cash Outflows.

What is the formula for the cash flow statement? ›

Free Cash Flow = Net income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure. Net Income is the company's profit or loss after all its expenses have been deducted.

What are the three main statements? ›

These statements offer vital data to make informed decisions on capital allocation for business growth. The three primary financial statements are the income statement, cash flow statement, and balance sheet. Together, they present a comprehensive overview of a company's financial status.

What are the advantages of the 3 statement model? ›

There are several advantages to performing scenario analysis with a 3-Statement Financial Model. Gaining the capacity to prepare for the future, becoming proactive, minimizing risk and failure, and estimating returns and losses are just a few examples.

What is the third statement? ›

The third statement of financial position displays details of a cash flow statement, and variations in business' equity, a record showing gains and prices suffered in the company within the given period together with other income realized and a record displaying details of the business's financial position.

What is statement modeling? ›

Financial statement modeling is a key step in the process of valuing companies and the securities they have issued. We focus on how analysts use industry information and corporate disclosures to forecast a company's future financial results.

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