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
There are two common approaches to structuring a 3 statement model: single worksheet and multi worksheet. While both approaches are fine, CFI strongly recommends using a single worksheet structure (with grouping) for several reasons outlined below.
Advantages of a single worksheet model are:
- Easier to navigate (don’t have to switch between tabs)
- Less risk of mislinking formulas (all time periods are in the same column)
- More organized with the use of grouping cells
- Allows more room for consolidating multi-business companies
Download a free 3 statement financial model from CFI Marketplace.
How do you build a 3 statement model?
There are several steps required to build a three statement model, including:
- Input the historical financial information into Excel
- Determine the assumptions that will drive the forecast
- Forecast the income statement
- Forecast capital assets
- Forecast financing activity
- Forecast the balance sheet
- Complete the cash flow statement
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 online financial modeling courses.
Input the 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 free course on Excel best practices), you’ll need to do some basic formatting to make the information easy to read and 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.
Download the financial model template
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 that 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 capital assets and financing activity.
Forecasting capital assets
At this point, we need to forecast capital assets like 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, 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, add any increases or decreases in principle, and arrive at the closing balance The interest expense can be calculated on opening balance, closing balance, or the average balance of debt outstanding. Or, a detailed interest payment schedule can be followed if 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 like PP&E 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 essentially 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, how to build a financial model in Excel.
Download the financial model template
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.
Below are some of our most helpful resources and guides: