90% of financial analysts rely on a 3 statement financial model to forecast a company’s future.
Why?
These models link to the:
- Income statement
- Balance sheet
- Cash flow statement
These give a complete picture of a company’s financial health.
If you want to make data-driven decisions or impress potential investors, mastering the 3 statement model is a must.
In this blog, we’ll break down the steps to create one, even if you’re just getting started.
What is a 3 Statement Financial Model?
A 3 statement financial model is used to predict a company’s future.
This model connects the:
- Income Statement:
Shows how much money a company makes and spends over a specific period.
- Balance Sheet:
Lists what the company owns (assets), owes (liabilities), and the owner’s equity at a given point in time.
- Cash Flow Statement:
Tracks how cash moves in and out of the business, covering operating, investing, and financing activities.
Let’s say a company made:
- $100,000 in revenue
- Spent $60,000 in expenses
- Earned $40,000 in profit.
On the income statement, the profit of $40,000 flows to the bottom line as net income.
On the balance sheet, this net income increases retained earnings under equity.
On the cash flow statement, the $40,000 shows up under operating activities as cash inflow.
By linking these statements, you can see how one financial move impacts the entire business.
Want to learn how to build one?
Let’s dive deeper.
How to Make a 3 Statement Financial Model (in an easy way)?
Building a 3 statement financial model might sound complex, but breaking it down into easy steps can make it much simpler.
Here’s how to do it:
1. Gather financial data:
Before starting, collect past financial data:
- Income statement
- Balance sheet
- Cash flow statement.
Look for key numbers like:
- Revenue
- Expenses
- Assets
- Liabilities
- Cash flows.
2. Set up a template:
Open Excel or Google Sheets and create separate tabs for each statement:
- Income Statement
- Balance Sheet
- Cash Flow Statement
3. Start with the income statement:
List revenue at the top.
Subtract expenses to calculate net income (profit).
Example:
Revenue: $100,000
Expenses: $60,000
Net Income: $40,000
4. Move to the balance sheet:
List assets like:
- Cash
- Inventory
- Equipment.
Add liabilities like loans and accounts payable.
Calculate equity using this formula:
Assets – Liabilities = Equity
Update retained earnings with the net income from the income statement.
5. Link the Cash flow statement:
Start with net income from the income statement.
Adjust for non-cash items like depreciation.
Include cash flows from:
- Operating
- Investing
- Financing activities.
Make sure the ending cash balance matches the cash line on the balance sheet.
6. Connect all statements:
Link net income from the income statement to the cash flow statement and retained earnings in the balance sheet.
Ensure that the cash closing balance on the cash flow statement matches the cash line in the balance sheet.
7. Check for accuracy:
Verify that all links are working correctly.
Confirm that the balance sheet balances (Assets = Liabilities + Equity).
Example:
Income Statement:
Revenue = $100,000
Expenses = $60,000
Net Income = $40,000
Balance Sheet:
Assets = $150,000
Liabilities = $80,000
Equity = $70,000
Cash Flow Statement:
Starting Cash = $10,000
Cash Inflow (Net Income) = $40,000
Ending Cash = $50,000
By linking these 3 statements, you can see how a single financial change affects the entire business.
5 Best Practices For Building a 3 Statement Financial Model
Creating a 3 statement financial model can be an overwhelming process.
But with the right hacks, you can simplify the process and avoid common pitfalls.
Here are some proven best practices to keep your model clean, accurate, and easy to understand:
1. Keep the balance sheet simple:
Only add as much detail as necessary.
If you don’t need to track every single bank account or debt facility, group them.
However, if you’re preparing a cash flow statement based on balance sheet movements, include enough detail to ensure accuracy.
Too much detail can clutter the model, making it harder to follow and update.
→ This way, you maintain clarity without sacrificing accuracy.
2. Only model subsidiaries separately if they’re complex:
If the subsidiaries are straightforward (no complex inter-company loans or separate bank accounts), treat them as one entity.
If they have distinct financial arrangements (e.g., separate loans, tax assets), model them separately and then consolidate.
→ This saves time and keeps your model from becoming unnecessarily complicated.
3. Don’t assume a revolving credit facility:
A revolving credit facility isn’t necessary unless the company actually has one.
If cash flow projections show a potential overdraft, investigate why and adjust the model rather than adding a revolver by default.
→ This prevents you from overstating available cash or miscalculating interest expenses.
4. Practice with simple models first:
Instead of getting stuck on a single complex model, practice building several basic models for mature companies.
This helps you see how financial data flows through the statements.
Then, compare your results to publicly available financial reports to spot gaps.
→ This exercise helps you to spot common patterns and develop a stronger understanding of how the three statements connect.
5. Let the cash flow statement guide you:
If you’re struggling to link the statements, focus on the cash flow statement.
- Check footnotes, long-form endnotes, and historical cash flow items.
- Match your cash flow data with the income statement and balance sheet to spot discrepancies.
→ The cash flow statement acts as the bridge between the income statement and balance sheet, making it easier to catch mistakes.
Conclusion
Building a 3 statement financial model isn’t a one-size-fits-all process.
The complexity of the model and the time it takes to build it largely depend on how much information you have and how intricate the business structure is.
For simpler businesses with clear financials, you can get the model done in a few hours
But for startups with multiple subsidiaries or unclear financials, it can take days or even weeks.
The key is to keep your model as simple as possible while including the essential details that accurately represent the company’s financial health.
With practice, you’ll become faster and more confident in building models that help drive smart business decisions.
We hope this blog has made building your 3 statement financial model easier and more approachable.
