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: 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. A three-statement financial 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. Source: Corporate Finance Institute 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. 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. Unify your departments Move your team from different spreadsheets to the same page with all revenue data in one place. 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 Agile Scenario Modeling Mitigates Risk See how the decisions you make today will affect your bottom line tomorrow, with Vena. 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.Key Takeaways:
What Is a Three-Statement Model?
3 Core Elements of a Three-Statement Finance Model
1. Income Statement
2. Balance Sheet
3. 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 Create 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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Alright, buckle up for a crash course in financial modeling! As someone who's been elbow-deep in spreadsheets and financial statements, I can vouch for the crucial role of accounting in understanding an organization's past through historical financial statements. The real magic, however, lies in the ability to forecast future performance using those statements.
Now, the article talks about a powerhouse tool— the three-statement financial model. I've practically lived in these models, and they're like the Swiss Army knife for financial experts. FP&A professionals, corporate development whizzes, investment bankers, you name it—this is their go-to tool for visualizing an organization's operational and financial decisions.
So, what's this three-statement model all about? It's an integrated model forecasting income statements, balance sheets, and cash flow statements. Think of it as the cornerstone for more advanced financial models like merger models, DCF models, and leveraged buyout (LBO) models.
The core elements—income statements, balance sheets, and cash flow statements—require some serious data gathering before you can start flexing those modeling muscles. SEC filings, equity research reports, and maybe a dash of press releases—these are your raw materials. And trust me, for private companies, it's like searching for treasure in uncharted waters.
Now, let's break down these three amigos:
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Income Statement: This one's all about profitability, presented in a neat format with at least three years of historical results. Inputting data here is like crafting a financial story, starting with revenue forecasts and dancing through various expense predictions. It's the heartbeat of your financial model.
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Balance Sheet: Unlike the income statement's timeline, the balance sheet is a snapshot post any reporting period. It showcases the company's assets, resources, and the funding for those resources. It's the cart that rides on the mule of operating assumptions driven by revenues.
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Cash Flow Statement: The final core element. No need to dwell on historical cash flow statements; this one's about reconciling changes in the balance sheet year-over-year. Nail this, and your balance sheet will do a perfect balancing act.
And because I'm all about action, here are seven steps to whip up a three-statement financial model:
- Enter historical financial data into Excel (because what's finance without Excel, right?).
- Define the predictions that fuel your forecasting.
- Predict the income statement drama.
- Forecast capital investments and assets' fate.
- Predict financing activities (money talks, after all).
- Predict the balance sheet acrobatics.
- Complete the symphony with a cash flow statement.
Now, if you're on a quest for the holy grail of three-statement modeling, the article gives a nod to Vena. They're rocking an FP&A ecosystem that lets you create and run these models at the drop of a hat. Power BI integration, ad-hoc reporting tools, and executive-level reporting templates—it's like having a financial modeling sidekick.
So there you have it, a crash course and a roadmap for conquering the financial modeling kingdom!
