What is a 3-Statement Model?

what is a 3 statement model?

As a business owner or financial analyst, it’s crucial to have a clear understanding of your company’s financial performance. A 3-statement financial model is an excellent tool for achieving this understanding. In this blog, we’ll explain what a 3-statement model is, its core elements, and how to build one. We’ll also discuss the importance of the 3-statement model and whether it can be automated. So, let’s dive in and explore this essential financial tool.

What is a 3-statement model?

A 3-statement model is a financial model that combines three financial statements: the income statement, balance sheet, and cash flow statement. It is a comprehensive way to analyze a company’s financial health and predict its future performance.

3 core elements of a 3-statement model

Income statement

An income statement is a financial statement that provides information about a company’s revenues and expenses over a specific period of time. It shows how much money a company earned and spent during the period, and whether it made a profit or a loss. The income statement is also known as a profit and loss statement (P&L), statement of operations, or statement of income. It is an essential tool for investors, creditors, and analysts to evaluate a company’s financial performance and profitability.

Balance sheet

A balance sheet is a financial statement that provides a snapshot of a company’s financial position at a specific point in time. It shows the company’s assets, liabilities, and equity. The balance sheet is based on the fundamental accounting equation: assets equal liabilities plus equity. The assets represent what the company owns, the liabilities represent what the company owes, and the equity represents the owners’ residual interest in the company. The balance sheet is an important financial statement that provides investors and creditors with insight into a company’s financial health and its ability to meet its obligations.

Cash flow statement

A cash flow statement is a financial statement that shows the amount of cash and cash equivalents entering and leaving a company during a specified period of time. It provides insight into a company’s cash position and its ability to generate cash in the future. The cash flow statement is divided into three sections: operating activities, investing activities, and financing activities. It is an important tool for investors and analysts to evaluate a company’s financial health and liquidity.

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How is the 3-statement model linked?

The 3-statement model is linked through the flow of financial information between the income statement, balance sheet, and cash flow statement, which provide a more in-depth understanding of a company’s financial report. All three statements are linked through various calculations and formulas.

The net income (or loss) from the income statement is transferred to the balance sheet, affecting the retained cash balance. Changes in the balance sheet accounts are reflected in the cash flow statement, which ultimately results in changes to the cash and cash equivalents balance on the balance sheet. By analyzing the information in these three financial statements, investors and analysts can gain a comprehensive understanding of a company’s financial health and performance.

Why is the three-statement financial model important?

The three-statement financial model is important because it provides a comprehensive view of a company’s financial health. By analyzing the income statement, balance sheet, and cash flow statement together, investors and analysts can gain a deeper understanding of a company’s performance, financial position, and cash flow.

This model allows for more accurate financial reporting and helps to identify areas of concern or opportunities for growth. It also provides a basis for making informed decisions about investments, mergers and acquisitions, and strategic planning.

Furthermore, the three-statement financial model is a key tool for assessing a company’s creditworthiness, as lenders and creditors rely on it to evaluate a company’s ability to repay debt. By providing a complete picture of a company’s financial situation, the three-statement financial model helps to mitigate financial risk and improve transparency for all stakeholders.

How do you build a 3 statement model?

Building a three-statement financial model involves a series of steps that require a good understanding of accounting principles and financial statements. Here are the general steps to follow:

Gather financial statements

Collect the financial statements of the company for at least the past three years. This includes the income statement, balance sheet, and cash flow statement.

Adjust for non-recurring items

Remove any one-time or non-recurring items that could skew the financial data.

Create historical financial statements

Create historical income statements, balance sheets, and cash flow statements for each year.

Forecast future financial statements

Project future income statements, balance sheets, and cash flow statements based on assumptions about the company’s growth prospects and industry trends.

Link the statements

Link the historical and projected financial statements together. The net income from the income statement flows into the balance sheet, which in turn affects the cash flow statement.

Perform ratio analysis

Conduct ratio analysis to evaluate the company’s financial health, liquidity, profitability, and leverage.

Sensitivity analysis

Perform sensitivity analysis to test the sensitivity of the model to different assumptions and scenarios.

Validate the model

Validate the model against actual financial results to ensure its accuracy and relevance.

Update the model

Update the model regularly to reflect changes in the company’s operations, market conditions, and other relevant factors.

Building a three-statement financial model can be complex and time-consuming, but it provides valuable insights into a company’s financial performance and prospects.

For more information on building financial models, check out Brixx’s templates and downloads page.

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Can you automate the 3-statement model?

Yes, you can automate the 3-statement model using financial modelling software like Brixx. With Brixx, you can easily build and automate your 3-statement financial model, allowing you to focus on analyzing the data and making informed business decisions. Brixx’s user-friendly interface and customizable templates make it easy to create and manage your financial statements, even if you have limited financial knowledge. If you’re looking to streamline your financial reporting process and gain deeper insights into your business’s financial performance, get started with Brixx for free today and see how Brixx can help you take your financial reporting to the next level.

3-Statement Model FAQs

Can the 3-statement model be used for fundraising or seeking investment?

Yes, the 3-statement model can be a useful tool for fundraising or seeking investment as it provides potential investors with a clear understanding of a company’s financial position and growth potential.

Do I need a professional background in finance to build a 3-statement model?

While a background in finance can certainly be helpful, it’s not necessary when using Brixx’s user-friendly interface. Our software is designed to be easy to use, even for those without a professional finance background. With our templates and step-by-step guidance, you can quickly and easily build a financial model that accurately reflects your business’s financial position.

What are some common errors to avoid when building a 3-statement model?

Common errors include incorrect formulae or data inputs, overestimating revenues or underestimating expenses, and failing to consider external factors such as market trends or economic conditions.

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