What is a three-statement model?
A three-statement model is a financial model that links a company's profit and loss statement, balance sheet and cash flow statement, so that one assumption, such as revenue growth or payment terms, flows consistently through all three. It is the standard model for forecasting, budgeting, fundraising, lending and valuation.
Also called3-statement modelintegrated financial modellinked financial statements
Compare the softwareBest FP&A software →All 6 FP&A and forecasting vendors →
- Links
- P&L, balance sheet, cash flow
- Check
- Balance sheet balances
- Used for
- Forecasts, funding, valuation
How a three-statement model works
The model starts with assumptions: revenue drivers, margins, operating costs, headcount, capital spending, working capital days, debt and tax. The profit and loss is forecast first. Net profit flows into retained earnings on the balance sheet. Working capital balances, such as receivables, inventory and payables, are forecast from days or turnover assumptions, and capital spending and depreciation drive fixed assets. The cash flow statement is then derived from profit and the changes in balance sheet items, and its closing cash becomes the cash line on the balance sheet. If the links are right, the balance sheet balances every period; a balance check is the first test of the model. Interest that depends on cash balances can create a circular reference, which modellers handle with an average balance or a switch. Planning software builds these links in, so finance teams do not maintain them by hand.
Common questions
How are the three financial statements linked?+
Net profit from the profit and loss flows to retained earnings. Changes in balance sheet items, together with profit, make up the cash flow statement, and its closing cash becomes the balance sheet cash.
Why does my three-statement model not balance?+
Usually a missing link: a balance sheet movement not reflected in the cash flow, a sign error, or a new account added on one statement only. Checking each period's cash and retained earnings links finds most errors.
What is the difference between a three-statement model and a DCF?+
A three-statement model forecasts the financial statements. A discounted cash flow valuation takes the free cash flows from that forecast and discounts them to a present value.
Software for three-statement models
Part of Accountio’s accounting technology coverage · Glossary
