The category
What a three statement model is.
Three pages that describe the same business from three angles, wired together so they can't disagree. The income statement says what you earned, and it's the page most owners call the profit and loss, or the P&L. The balance sheet says what you own and owe on one day. The cash flow statement says where the money went.
Build your own three statement model free, and all three pages fill in from your answers.
If you went looking for a financial model template or a startup financial model, this is what those templates are trying to be. The difference is that it fills itself in from your answers and checks its own arithmetic, so there's no formula to break.
You'll see the same thing called a few different names. The three financial statements. The three accounting statements. A three statement model, written 3 statement model about as often, which is what a bank or an investor will call it. A 3-way forecast, or a 3 way cash flow forecast, if whoever you're talking to learned the trade in Britain or Australia. They all mean these three pages, linked.
They're linked, and that's the point. Profit flows into equity. The cash at the bottom of the cash flow statement is the cash on the balance sheet. Change one assumption and all three pages move together, or the model is wrong.
The three pages
One business, three angles
Income statement
- Revenue
- Cost of revenue
- Operating expenses
- Interest and tax
- Net income
Balance sheet
- Cash
- What else you own
- What you owe
- Equity
- Check-
Cash flow
- From operations
- From investing
- From financing
- Change in cash
- Cash at the end
Net income flows into Equity
Cash at the end is the same figure as Cash on the balance sheet
The income statement covers a period, a month or a quarter or a year. The balance sheet is true on one date and no other. The cash flow statement covers the same period as the income statement. It explains why the cash on one balance sheet isn't the cash on the last one. If you want the middle page in detail, here's how to read a balance sheet, and here's how to read a cash flow statement.
Why linked matters
One input, three pages, and they agree
Say you hire someone in March.
The income statement takes their wages from March onward, so profit falls. The cash flow statement takes the same wages out of cash in March. Payroll is paid in the month it's earned, and doesn't wait the way a supplier invoice does. The balance sheet shows less cash and less retained earnings, by the same amount, so it still balances.
One input, three pages, all moving at once. That's the difference between a model and three spreadsheets that happened to be built by the same person. In three spreadsheets you wire two of the three, and you find out which one you missed in the meeting.
It's also why the check row exists. Assets, less liabilities, less equity, on every single month. Zero, or something upstream is wrong.
Who asks for it
Three people, three reasons
A lender
Checking you can make the payments. They read the cash flow page and the coverage that falls out of it. Their question is whether the money is there on the day the payment is due.
An investor
Pricing the company. They read the summary first and the statements second, and what they're really testing is whether you know which assumption the whole plan rests on. What goes in the deck covers that one.
You
Testing a plan before you spend a year on it. This is the one people skip, and it's the only one where the model can still change what you do.
Being straight about it
What it isn't
It isn't a forecast anyone guarantees. It's a plan built out of assumptions you can name, change and be wrong about, which is exactly what makes it useful. Every number in it comes from something you typed.
It isn't accounting for a year that's already happened either. That's bookkeeping, and it's a different job with different rules. And nothing here is financial, tax or legal advice. If you're going to rely on the output, put it in front of your own accountant first.
What the full model adds
- Receivables, payables, inventory, deferred revenue, depreciation and loss carryforwards are handled behind the pages, and you never write a formula.
- A Sources and Uses page and a Management Discussion written from the figures come out of the same assumptions. The words and the numbers can't drift apart.
- The Excel workbook has a monthly sheet sitting behind the statements, and the print pack sends every page out in one job. Both are on a paid plan.
- Compare puts a base case, an upside and a downside next to each other. That's how you find out which assumption the plan really rests on.
Building the model and reading every page is free. The pricing page lists what each plan includes, and the questions page answers the rest.