Quick Answer
A three-statement model links the income statement (P&L), balance sheet, and cash flow statement into a single integrated model. Build the P&L first with revenue and cost assumptions, then construct the balance sheet with working capital and asset schedules, and finally derive the cash flow statement. The key is circular linkages: net income flows to retained earnings, CapEx connects P&L depreciation to balance sheet assets, and working capital changes drive operating cash flow.
A three-statement model is an integrated financial model that links all three core financial statements. Changes to the P&L cascade through the balance sheet and cash flow statement, giving you a complete picture of financial performance, position, and liquidity.
Start with revenue, then layer in cost of goods sold (COGS), operating expenses, depreciation, interest, and tax. The structure follows the standard P&L: Revenue - COGS = Gross Profit - OpEx = EBITDA - D&A = EBIT - Interest = EBT - Tax = Net Income.
Assets: Cash (from cash flow statement), accounts receivable (from revenue and DSO), inventory (if applicable), fixed assets (from CapEx schedule minus depreciation), and other assets.
Liabilities: Accounts payable (from costs and DPO), accrued expenses, debt (from debt schedule), and other liabilities.
Equity: Share capital plus retained earnings (prior year retained earnings plus net income minus dividends).
Operating cash flow: Start with net income, add back depreciation, and adjust for working capital changes (change in receivables, payables, inventory).
Investing cash flow: CapEx purchases minus asset disposals.
Financing cash flow: Debt drawdowns minus repayments, equity raises, dividends paid.
Net change in cash: Sum of operating + investing + financing cash flows. This feeds back to the balance sheet cash line, completing the circular linkage.
The main challenge is circular references — interest expense depends on debt balance, which depends on cash flow, which depends on interest expense. Most spreadsheet models handle this with iterative calculations. FP&A software typically resolves these automatically.
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FAQ
A simplified version is useful for any business. At minimum, link your P&L to a cash flow forecast. A full three-statement model becomes important when raising funding, applying for loans, or planning CapEx-heavy investments.
In Excel, enable iterative calculations (File > Options > Formulas). In Google Sheets, enable iterative calculations in settings. In FP&A software like Grove FP, circular references are resolved automatically by the calculation engine.
Project 3-5 years for fundraising and strategic planning, with monthly detail for year 1 and annual detail for years 2-5. For operational planning, 12-18 months of monthly detail is typical.
The balance sheet and working capital assumptions are typically the hardest. Getting the timing of cash flows right — when payments are received and made — requires careful modelling of payment terms and working capital cycles.
Yes. Grove FP generates integrated P&L, balance sheet, and cash flow projections from your planning model. Working capital, depreciation, and debt schedules are built in, with automatic circular reference resolution.
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