How do the three statements link together?

Net income from the P&L flows into retained earnings on the Balance Sheet. The Cash Flow statement starts with net income, adjusts for non-cash items and working capital changes, and reconciles to the change in cash on the Balance Sheet. These links must always balance.

What is the hardest part of building a three-statement model?

Getting the working capital and cash flow sections right. Most errors occur in the relationship between Balance Sheet changes and Cash Flow movements. Using a tool like Grove FP that enforces these links automatically eliminates the most common modelling errors.

Do startups need a three-statement model?

Early-stage startups can often get by with a P&L forecast and a cash flow forecast. A full three-statement model becomes important once you have meaningful assets, liabilities, or debt -- typically from Series A onwards or when dealing with lenders.

How often should I update a three-statement model?

Monthly for actuals, quarterly for the forward forecast. The model should be the single source of truth for your company's financial position, so it needs to stay current. Automate the actuals import to reduce the update burden.

Example

Three-Statement Financial Model Example

A 150-person manufacturing company in Sheffield with £8.5M revenue. The FP&A team maintains a three-statement model that links the P&L, Balance Sheet, and Cash Flow statement. This is the FY2025 annual summary used for lender reporting and strategic planning.

Example data

Financial model

Statement

Line Item

FY2025

P&L

Revenue

£8,500k

P&L

Net Income

£680k

Total Assets

£5,200k

Total Equity

£3,100k

Operating CF

£920k

Investing CF

(£350k)

Net Change in Cash

£420k

Net Income

Net income of £680k (8% margin) flows directly into retained earnings on the Balance Sheet, increasing total equity from £2.42M to £3.1M.

Operating CF

Operating cash flow of £920k exceeds net income by £240k because depreciation (a non-cash charge) is added back and working capital improved.

Net Change in Cash

Despite £350k of capital investment, the business generated £420k of positive net cash flow, strengthening the balance sheet.

Formulas

Key formulas

fxRetained Earnings (BS) = Prior RE + Net Income (P&L) - Dividends

This is the primary link between P&L and Balance Sheet. Net income from the P&L flows into retained earnings on the equity section of the Balance Sheet.

fxOperating CF = Net Income + Depreciation + Working Capital Changes

The Cash Flow statement starts with net income from the P&L, adds back non-cash items, and adjusts for working capital movements from the Balance Sheet.

fxCash (BS) = Prior Cash + Net Change in Cash (CF)

The closing cash on the Balance Sheet must equal the prior period cash plus the total net cash movement from the Cash Flow statement. This is the key integrity check.

Analysis

What makes this example good

All three statements are mathematically linked with clear formulas

The Balance Sheet balances (Assets = Liabilities + Equity)

Cash flow reconciles to the change in cash on the Balance Sheet

Operating cash flow exceeds net income, showing strong cash conversion

The model supports what-if analysis across all three statements simultaneously

Customisation

How to adapt for your business

Add monthly or quarterly columns for more granular tracking

Include separate schedules for working capital, capex, and debt

Add ratio analysis (ROE, ROIC, debt/equity, current ratio) below the statements

Build in scenario toggles so changes to revenue assumptions cascade through all three statements

Add a debt schedule if the company has term loans or revolving facilities

Common variations

--Quarterly three-statement model for investor reporting
--Five-year projection model for strategic planning or fundraising
--Simplified two-statement model (P&L and Cash Flow only) for startups
--Multi-entity consolidated three-statement model with eliminations

Keep exploring

Related examples

Annual Budget Example

A 120-person B2B software company based in Manchester with £5.2M annual revenue. The business sells a subscription product to mid-market companies and is forecasting 18% growth this year. The finance team is building the annual budget for FY2026.

View example

13-Week Cash Flow Forecast Example

A 40-person e-commerce company in Leeds with £2.8M revenue. The business is profitable but cash-tight due to inventory purchasing cycles. The finance team runs a weekly 13-week cash forecast to ensure the company never drops below its £50k minimum cash threshold.

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Capex Plan Example

A 200-person manufacturing company in Coventry with £12M revenue. The Finance Director is building a 3-year capital expenditure plan for board approval. The company needs to invest in new production equipment, warehouse expansion, and IT infrastructure to support the growth plan.

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FAQ

Frequently asked questions

Each statement tells a different part of the story. The P&L shows profitability, the Balance Sheet shows financial position, and the Cash Flow shows liquidity. A profitable company can still run out of cash; a cash-rich company can still be destroying value. You need all three views.

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