We walk through the process of building a 3 statement financial model starting with an empty Excel spreadsheet. Also included is a downloadable template of the model.
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In this video, we learn how to build a 3 statement financial model in Excel, which includes an integrated Income Statement, Balance Sheet, and Cash Flow Statement – with a balance sheet that balances!
Also included is a link (in “resources & links” section) where you can download the 3 statement financial model Excel template for free.
In order to successfully build these types of models, you need to really understand that the models are representing the operations of a company. And if you understand the operations and construction of these models, you will be better at building them, and better at fixing them.
So in an effort to make you better at financial modeling (and being analytical), let’s zoom out and talk about what these three financial statements represent, and how they work.
Here is a brief explanation of each one.
The income statement shows the amount of revenue a business generates from providing a service, and the expenses associated with the service, over a window of time. This is why the income statement is considered a flow statement – as it summarizes flows of income over time. This statement, however, doesn’t tell us anything about the capital structure of a company (debt, equity, assets purchases, etc).
While the income statement shows us what happened during a period of time, the balance sheet can only show us one precise moment. The balance sheet shows us exactly what a company owns, and owes, on a specific date. But what happens to what we owe / own over periods of time? The balance sheet cannot tell us anything about that.
Cash Flow Statement:
The cash flow statement is a flow statement, similar to the income statement. However, while the income statement is showing us revenues and related costs, the cash flow statement is simply converting the balance sheet into a flow statement by calculating the changes in what we owe / own (on the BS). The cash flow statement doesn’t care about what services we provide, it only tracks where the dollars go. Things like debt repayment and changes in working capital show up on the cash flow statement, but not on the income statement.
0:15 Overview of income statement, balance sheet, and cash flow statement
1:14 Steps for building a 3 statement financial model
1:55 Income statement: building the assumptions
5:39 Income statement: building the forecasting model
13:25 CAPEX & depreciation schedule
18:57 Balance sheet: historical numbers & concept discussion
21:05 Liabilities + Equity = Assets (in order for the balance sheet to balance)
21:39 Balance sheet: building the assumptions
23:55 Balance sheet: building the forecasting model
25:20 Balance sheet: linking in the Capex model
26:30 Balance sheet: modeling out debt
28:15 Balance sheet: linking net income (P&L) to retained earnings (BS)
29:55 Cash flow statement: structure & discussion
31:15 Cash flow statement: operating cash flow section
33:30 Cash flow statement: investing cash flow & free cash flow
34:00 Cash flow statement: cash flow from financing
35:15 Cash flow statement: net cash flow calculation
35:43 Balancing the balance sheet (linking in net cash flow)
36:32 Troubleshooting checklist – if your balance sheet doesn’t balance
I hope that you can now feel confident building a 3 statement financial model in Excel. If you have questions (I’m sure you do) – please leave comments below and I’ll try to help. Cheers!