I took the first 7 months of last year to add 3-statement models to all the financial forecasting models I had built up to that point (from 2016 to the end of 2021). It was a big pull and helped increase the value of the templates I have to offer. Prior to this, I had most of the line items that would be needed, such as all items required to get down to cash flow, but didn't have a comprehensive and consistent output report. Now, I do and I include it in all future bottom-up startup financial models as well.
A three statement model is a financial model that consists of three financial statements: the income statement, the balance sheet, and the cash flow statement. Here are some benefits of using a three statement model:
- Holistic view of a company's financial health: A three statement model provides a comprehensive view of a company's financial health by incorporating information from three key financial statements. There are generally accepted accounting principals that are used to define what an asset is, what revenue is, what is tax deductible, what a liability is, and how to account for various things. By using this consistent code, everyone that is producing financial reports and forecasts can be on the same page since there is an agreement about what to label things. There is no waste or unbalancing with these statements and everything is 'accounted' for.
- Better decision-making: With a three statement model, decision-makers can analyze the financial performance of a company over time, which can help them make informed decisions about investment, financing, and operational strategies. By showing this in a forecast model, it makes it easy to see how assets, liabilities, equity change over time as various assumptions are adjusted.
- Improved forecasting accuracy: By using a three statement model, companies can forecast future cash flows more accurately, which can help them plan for future capital expenditures and investment opportunities. You can see what items effected cash flow per period and how those items effected key accounts.
- Facilitates financial modeling: A three statement model provides a solid foundation for financial modeling, which can help companies to analyze different scenarios and make informed decisions based on those scenarios. I think being able to communicate the assumptions in a consistent way is hugely important.
- Helps identify potential issues: A three statement model helps to identify potential issues in a company's financial performance, such as liquidity problems or unsustainable debt levels, before they become critical.
You can produce your own financial statements with this template (accrual friendly).
Article found in Accounting and Finance.
