Tag: Three Statement ModelA three statement model is called when your financial model results in the three financial statements: Income Statement, Balance Sheet and Cash Flow Statement by interlinking them dynamically.
Why do you need a Three Statement Model?
It is quite easy, the alternative of building a three statement model would be to build a direct cash flow model. So what is wrong with that? The problem with that is that you can perform your analysis only to a certain degree, especially tax and net working capital calculations might not be very precise. Also you are running the risk creating a cash flow forecast which might simply be unrealistic as you haven't looked at the implied financial statements. So a more precise way to predict the future financial performance of a company is to build a three statement model.
Advantages of Modelling the Three Financial Statements
The main advantage is that the quality of your model increases. If you create a dynamic three statement model, you normally start with building the Income Statement. The Balance Sheet is mostly driven how you project the Income Statement, as all net working capital positions such as receivables, inventory, payables depend on your projected revenues and cost of goods sold. Depending on your projection, more or less financing is required. In addition, in many models the investment in Fixed Assets (CAPEX) drives sales, so that's now where your interlinking comes handy as you can see the effect of your assumptions in an instance on all three financial statements. The other main quality advantage is that once you have built the three financial statements, you can properly calculate all financial ratios. This opens up new possibilities as now you can check your financial model in an analytical way by simply analysing the financial ratios and the reasons why provide these results. This avoids that you have to go through the model checking it line by line (which can be an impossible task).
Our Inventory of Three Statement Models
At eFinancialModels we offer many Excel model templates in the form of comprehensive and fully dynamic three statement models. Find a selection of those on this page.
The Pharma Biotech Valuation Model Template calculates the risk-adjusted DCF Value of a Pharma or Biotech Company with several products under development. The product forecasts are probability adjusted to take into account the success probabilities…
The purpose is to calculate, compare, and apply different theories of corporate valuation in order to assess their equivalence by using as a platform the company Jumbo S.A. (a retail company in the toys /…
This Model provides a framework to accurately forecast the financial statements of a Construction / Infrastructure company over the next 10 years. The model uses a detailed breakdown to estimate the company’s operating assumptions on…
This Financial Model for Mobile Apps provides an easy way to forecast the financial performance for an App sold in the App Stores and deriving revenues from paid downloads, advertisement and subscriptions.