Model Overview & Structure
Master the fundamentals and architecture of three-statement financial models. Understand how the Income Statement, Balance Sheet, and Cash Flow Statement fit together before you ever touch the modeling grid.
Analyst Objective
Build a clean mental model of how a professional three-statement model is structured so later lessons feel intuitive, not overwhelming.
What is a Three-Statement Model?
A three-statement financial model integrates three core financial statements to project a company's future financial performance. It's the foundation of investment banking, private equity, and corporate finance analysis.
Income Statement
Revenue, expenses, and profitability
Balance Sheet
Assets, liabilities, and equity
Cash Flow
Operating, investing, and financing flows
Why This Matters
Investment bankers use three-statement models to value companies ($10M-$10B+), advise on M&A transactions, and structure complex financings. Mastering this skill is essential for landing and succeeding in IB roles at Goldman Sachs, Morgan Stanley, JPMorgan, and other elite firms.
Visual Overview (Coming Soon)
How the Income Statement, Balance Sheet, and Cash Flow Statement Talk to Each Other
This placeholder will become an interactive animation that walks through the core links between the three statements as you build your first model.
Model Architecture & Best Practices
1Assumptions Section
The "brain" of your model. All key drivers should be in one centralized location.
Key Assumptions to Include:
- Revenue growth rates by segment
- Margin assumptions (gross, EBITDA, net)
- Working capital metrics (DSO, DIO, DPO)
- CapEx as % of revenue
- Tax rate and interest rates
2Historical Period (Actuals)
Typically 3-5 years of historical data from company filings (10-Ks, 10-Qs).
Example: 2019-2023 for Apple Inc.
Source: Apple 10-K filings
Frequency: Annual (can be quarterly for detailed models)
3Projection Period (Forecast)
Forward-looking estimates based on assumptions and growth drivers.
Standard: 5 years (2024-2028)
For M&A/LBO: 5-10 years
For DCF: 5 years + terminal value
The Golden Rules of Financial Modeling
1. Blue for Inputs
All manual inputs and assumptions should be highlighted in blue. This makes it instantly clear what can be changed without breaking formulas.
2. Black for Formulas
Calculated cells should remain black (or your default color). Never hardcode values into formula cells - always link to assumptions.
3. Left-to-Right Flow
Time flows left to right (Historical → Projected). This makes the model intuitive to navigate and reduces errors.
4. One Formula Per Row
Write your formula once, then copy it across all time periods. This ensures consistency and makes auditing easier.
Understanding Statement Linkages
The three statements are interconnected through specific line items. Here's how they link together:
Income Statement → Cash Flow Statement
Net Income from the I/S is the starting point for the Cash Flow Statement's operating activities section.
Cash Flow Statement → Balance Sheet
Change in Cash from the CFS updates the Cash balance on the Balance Sheet's assets section.
Balance Sheet → Income Statement
Debt Balance from the B/S determines Interest Expense on the I/S (Debt × Interest Rate).
Note: These linkages create a circular reference in Excel (Debt → Interest → Net Income → Cash → Debt). We'll learn how to resolve this in Lesson 5 using proper cash management logic.
Key Takeaways
A three-statement model integrates the Income Statement, Balance Sheet, and Cash Flow Statement to provide a complete financial picture
Proper model structure includes: centralized assumptions, historical period, and projection period
Follow the golden rules: blue for inputs, black for formulas, left-to-right flow, one formula per row
The three statements are interconnected through specific linkages that we'll build in upcoming lessons