Three Statement Model

A three statement model is the cornerstone of corporate finance and a fundamental type of financial model. It integrates a company's three primary financial statements—the Profit and Loss (P&L) Statement, the Balance Sheet, and the Cash Flow Statement—into a single, dynamic framework.

The model's power lies in its interconnectedness, which reflects the principles of double-entry accounting. For example, Net Income from the P&L flows into Retained Earnings on the Balance Sheet. The Cash Flow Statement then reconciles the change in the cash balance on the Balance Sheet, starting with Net Income and adjusting for non-cash expenses and changes in working capital.

This comprehensive structure makes the three statement model essential for financial forecasting, valuation analyses like Discounted Cash Flow (DCF), and robust scenario planning. The model is considered complete and correct only when the Balance Sheet remains balanced (Assets = Liabilities + Equity) under all forecasted scenarios.