
We are a consultancy based in Switzerland, so we always work with clients on generating a 3 statement model for their business. Now they don’t have to be a startup. They could be a startup, but they could also be a company that’s generating good revenue in the past ten years or so.
We have a method of creating those three-statement models. Let us elaborate how we do this so that you could benefit from it and create your own three-statement model.
Step 1: Creating the 3 Statement Model Flow Chart
Step one, we always draw a flow chart. Now don’t underestimate this phase. What most of the people do on the Internet, honestly, is that they just download a three-statement model template and start changing the variables to fit their company. This is kind of not perfect and let me tell you why.
Any model that is designed out there is designed with a certain market and industry in mind. Let’s say you work in the foods and beverages industry, you might download a three-statement model for foods and beverage company.
This is still kind of flawed because inside the Foods and beverage industry, there are different business models, and markets. Hence there are different three-statement models accordingly.
Structuring Your 3 Statement Model
So what you should always start with is a storyboard or a structure, which is in our case a flow chart. What we do is we use tools like Apple Freeform or Figma, or even Miro, so that we would draw a flow chart of what we want to put in the model.
Think of it from a bird’s eye perspective, not from a numerical perspective. Numbers and math are easy. What is difficult is to connect everything together before actually jumping into the math storyboard.
So we draw three big rectangles, each one having an income statement, a balance sheet and a cash flow analysis. These are the three-statement model pillars. They connect to each other in the average traditional way.
Using AI for 3 Statement Model Planning
But what you need to know is what goes into the costs, what is taken from the cash flow, are you going to do any investments in the upcoming period? etc.
All these things, all these questions from the beginning of the product being purchased by a customer all the way to the money going to the pocket of the investor or the bank that you took a loan from – this sort of supply chain has to be viewed by a flow chart. So this is the first thing you should do.
Here's a hint for you. I'm not sure if ChatGPT does it, but Anthropic's Claude, creates very cool flow charts for this particular purpose. You could use artificial intelligence in this sense to help you with envisioning the model by creating a flow chart before you start working on the actual model. We've tested it a few times and it's actually good. It just needs a follow-up and further building to actually make it look good.
Creating Your 3 Statement Model Template
Step two, once you’re done with this structure storyboard, it’s time to get your hands dirty or your math done more or less. You start either downloading a template on Excel, which is the easiest thing.
When you download a template, there are standard connections between an income statement, a balance sheet and a cash flow analysis that are usually connected, and this would spare you time when it comes to connecting and balancing the sheet.
So if you can download a template that already connects those three, I think we have a few on our website, but you can find that online as well. This is when you have something ready for a template. Then you have to do your market research to actually understand whether the numbers make sense or not for your projections.
Market Research for Your 3 Statement Model
Let’s continue with our example that you work in the foods and beverage industry. Let’s say that you’re working on creating a new tea brand. How many packets of tea or boxes of tea are you actually going to sell? The answer to this is not the same as how many you can produce. The answer to this depends on the market. How much does the market really consume?
If you’re in the UK, it’s different because it’s a huge market and tea is sort of a common thing there while in places like the US, it might not be as common.
Although there’s always the competition that’s much fiercer in the UK compared to the US. So all those have to be put in consideration to create a great model.
Finalizing Your Model
You need to study the market very well before you put projections. The rest of the steps are very straightforward. You open the income statement and you simply put your costs and your revenue. You should always start with revenue, we have always found this as the best sort of starting point.
When you draw the revenue, you can see what happens when you start deducing the costs. Then actually generate profitability and see how this product works in the upcoming years.
Then you start your cash flow analysis sheet. The cash flow analysis sheet is important. You might be generating a good amount of revenue but still go bankrupt because you don’t have enough cash flow at a certain moment in time, and that’s why the cash flow analysis sheet is there.
So that you would know that you need a bank loan or an investment in this particular period.
If you’re working on an AI company, for example, there is a very high chance that you needed an infusion of cash at a certain point due to the high costs of maintaining these sort of startups.
Balance Sheet and Final Considerations
Finally, the balance sheet is just there as a formality to make sure that everything makes sense. This is sort of your financial checkmark. Once you look at the balance sheet, you’ll be able to see all sorts of variables and verify whether, as a business, everything makes sense.
You might see numbers that are a little bit too big for the market. All these questions are answered in the balance sheet and these are the exact method of working on these things.
This is how we advise you to create a three-statement model. But don’t forget the most important element of a three-statement model is always to research, research and even do more research.
Homework gives you an edge in this financial world.