The 3 statement financial model is an important tool for anyone working within the business or finance community. This commonly used model brings together a company’s income statement, balance sheet, and cash flow statement to formulate the current standing and future outlook of a company’s success — based upon financial and operational decision making.
Having a functional 3 statement model allows investors and managers alike to evaluate a business’s historical financials, compare those to the firm’s ongoing concerns, and project performance into the future. This introductory model lays the foundation for all other financial forecasting models.
“Walk me through the three financial statements.”
Not only is the fundamental understanding of the model critical to your success in a day-to-day role within the financial industry, but it is also necessary for the interview process. If you anticipate interviewing for an internship or full-time position in investment banking, equity research, or other competitive fields in finance, one of the questions you’re likely to see is “walk me through the three financial statements.”
This is usually one of the first technical questions asked in the interview, and depending on how thoroughly and precisely you answer, it can set the tone for your interview. So it is important to know how to prepare and execute the right answer when the time comes.
Here we breakdown how to best familiarize yourself with the three statement model, and what you can do to best position yourself for a future interview. The two sections we’ll cover include:
A 3 statement financial model is a core element used by business and financial leaders and analysts alike. Through a methodical approach, historical company data and expert forecasting are used to help project future outcomes based upon direct financial and operational decision making. Building an accurate and useful 3 statement model is highly technical, requiring in-depth knowledge of Microsoft Excel or Google Sheets, in conjunction with complex financial data points. However, this model helps serve as the basis for all other financial predictions and formulas, making it critical to understand and create. Even with guidance, a proper 3 statement model takes hours to build out. With Adventis, our expert-designed certification course helps students accurately create and conceptualize this model in under 90 minutes after taking the FMC course — equipping them with the real-world skillset needed today.
The balance sheet is a financial snapshot of a business at a particular time. It shows the assets, liabilities, and shareholders’ equity balances on a given day.
Similar to an income statement, a cash flow statement examples a specific period of time. It illustrates the inflows and outflows of cash, broken down into operating, investing, and financing activities.
The income statement serves as a summary of the company’s revenue and expenses over a period of time.
A great way to conceptualize and explain the three statement financial model is by visualizing the use and interaction on an example model. The particular model used in this video is from our Financial Modeling Certification Program, which requires you to build a three statement, 8 tab financial model in under 90 minutes with less than 10 formatting errors and minimal formula errors.
So let’s dive into an Excel spreadsheet. First, we’ll start with the income statement.
As a critical piece to valuing and operating most businesses, creating a proper model starts from the ground up. Using Microsoft Excel or Google Sheets to create the model, begin by creating three main tabs: income statement, balance sheet, cash flow statement. Color coding your data points is helpful for organization and function inputs. A suggested color code looks like:
Following this, you’ll need to fill your sheet with historical financial data points and build off of those figures. Public company’s historical financial data can be found in their 10k on sec.gov or on the company’s own investor relations page.
Next, you will want to import the future projections of the company. These financial assumptions and forecasts can be taken from wall street analysts or a combination of internal predictions. There are a variety of pros and cons to where and what mixture of assumptions you pull from external and internal sources.
Once historical data and future projected metrics have been uploaded into the model, you can now begin to focus on the associated schedules — which act as the heart and soul of any 3 statement model. In our video tutorial, we use property plan equipment (PP&E), working capital, equity, debt, and interest — with each receiving their own tab and individual sheet, just like income statement, balance sheet, and cash flow statement. Through the customization of data and the hardwiring of the mathematical formulas, you are then able to use these tabs to calculate their respective topic and link the final result back into the three statements.
With this circular financial model, each cell you change will flow through the entire model and enable you to see how the actual business would be affected by that direct change – providing stakeholders, managers, investors, and other critical players a powerful tool, with loads of financial insight.
Preparing for your internship or job interview is essential to seeing a positive outcome. You will be compared to your fellow interviewed peers, and therefore, your knowledge, likability, and potential value will all be on display. Get off on the right foot by accurately answering questions relating to the three statement financial model.
Here are a few high-level notes to keep in mind:
Understanding a 3 statement financial model is critical to your success within your specific field. The Adventis FMC certification gives individuals the real-world knowledge to make an impact from day one in their entry-level position. However, understanding the concept, function, and use of the model is different than being able to answer questions based on it.
The interview is an essential piece for displaying your knowledge and skillset to employers. While managers and decision-makers like to see strong resumes, the interview is where these stakeholders make a firm judgment on your competencies and potential value to their company. With a lot riding on this 30 to 60-minute interview, you’re going to need to practice answering a variety of questions surrounding the 3 statement financial model.
In doing so, you are working to strengthen two different muscles in this preparation process. First, you must sharper your modeling insight — having a full grasp of the ins-and-outs of how to build, analyze, and forecast from these financial data points. Secondly, you need to formulate how to concisely articulate your answers that will resonate with these industry experts.
One of the best ways to walk through the 3 statement financial model is to first explain the income statement, followed by the cash flow statement, and end with the balance sheet. This suggested order helps display how these three sections funnel into each other, in a tightly conjoined process.
Adventis is an industry leader in helping college-level students gain the real-world experience they need before starting their business or financial careers. Through cutting-edge certification courses on material like 3 statement financial modeling, we are helping reduce the learning curve and getting students on the right track to making an impact in their internship or job from day one.
The best way to prepare for your upcoming interview is to thoroughly familiarize yourself with the ins and outs of a three statement financial model. Your interviewers will easily be able to know if you have a firm understanding of the model concept or lack the right knowledge.
Even with guidance, building out a successful 3 statement financial model can take roughly four to five hours. Our Adventis FMC program helps students learn to accurately build-out and conceptualize this model. With our expert-level training, you will be certified and armed with the skills needed to nail your interview and thrive inside the business world.
Financial Modeling Certification
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