Guide
The three-statement model,explained with a live example.
How the income statement, cash flow statement and balance sheet connect, why the balance check is the test that matters, and a twelve-month seed-stage example computed by the same engine that runs the Replafin workspace.
Definition
What a 3 statement model is
A three-statement model projects a company's income statement, balance sheet and cash flow statement together, period by period, from one set of assumptions. The word that matters is together: each statement reads from the other two, so a change to any driver (a price, a hire, a payment term) moves all three at once and they stay consistent.
It is the standard structure in investment banking, FP&A and any serious startup model, because it answers the question a P&L alone cannot: not “are we profitable?” but “will there be cash in the bank in March?”
The links
How the statements connect
Five flows carry everything between the three statements.
- Net income → cash flow and equity. The last line of the P&L is the first line of the cash flow statement, and it is added to retained earnings on the balance sheet.
- Depreciation → added back. It reduces profit but no cash leaves, so the cash flow statement adds it back; PP&E on the balance sheet falls by the same amount.
- Working capital → cash. Revenue invoiced but not yet collected sits in receivables; bills not yet paid sit in payables; annual plans paid up front sit in deferred revenue. Growth in each moves cash without touching profit.
- Capex → PP&E. Equipment bought leaves cash under investing and appears as an asset, then depreciates.
- Financing → cash, debt and equity. A round or a loan adds cash and adds share capital or debt; repayments do the reverse.
The cash flow statement's ending cash is the cash line on the balance sheet. That single link is what makes the sheet balance, or not.
Worked example
Northwind Analytics: a seed-stage SaaS company, twelve months
120 customers paying $180 a month at the start, 25 new a month, 3% monthly churn, 6 people on payroll, $900k in the bank and $15k of equipment in month one. The SaaS template sets 30-day collection terms, 60 days of prepaid annual plans and a 20% cost of revenue. Every figure is computed by the model engine.
- Revenue, month 12
- $60.9k
- from $25.5k in month 1
- Avg net burn
- $43k
- per month, forward
- Ending cash
- $421k
- after twelve months
- Balance check
- 0.00
- assets − liabilities − equity
| Month 1 | Month 6 | Month 12 | |
|---|---|---|---|
| Revenue | 25,452 | 43,046 | 60,911 |
| Cost of revenue | (10,924) | (14,443) | (18,015) |
| Gross profit | 14,528 | 28,604 | 42,895 |
| Gross margin | 57.1% | 66.4% | 70.4% |
| Operating expenses | (71,967) | (71,967) | (71,967) |
| EBITDA | (57,438) | (43,363) | (29,071) |
| Depreciation | (417) | (417) | (417) |
| Net income | (57,855) | (43,780) | (29,488) |
| Month 1 | Month 6 | Month 12 | |
|---|---|---|---|
| Net income | (57,855) | (43,780) | (29,488) |
| + Depreciation | 417 | 417 | 417 |
| ± Receivables | (1,452) | (3,308) | (2,755) |
| ± Payables | 2,890 | 662 | 551 |
| ± Deferred revenue | 2,904 | 6,616 | 5,511 |
| Cash from operations | (53,096) | (39,393) | (25,765) |
| Capital spending | 15,000 | – | – |
| Cash from financing | – | – | – |
| Net change in cash | (68,096) | (39,393) | (25,765) |
| Ending cash | 831,904 | 608,909 | 421,458 |
| Month 1 | Month 6 | Month 12 | |
|---|---|---|---|
| Cash | 831,904 | 608,909 | 421,458 |
| Accounts receivable | 25,452 | 43,046 | 60,911 |
| Equipment, net | 14,583 | 12,500 | 10,000 |
| Total assets | 871,939 | 664,455 | 492,368 |
| Accounts payable | 82,890 | 86,409 | 89,982 |
| Deferred revenue | 50,904 | 86,093 | 121,821 |
| Share capital | 796,000 | 796,000 | 796,000 |
| Retained earnings | (57,855) | (304,047) | (515,435) |
| Total liabilities & equity | 871,939 | 664,455 | 492,368 |
| Check: assets − L&E | 0.00 | 0.00 | 0.00 |
Read across and the links show: the month-one net loss of $57,855 is the first line of the cash flow statement and the movement in retained earnings; the $15,000 of equipment leaves cash under capital spending and sits under assets, then depreciates; deferred revenue grows as annual plans are prepaid, which is cash in before the revenue is earned. Ending cash on the cash flow statement is the cash line on the balance sheet, every month, and the check row stays at zero.
Why it matters
The balance check is the test
Most spreadsheet models break in the link between the cash flow statement and the balance sheet: a working-capital sign flipped, a depreciation schedule that outlives the asset, a loan repayment posted once as cash and once as an expense. The symptom is always the same: assets stop equalling liabilities plus equity, and someone adds a “plug” line to hide it.
Replafin does not have a plug. All the math lives in pure functions, and a test asserts the check is within a rounding error of zero for the opening column and every projected month, under the default assumptions and after every kind of edit. A change that would unbalance the sheet cannot ship. That is what makes the model safe for an assistant or an agent to edit: the guardrail is in the engine, not in a reviewer's eye.
Build one
Excel, or the model that checks itself
In a spreadsheet: drivers on one tab; the P&L; the balance sheet; the cash flow statement by the indirect method; ending cash linked back to the balance sheet; a check row. Budget a day for the build and an afternoon a month for the maintenance, and keep the check row visible.
In Replafin: pick a business model template, type the drivers, and the three statements are computed and checked as you go. Connect a bank, Stripe or your accounting software and the forecast starts from real balances. Export any statement to CSV or XLSX when the board deck needs it.
Questions
Three-statement models, answered
Which financial statements does Replafin produce?
A linked profit and loss, cash flow statement and balance sheet, month by month. The same model also supplies the revenue build, burn and runway, profitability measures and five-year projections.
Does the balance sheet actually balance?
Yes. Assets must equal liabilities plus equity in the opening balances and every projected month, within rounding tolerance. Replafin tests this across the model rather than adding an adjustment to hide a difference.
What is a 3 statement model?
A financial model in which the income statement, the cash flow statement and the balance sheet are built together and linked: net income flows into cash and retained earnings, changes in working capital and capital spending move cash, and the balance sheet has to balance every period. It is the standard way to project a business because the three statements cannot be inconsistent with each other.
What are the three financial statements?
The income statement (or P&L) shows revenue, costs and profit over a period. The balance sheet shows what the company owns and owes at a point in time. The cash flow statement reconciles the two: it starts from net income and explains how the cash balance moved.
How are the three statements linked?
Net income from the P&L is the first line of the cash flow statement and is added to retained earnings on the balance sheet. Depreciation is a P&L expense with no cash, so it is added back. Growth in receivables, inventory or prepaid customer balances moves cash without touching profit. Capital spending leaves cash and becomes PP&E. The cash flow statement's ending cash is the cash line on the balance sheet.
Does a startup need a three-statement model?
If you raise money, borrow, hold inventory or invoice customers on terms, yes: a P&L alone will tell you that you are profitable in a month when you are running out of cash. A pre-revenue company can start with a cash forecast and grow into the full model as the balance sheet gets real items on it.
How do I build a three-statement model in Excel?
Drivers on one sheet, then the P&L, then the balance sheet, then the cash flow statement built by the indirect method, with ending cash linked back to the balance sheet and a check row that subtracts liabilities and equity from assets. The check row is where most spreadsheets break, which is why a modelling tool that computes the statements from drivers and tests the balance on every change exists.
Three statements.One set of drivers. Zero plugs.
Open the workspace, change one assumption, and watch the P&L, cash flow and balance sheet move together, with the check still at zero.