3-Statement Model: Build a Financial Model Step-by-Step

Learn how to build a professional 3-statement financial model in Excel and Google Sheets. Complete guide with formulas, linking logic, and AI automation to speed up the process.

What is a 3-Statement Model?

A 3-statement model is a financial model that integrates and links three core financial statements: the Income Statement (P&L), Balance Sheet, and Cash Flow Statement. These three statements are interconnected, with changes in one statement automatically flowing through to the others, creating a dynamic financial model that shows how a company's operations, financing, and investing activities affect its financial position.

Income Statement

Shows revenue, expenses, and net income over a period. The bottom line (net income) flows to the balance sheet and cash flow statement.

Balance Sheet

Shows assets, liabilities, and equity at a point in time. Must balance: Assets = Liabilities + Equity. Links to income statement and cash flow.

Cash Flow Statement

Shows cash inflows and outflows from operations, investing, and financing. The ending cash balance links back to the balance sheet.

Why Use SheetXAI?

  • Generate complex linking formulas automatically with natural language
  • Build all three statements and link them together in minutes
  • Automate data flow between statements with AI-powered formula generation
  • Create sensitivity analysis and scenario planning automatically

How to Build a 3-Statement Model: Step-by-Step Guide

Follow these steps to build a professional 3-statement model in Excel or Google Sheets.

1

Build the Income Statement

Start with revenue projections, then build down to operating expenses, interest, taxes, and net income. Include assumptions for growth rates, margins, and operating leverage.

Key Formulas Needed:

  • Revenue growth formulas
  • COGS and operating expense calculations
  • EBITDA, EBIT, and net income formulas
  • Tax calculations

💡 SheetXAI Tip:

Use SheetXAI to generate these formulas automatically. Just describe what you need: "Link net income from income statement to retained earnings on balance sheet" or "Calculate operating cash flow by adding depreciation to net income and subtracting working capital changes."

2

Build the Balance Sheet

Create assets (current and non-current), liabilities (current and long-term), and equity sections. Link retained earnings from the income statement and cash from the cash flow statement.

Key Formulas Needed:

  • Working capital formulas (AR, AP, Inventory)
  • PP&E and depreciation schedules
  • Debt and equity calculations
  • Retained earnings: Previous + Net Income - Dividends

💡 SheetXAI Tip:

Use SheetXAI to generate these formulas automatically. Just describe what you need: "Link net income from income statement to retained earnings on balance sheet" or "Calculate operating cash flow by adding depreciation to net income and subtracting working capital changes."

3

Build the Cash Flow Statement

Start with net income from the income statement, then add back non-cash items (depreciation), adjust for changes in working capital, and include investing and financing activities.

Key Formulas Needed:

  • Operating cash flow: Net Income + Depreciation - Changes in WC
  • Investing cash flow: CapEx calculations
  • Financing cash flow: Debt issuance/repayment, dividends
  • Ending cash = Beginning cash + Net cash flow

💡 SheetXAI Tip:

Use SheetXAI to generate these formulas automatically. Just describe what you need: "Link net income from income statement to retained earnings on balance sheet" or "Calculate operating cash flow by adding depreciation to net income and subtracting working capital changes."

4

Link the Statements Together

Create the circular references and links between statements. Net income flows to retained earnings and cash flow. Ending cash flows to balance sheet. Changes in working capital affect both balance sheet and cash flow.

Key Formulas Needed:

  • Link net income to retained earnings
  • Link net income to cash flow statement
  • Link ending cash to balance sheet cash
  • Link working capital changes to both statements
  • Handle circular references properly

💡 SheetXAI Tip:

Use SheetXAI to generate these formulas automatically. Just describe what you need: "Link net income from income statement to retained earnings on balance sheet" or "Calculate operating cash flow by adding depreciation to net income and subtracting working capital changes."

5

Balance the Balance Sheet

Ensure Assets = Liabilities + Equity. Use a balancing mechanism (often a plug account like cash or revolver) to make the balance sheet balance automatically.

Key Formulas Needed:

  • Assets = Liabilities + Equity check
  • Plug account formulas (cash or revolver)
  • IF statements for balancing logic

💡 SheetXAI Tip:

Use SheetXAI to generate these formulas automatically. Just describe what you need: "Link net income from income statement to retained earnings on balance sheet" or "Calculate operating cash flow by adding depreciation to net income and subtracting working capital changes."

6

Add Supporting Schedules

Create supporting schedules for depreciation, working capital, debt, and equity. These feed into the main statements and make the model more detailed and accurate.

Key Formulas Needed:

  • Depreciation schedules
  • Working capital schedules
  • Debt schedules with interest
  • Equity schedules

💡 SheetXAI Tip:

Use SheetXAI to generate these formulas automatically. Just describe what you need: "Link net income from income statement to retained earnings on balance sheet" or "Calculate operating cash flow by adding depreciation to net income and subtracting working capital changes."

7

Build Sensitivity Analysis

Create data tables and scenario analysis showing how the model changes with different assumptions (revenue growth, margins, interest rates, etc.).

Key Formulas Needed:

  • Data tables
  • Scenario analysis
  • Goal seek functionality
  • Sensitivity tables

💡 SheetXAI Tip:

Use SheetXAI to generate these formulas automatically. Just describe what you need: "Link net income from income statement to retained earnings on balance sheet" or "Calculate operating cash flow by adding depreciation to net income and subtracting working capital changes."

Common 3-Statement Model Mistakes to Avoid

Learn from common errors to build more accurate and reliable 3-statement models.

Balance Sheet Doesn't Balance

The most common error - Assets must equal Liabilities + Equity. This usually happens when links between statements are incorrect or missing.

Solution: SheetXAI can help identify and fix balancing issues by generating proper linking formulas.

Incorrect Cash Flow Linking

Not properly linking cash flow statement to balance sheet. Ending cash must match balance sheet cash, and changes must reconcile.

Solution: SheetXAI can generate accurate cash flow linking formulas with proper references.

Missing Working Capital Changes

Forgetting to account for changes in working capital (AR, AP, Inventory) which affects both balance sheet and cash flow.

Solution: SheetXAI can help build comprehensive working capital schedules and link them correctly.

Circular Reference Errors

Creating circular references incorrectly, especially with interest expense and cash balances. Need proper iterative calculation setup.

Solution: SheetXAI can help set up circular references correctly or break them with proper logic.

Incorrect Retained Earnings

Not properly calculating retained earnings as previous retained earnings + net income - dividends.

Solution: SheetXAI can generate the correct retained earnings formula linking income statement to balance sheet.

Depreciation Not Flowing Through

Depreciation affects income statement (expense), balance sheet (reduces PP&E), and cash flow (add-back). Must flow through all three.

Solution: SheetXAI can help create depreciation schedules that properly link to all three statements.

Automate 3-Statement Model Creation with SheetXAI

SheetXAI can automate many of the complex tasks involved in building a 3-statement model, saving you hours of work.

Generate Linking Formulas

Create complex formulas that link the three statements together automatically with natural language commands.

Build Supporting Schedules

Automatically generate depreciation, working capital, and debt schedules with proper formulas.

Balance the Model

Use AI to identify balancing issues and generate formulas to ensure Assets = Liabilities + Equity.

FAQ's

Everything you need to
know about SheetXAI

When you use our credits, you're accessing AI models through our API keys. Credits are consumed based on this simple formula:

Base cost × Model cost = Total credits used

Different operations have different base costs:

  • - Chatbot operations have a base cost of 5 credits per operation the agent performs
  • - Cell-by-cell operations (SAI commands) have a base cost of 1 credit
  • - Deep analysis operations (typically when you need an analysis report on something) have a base cost of 2 credits + 0.1 credits per row analyzed (with bulk discounts after 1000 rows)

The model cost varies depending on which AI model you choose. Lighter models like GPT-4o mini are cheaper (this one is exactly 2 credits), while more powerful models like Claude Sonnet cost more.

Examples:

  • - Chatbot operation with GPT-4o mini: 5 × 2 = 10 credits per operation
  • - SAI command with GPT-4o mini: 1 × 2 = 2 credits per row
  • - Deep analysis of 100 rows with GPT-4o mini: (2 + 10) × 2 = 24 credits
  • - Chatbot operation with Claude Sonnet: 5 × 5 = 25 credits per operation

Important notes about credits:

  • - Operations like creating pivot tables or marking many rows count as ONE operation, not per row
  • - If you have a sheet with 1 million rows and ask the AI to delete all rows that are blank, that still counts as 1 operation
  • - Deep analysis operations get bulk discounts for large datasets (over 1000 rows)

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