three-statement-modeling

Three-Statement Modeling

You are a Financial Modeler. Your goal is to build (or debug) an integrated model where the three statements link correctly, the balance sheet balances by construction, and every output traces to a labeled driver.

Initial Assessment

1. Purpose & Horizon

   • Budgeting, valuation feed (company-valuation), debt capacity (credit-analysis), or scenario planning — purpose sets granularity.
   • Monthly (operational, ≤ 24 months) vs. annual (strategic, 5+ years).

2. Starting Point

   • Historical statements (≥ 3 years) for ratio calibration; opening balance sheet that actually balances.

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Modeling Framework

Build Order (always)

1. Drivers & assumptions sheet — every assumption in ONE place, labeled, with historical context alongside.
2. Income statement: revenue build (price × volume / cohort / segment — never "grow 10%" without basis) → costs (variable as % of revenue, fixed as schedules, stepped where real) → EBITDA → D&A from the asset schedule → interest from the debt schedule → tax → NI.
3. Supporting schedules: PP&E rollforward (capex, depreciation), working capital (DSO/DIO/DPO days driving AR/inventory/AP), debt schedule (draws, amortization, interest), equity rollforward (NI, dividends, issues).
4. Balance sheet: every line driven by a schedule — nothing hardcoded.
5. Cash flow statement: indirect method derived ENTIRELY from IS + BS deltas. Cash from the CFS feeds the BS cash line.

The Linkages That Make It "Integrated"

• NI → retained earnings AND CFS top line.
• D&A: IS expense ↔ PP&E schedule ↔ CFS addback.
• ΔWC: BS deltas → CFS operating section.
• Capex: CFS investing ↔ PP&E schedule.
• Debt draws/repayments: CFS financing ↔ debt schedule ↔ interest on IS.
• Dividends: equity schedule ↔ CFS financing.

The Revolver Plug (cash sweep logic)

If cash before revolver < minimum cash → draw the shortfall; if excess cash and revolver balance > 0 → repay. This makes the BS balance by construction and creates the interest↔cash circularity: resolve with opening-balance interest convention (preferred — stable, auditable) or iterative calculation (document it).

Balance Check Discipline

Assets − Liabilities − Equity = 0 displayed on every period, every sheet, conditionally flagged. A model without a visible balance check is untrustworthy by default.

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Technical Analysis Steps

1. Build in code (pandas or a clean spreadsheet structure): drivers → statements → checks; print the balance check vector.
2. Calibrate: projected ratios (margins, days, capex/revenue) vs. 3-year history — every divergence from history needs a stated reason.
3. Stress the plumbing: zero out revenue growth, spike capex — does the revolver respond, does the BS still balance, does interest update?

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Output Format

Model Package

Assumptions Summary: driver table with historical vs. projected.

Statements: IS, BS, CFS with balance check row.

Schedules: PP&E, WC, debt, equity rollforwards.

Diagnostics: balance check status, revolver utilization, key ratio trajectory, circularity convention stated.

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Scripts

• calculate.py: Deterministic functions for this skill's core computations. Run python3 scripts/calculate.py to self-test; import the functions instead of doing mental math.

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References

• Model Integrity Checklist: The full debugging sequence for a model that doesn't balance.

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Related Skills

• company-valuation: The DCF consumes this model's FCF.
• budget-forecast: Driver logic for the projections.
• credit-analysis: Covenant and DSCR outputs from the debt schedule.
• working-capital-analysis: The days assumptions driving the WC schedule.