The three-statement model

The three-statement model is the base of nearly every banking analysis. DCFs, merger models and LBOs all start from a forecast of the income statement, balance sheet and cash flow statement that balance and tie. If the core model is wrong, everything built on it is wrong.

Start with historical statements, cleaned of one-offs. Forecast the income statement down to EBIT, build supporting schedules for PP&E, working capital and debt, complete the income statement with interest and tax, then build the cash flow statement and let it drive cash on the balance sheet.

The PP&E schedule rolls forward: beginning balance plus capex minus depreciation. Working capital is forecast with days measures: receivable days, inventory days and payable days. The debt schedule tracks each tranche, mandatory repayments and optional cash sweeps.

If the balance sheet does not balance, check that every balance sheet change has a matching cash flow line, and that signs are correct. Most errors are a missing link or a reversed sign. A difference that grows each year usually points to a flow that is booked once but not the other.

Add a case switch — base, upside, downside — feeding the key assumptions. This lets you show how sensitive debt capacity or valuation is to the operating plan, and is often the first thing a senior banker asks to see.