3-Statement Modeling Using Excel

Introduction

3-statement modeling is a financial modeling process that uses three financial statements—the income statement, balance sheet, and cash flow statement—to create a complete picture of a company's overall financial performance over a specific period of time. It is commonly used for forecasting, corporate valuation, financial projections, and other strategic financial planning.

The three statements provide a comprehensive view of a business's financial performance and health, and can be used to estimate future earnings, calculate risk, and value companies. The statement types include:

• Income Statement - Overview of the company's revenues and expenses
• Balance Sheet - Overview of the business's assets, liabilities, and equity
• Cash Flow Statement - Overview of the cash flowing into and out of the business

Understanding the Role of Excel in 3-Statement Modeling

Excel is a widely used computing platform for a variety of purposes, but it can be invaluable for financial analysis. Three-statement modeling involves the building of the three core financial statements, balance sheet, income statement, and statement of cash flows, from the scratch. Examining how the models are structured and how they tie together gives an analyst deeper insight into the health of a company and its operations, and Excel is the key tool used to construct these models. Here, we'll take a look at the role of excel in 3-statement modeling and understand how financial data can be imported, manipulated, and formatted to form these statements.

Importing Financial Data into Excel

Financial information such as the organization's balance sheet or income statement can often be obtained by downloading directly from the company's investor relations website or other sources. From here, the data can be imported into Excel easily using the built-in 'Data Import' tool. This allows for the swift import of larger data sets into the program, allowing for efficient 3-statement modeling.

Using Excel Functions to Construct Statements

The raw financial data can then be manipulated and built upon in order to form comprehensive 3-statement models. Excel's wide variety of formulas and functions allow the analyst to construct these models with ease. Rather than doing each calculation by hand, the formulas in Excel can quickly aggregate multiple figures, such as for a total line item on a balance sheet.

Using Excel Formatting for Presentational Purposes

Finally, once the statements have been put together and analyzed, they can be presented in a visually appealing format. Excel possesses a range of features that allow the user to present their information in an attractive and understandable way. This can include the use of color coding to separate out figures on a page, data tables which make statements easier to read, and basic graphic display features such as graphs and charts.

• Cell formatting to format and align figures
• Color-coding to highlight key figures
• Conditional formatting to pick out trends
• Data tables for easy to read tabular data
• Basic charts and graphs to visualize data

Tips to Effectively Model with Excel

3-Statement Modeling using Excel is a process used by finance professionals and business analysts to construct a comprehensive financial picture of a company. In addition to creating impressive models, develop the proper framework of efficient, repeatable processes. By following certain predetermined best practices steps and tips, you can use Excel more effectively to construct the 3-statement model.

Establish Templates for Future Use

Creating templates for future financial models can help you with repetition and efficiency when constructing a 3-statement model. A good model should be structured like a financial statement with sections for producing the income statement, balance sheet, and cash flow statement. Once you have constructed a template in Excel, it will be much faster to populate other 3-statement models. This will help maintain consistency between the models and ensure accuracy.

Utilize Appropriate Formulas

Model accuracy is closely linked to the accuracy of the formulas used. Users should double check their formulas when constructing a 3-statement model and make sure they link properly to other sections of the model. Automation tools such as macros or Visual Basic can also be established to maintain model accuracy over larger models and develop a robust model.

Set Up Tables with Appropriate Naming Conventions

Before you set up tables, you should define the structure of the tables. Name the tables in a way that makes sense and reflects the type of data they contain. This will make the model easier to read and easier to maintain. Utilize dynamic filtering and sorting on the tables to isolate trends in the data. Additionally, create multiple tables for different facets of information, and link them with common fields for efficient and organized referencing of data.

Creating Cash Flow Models in Excel

In the world of finance, a variety of analytical tools - such as the 3-statement model - can be used to assess the overall health of a business. Excel is a popular choice for creating sophisticated financial models and can be used to construct robust cash flow models. In this blog post, we'll explore two approaches to creating cash flow models in Excel - using Excel functions to construct activities and preparing reports to analyze cash flow.

Using Excel Functions to Construct Operating and Investing Activities

One way to create a cash flow model with Excel is to use the various finance functions available in the program. This approach allows users to build the model using mathematical equations, and the various operating and investing activities can be calculated automatically. By using functions such as PV, FV, NPV, IRR, and PMT, users can accurately construct a cash flow model with minimal effort.

Preparing Reports That Analyze Cash Flow

After constructing the cash flow model, users can leverage the report-generating capabilities of Excel to build reports that help analyze the model. These reports can be used to identify potential areas of risk in the model, spot trends in cash flow patterns, and compare activities across different periods. Excel's chart and graph features can be used to create visual representations of cash flow models, making them easier to interpret and identify issues quickly.

• Cash flow analysis reports
• Producing graphs to visualize cash flow
• Comparing activities across different time periods

Using Excel to Create Valuation Models

Valuation models are used by investors to assess the financial value of companies before making investment decisions. These models take into consideration a variety of financial metrics and generate output based on a predetermined set of inputs. Excel spreadsheets can be used to create such models and can be customized to allow for quick assessment of any company’s financials.

Purpose of Valuation Models

Valuation models are used to assess the financial worth of a company or asset. Such models are typically comprised of a series of formulas designed to assess the company’s performance, profitability, and future outlook. By evaluating these metrics, potential investors or lenders can make educated decisions on whether or not to invest or lend to the company.

Inputting Data Into Excel Spreadsheets

In order to create a valuation model, the first step is to input the necessary financial data into an Excel spreadsheet. This data can include such metrics as net income, cash flows, equity, and liabilities. Once these values are inputted, formulas can be included that will allow for the computation of certain outputs such as the company’s market value or the present value of future earnings.

Inputting Formulas That Compute Outputs

Using Excel, formulas can be easily transformed into calculations that allow for the creation of financial projections. This can be done through the use of a variety of advanced formulas such as the Present Value of a Single Payment formula or the Internal Rate of Return formula. By utilizing these formulas and combining them with financial data, investors can quickly and accurately assess the valuation of a company.

• Net Income
• Cash Flows
• Equity
• Liabilities
• Present Value of a Single Payment Formula
• Internal Rate of Return Formula

Making Specialized Financial Reports with Excel

Using the 3-statement modeling system with Microsoft Excel can be a great way to create more detailed financial reports more quickly and in a more cohesive way. Excel provides the tools needed to quickly and accurately analyze information, allowing business owners to glue together the income statement, balance sheet, and cash flow statements into a single master sheet. This gives them a more comprehensive view of their business financial performance and provides a better prediction of how that business will fare in the future.

Examples of Specialized Reports

Financial reports generated with the 3-statement modelling technique in Excel can detail a range of data points, including things like revenue, costs, liabilities, assets and more. These reports can be used to make important business decisions, such as whether or not to invest in a certain project or where to cut costs in order to reduce expenses. Excel also allows businesses to incorporate non-financial factors into their reports, furthering the usefulness of the information.

Setting Up Excel Sheets to Analyze Ratios

Excel provides a range of capabilities geared towards analyzing financial data with 3-statement modelling. For example, business owners can use the software to set up their spreadsheets to measure different types of ratios. These ratios provide insight into profitability and cash flow, allowing business owners to make better informed decisions. Additionally, Excel’s advanced graphing capabilities can help better depict financial performance.

Making Presentations in Excel with Explanations of Formatting

Once the data has been gathered, business owners can create presentations for investors and other stakeholders directly in Excel. This can be done by selecting the cells that need to be included in the presentation and clicking the “Create Presentation” button. From there, you can choose from a variety of themes and formatting options to create a visually attractive document.

In addition to the presentation itself, Excel also allows users to add explanations and annotations to their charts and graphs. This allows business owners to explain the context behind the data and how it could affect their decisions or investments.

Conclusion

3-statement modeling is a powerful tool used by many finance and accounting professionals to help make informed decisions that can foster and strengthen business objectives. With the right knowledge and skill, Excel is an extremely powerful tool to facilitate 3-statement modeling. This post has highlighted some of the key benefits to using Excel for 3-statement modeling, making it an accessible and cost-effective option for anyone interested in taking their 3-statement modeling strategies to the next level.

Summary of Topics Covered

This post discussed some of the key advantages to using Excel for 3-statement modeling. Specifically, it outlined how:

• Excel is a powerful yet accessible tool available to most businesses that possess a Microsoft Office license and a computer
• Excel allows for more complex and accurate models with powerful functions such as pivot tables to summarize data points and formulas to automate calculations
• Excel is a more cost-effective option than many other software solutions
• Excel can help to streamline 3-statement modeling processes

Overview of Benefits of Excel for 3-Statement Modeling

With its powerful but accessible feature set and low cost, Excel was demonstrated to be an ideal tool for performing advanced 3-statement modeling. By understanding how to effectively harness the power of Excel, 3-statement modeling can be achieved quickly and cost-effectively. With the right knowledge of Excel’s many functions and formulas, 3-statement modeling can become a breeze and can produce more accurate models that can help a business reach its goals.