Three Statement Financial Modelling: What You Need to Know

Are you interested in investing your money when the entire world today is in chaos due to the pandemic? Well, why not, if you know the basics in accounting then eventually find your investment growing. This is really possible under the professional guidance and supervision of a competent financial modelling consultant. 

If you are able to follow a recipe when cooking or understand a nutrition label on a pasta you’re buying, then there should be no reason why you aren’t able to understand financial statements. FYI, there are three major financial statements to understand if you want to keep a new business running. Although each one has its own story to tell, an accurate combination will show you the complete story which is considered highly powerful information for investment seekers. First off, here are the terms you need to understand. 

What Is Financial Modelling?

Financial modelling is an illustration using numbers depicting the operation of a certain company in the past, present and future which is expressed as a forecast. This serves as an essential tool for decision making among financial managers, consultants, analysts, and so, for an in-depth appraisal on a company’s performance. Why three statement – because all three of them, balance sheet, income statement and cash flow statement though independent are at the same time actively linked to form a model. There are also more advanced financial models but the three-statement model is the foundation.

What Do You Need To Know About Financial Statements? 

“Show me the money” is a very famous line from the 1996 American romantic comedy-drama movie, Jerry Maguire, starred by Tom Cruise. Such a line tells us what financial statements do! Specifically, it tells where the company got its money, where it went and where it is at present. Then the story is blended into annual reports.

Balance Sheets

A balance sheet shows what a company owns and what it owes at a predetermined point in time. In other words, information such as assets, liabilities and equity are an important fixture in the said presentation. This equation is a summary of what a balance sheet shows: Assets = Liabilities + Equity. This means that asset is always the totality of liabilities and equity at the end of the reporting period. If in case your figures don’t tally, then there’s something wrong with your computation. You need to review your figures to come up with a balance. 

Income Statements

An income statement reveals the earnings of the company within a specific time period plus the costs and expenditures related to earning that revenue. At the bottom of that statement are figures telling us the net earnings or losses – how much the company earned or lost for that given period.

Cash Flow Statements

Here are presented the company’s inflows and outflows of cash which determines its capacity to pay expenses and buy assets. If an income statement shows whether it gained some profit, the cash flow shows if the company actually generated cash. Its bottom shows a decrease or increase in cash for that given period.

How the Three Are Connected

Whatever changes in assets and liabilities reflected on the balance sheet is also seen in the revenues and expenses on the income statement, and this results in the gains or losses of the company. Should you need the help of an expert financial modelling consultant for a better understanding of the three-statement financial modelling, don’t hesitate to contact an expert.