The Basics of a 3 Statement Financial Model

I'm a Startup CFO and I help a lot of Founders build financial models. I thought folks on the thread would like to read a basic overview of a 3 Statement Model - Income Statement, Balance Sheet and Cash Flow Statement. For us, building these kinds of models are always a collaborative process. We have built a ton of models but the Founders have an innate understanding of their business. The Founders know best. :) You want to begin by isolating 4 or 5 Key Performance indicators (KPI). Use these metrics to drive your model because they drive your business! They might be variations on # of users/customers, revenue per user/customer, churn rate, customer acquisition cost, etc. Once you have these metrics, use them to drive your Income Statement. Be realistic about your growth rates and costs. Otherwise your model will look to rosy and you'll underestimate your burn rate. This could result in your company running out of money way faster than you expect. The Net Income from the P&L will connect to the Cash Flow Statement and Balance Sheet. Make sure to think through your Cap Ex and Changes to Working Capital. Most founders underestimate how much hard equipment they must buy and how much Accounts Receivables and Payables fluctuate. Most businesses that start growing quickly need a lot of Working Capital. You will make these assumptions on the Balance Sheet and the differences will materialize on the Cash Flow Statement. It's difficult to build these models but it's totally worth it. You need the 3 Statement Model to accurately predict your Cash Burn and Runway. It's a great exercise and I find Founders really understand their business after connecting everything in the model. :)