The 3 statement financial model: Income, balance sheet, and cash flow

As a startup founder, you know that a robust financial model is the Swiss Army knife in your toolkit. It's not just about keeping the lights on; it's about illuminating the path ahead, helping you navigate the twists and turns of business growth with precision and confidence. 

Whether you're trying to make sense of the numbers, pitching your vision to investors, or strategizing your next capital raise, your financial model is your north star. Yet, the journey from spreadsheet novice to financial maestro is fraught with complexity and time-consuming challenges.

This blog post aims to demystify the 3-statement model, breaking down its components and getting to the root of how it can be a game-changer for startup founders looking to steer their companies with confidence and clarity.

Table of contents

• The essence of the 3-statement model
• Financial modeling at the pre-revenue stages
• Financial modeling at the post-revenue stages
• The path forward
• Getting the support you need

The essence of the 3-statement model

The 3-statement model is a combination of three key financial statements: the income statement, balance sheet, and cash flow statement. Each statement offers a unique lens through which to view your business's financial status, and together, they provide a powerful holistic financial overview.

These aren't just reports; they're a narrative, a detailed story of your business's financial health and operational efficiency.

The income statement: This statement is the storyteller of your business's operational performance, detailing revenues, expenses, and ultimately, profit or loss over a specific period. It answers the question, "Is the business profitable?"

The balance sheet: Acting as a financial snapshot at a point in time, the balance sheet reflects what your company owns (assets), owes (liabilities), and the equity built by the owners. It's a testament to your company's stability and financial resilience.

The cash flow statement: Cash management is the linchpin of business operations. This statement tracks the flow of cash in and out of your business, categorizing cash movements into operations, investing, and financing activities. The cash flow statement is crucial for understanding liquidity and ensuring the business can meet its short-term obligations.

The synergy of the three statements

The real power of the 3-statement model lies in its interconnectedness. Changes in one statement impact the others, creating a dynamic view of your business's financial reality. For instance, revenue growth boosts profits on the income statement, which affects cash in the bank (on the balance sheet) and is reflected in the cash flow from operations. This synergy allows founders to see the ripple effects of business decisions across the entire organization.

Financial modeling at the pre-revenue stages

Income statement
Without revenue, the focus shifts to planning for future income and managing expenses. Estimate potential revenues using industry benchmarks and market analysis and create assumptions around growth. Closely monitor and categorize all operational expenses to maintain control over cash flow and understand your burn rate. Highlight any initial funding or investments as indicators of financial support and confidence in the business model.

Balance sheet
Concentrate on listing your current assets, including cash reserves and any capital equipment or technology investments. Adjust liabilities to reflect any loans or financial obligations. This revision ensures a clear view of your company's financial standing, emphasizing assets over immediate revenue generation.

Pre-revenue cash flow
Document cash outflows related to operational expenses and initial investments, focusing on maintaining a clear record of where capital is being allocated. Include any financing inflows, such as investor capital or loans, which are crucial for sustaining operations before revenue streams are developed.

Financial modeling at the post-revenue stages

Income statement evolution
As revenue begins to flow, closely monitoring COGS and gross margin becomes crucial for understanding product profitability and managing operating expenses to ensure profitability scales with sales.

Balance sheet management
With expanded operations, the balance sheet requires detailed attention to things like inventory, receivables, and payables to optimize cash flow, balancing debt and equity to maintain financial health while possibly introducing more complex financial strategies.

Cash flow dynamics
Revenue activation transforms the cash flow statement, emphasizing the importance of operating cash flow, investment in growth, and financing strategies to enhance the cash conversion cycle for financial sustainability.

Strategic forecasting and scenario planning
A richer financial model enables the art and science of forecasting and scenario planning, allowing for proactive management and strategic decision-making to navigate startup growth effectively.

Integrating advanced models
Growing business complexity necessitates the use of advanced models like the Consolidation Model, providing deep insights into various business segments for detailed profitability and cost analysis, ensuring the financial model accurately captures the nuances of the business.

The path forward

Understanding and implementing the 3-statement model can be a complex process, but it's essential for making informed business decisions. This model not only helps you manage your current financial health but also aids in forecasting future performance. By closely monitoring and adjusting your financial model, you can identify growth opportunities, manage risks, and build a resilient business poised for long-term success.

As you embark on this financial journey, remember that the goal is not just to manage your company's finances but to harness them in a way that propels your business forward. Embrace the complexity, revel in the learning, and let your financial model be the compass that guides you to entrepreneurial success.

Real-world applications

Theory often serves as the foundation, but it is the application of this theory that propels startups to success. The following case studies illustrate how startups across different sectors have effectively implemented the 3-statement model, navigating through various financial landscapes to achieve their goals.

Navigating market uncertainty: Science on call's strategic financial overhaul

Launching just before the pandemic hit, Science On Call, co-founded by Luisa Castellanos, faced immediate and unprecedented challenges as the restaurant industry, their primary customer base, was thrust into turmoil. Initially relying on a basic financial model, the team quickly realized the need for a more sophisticated approach to navigate the volatile market. By upgrading to Forecastr, Science On Call enhanced its financial planning, enabling a level of collaboration and strategic decision-making that was previously out of reach. This shift was pivotal not only for internal management but also played a critical role in their fundraising efforts, leading to a successful $1.1 million pre-seed SAFE round. The ability to adapt its financial model and strategies in real-time allowed Science On Call to stabilize and position itself for growth despite the uncertain market conditions, showcasing the importance of flexible financial modeling in responding to external shocks and securing investor confidence.

Pivoting with precision: Local sports network's strategic model transformation

Local Sports Network (LSN), led by Dustin D. McMahon, faced a pivotal challenge early in its journey of connecting high school sports fans through live streaming, social networking, and fan apparel. Initially adopting a subscription-based model, LSN discovered through feedback that an advertising model would better serve their long-term goals. This required a complete overhaul of their revenue strategy, a daunting task given the team's lack of experience with ads-based models. Enter Forecastr, introduced to Dustin during a Techstars accelerator program, which provided the tools and expertise to develop a new financial model tailored to this shift. Forecastr's collaborative approach and ability to translate complex financial scenarios into understandable terms enabled LSN to confidently present its vision to investors, securing its position for future growth. This partnership not only facilitated a seamless transition to an advertising revenue model but also prepared LSN for scalable success and future fundraising efforts, highlighting the critical role of adaptive financial modeling in navigating startup evolution.

How HyperTrader modeled its way to success in the volatile cryptocurrency markets

In the face of fluctuating customer acquisition rates and rapidly changing product relevance within the cryptocurrency market, HyperTrader, under the leadership of Amar Gautam, embarked on a critical pivot. Initially planning to bootstrap to Series A funding, the team quickly realized the necessity of revising their revenue strategy and enhancing their financial modeling to secure funding. By partnering with Forecastr, HyperTrader was able to refine its financial model, enabling data-driven decisions that facilitated an updated product launch, immediate revenue generation, and ultimately, the successful raise of $1.55 million in seed funding. This case study exemplifies the power of adaptive financial strategy and precise modeling in navigating the complexities of startup growth and market volatility.

Need more support?

We understand that the leap from understanding these concepts to implementing them in a dynamic, integrated financial model can be daunting. 

Forecastr illuminates the path to 3-Statement Model with a user-friendly online platform that transforms the complex web of your financial data into a coherent, actionable 3-statement model. We've stripped away the guesswork and technical hurdles, presenting you with a streamlined interface that makes financial modeling accessible, regardless of your background in finance.

But we didn't stop there. Recognizing that every startup has unique needs, we offer a bespoke onboarding experience. Imagine having not one, but two financial analysts, joining forces with you to tailor your financial model. Leveraging your data, assumptions, and aspirations, we craft a model that's not just a tool but a strategic asset. It gives you insights into cash flow dynamics, growth trajectories, and the financial levers at your disposal.

We're not just a platform or a service; we're your finance partner. Empowering you to approach finance with confidence, to navigate the complexities of startup growth with ease, and to carve out a future that's not only envisioned but realized. Welcome to the future of financial modeling.