3 statement financial model: how to build from start to finish

Income statement / cash flow => flow statements, represent periods of time
Balance sheet => represents one specific moment in time
Income statement => money you made and expenses related to those sales
Cash flow => changes in what you own and what you owe (fundraising/debt/cash, for example off P&L)

Step 1 Build income statement => leave depreciation & interest blank
Step 2 Create CAPEX and depreciation schedules
Step 3 Build balance sheet on historical #s
Step 4 Tied cash flow to the balance sheet
example off P&L)
Income Statement Year 1 Year 2 Year 3 Year 4

Revenue

Gross Revenue $ 3,000,000 $ 4,800,000 $ 10,000,000 $ 18,000,000

Refunds (150,000) (240,000) (500,000) (900,000)
Discounts (240,000) (384,000) (800,000) (1,440,000)
Net Revenue $ 2,610,000 $ 4,176,000 $ 8,700,000 $ 15,660,000

Cost of Goods Sold

Product $ 913,500 $ 1,461,600 $ 3,045,000 $ 5,481,000
Fulfillment 130,500 208,800 435,000 783,000
Merchant Services 78,300 125,280 261,000 469,800
Total COGS $ 1,122,300 $ 1,795,680 $ 3,741,000 $ 6,733,800

Gross Margin $ 1,487,700 $ 2,380,320 $ 4,959,000 $ 8,926,200

GM % 57% 57% 57% 57%

Operating Expenses
Personnel $ 522,000 $ 835,200 $ 1,740,000 $ 3,132,000
Marketing 261,000 417,600 870,000 1,566,000
Other 130,500 208,800 435,000 783,000
Depreciation 31,667 65,000 103,333 86,667
Total OPEX $ 945,167 $ 1,526,600 $ 3,148,333 $ 5,567,667

Operating Income $ 542,533 $ 853,720 $ 1,810,667 $ 3,358,533

Interest $ 192,000 $ 240,000 $ 168,000 $ 96,000

NI Before Taxes $ 350,533 $ 613,720 $ 1,642,667 $ 3,262,533

Taxes $ 73,612 $ 128,881 $ 344,960 $ 685,132

Net Income $ 276,921 $ 484,839 $ 1,297,707 $ 2,577,401

NI % 11% 12% 15% 16%

EBITDA $ 574,200 $ 918,720 $ 1,914,000 $ 3,445,200

ASSUMPTIONS

Revenue
New Customers 75,000 120,000 250,000 450,000
AOV $ 40 $ 40 $ 40 $ 40
Refunds (as % of rev) 5% 5% 5% 5%
Discounts 8% 8% 8% 8%

COGS
Product 35% 35% 35% 35%
Fulfillment 5% 5% 5% 5%
Merchant Services 3% 3% 3% 3%

Operating Expenses
Personnel 20% 20% 20% 20%
Marketing 10% 10% 10% 10%
Other 5% 5% 5% 5%
Depreciation other model other model other model other model

Interest other model other model other model other model

Tax Rate 21% 21% 21% 21%

Capex & Depreciation Useful Life (Years) Year 1 Year 2 Year 3 Year 4

Capex
Servers 5 $ 75,000
Custom Software 3 $ 50,000 $ 100,000 $ 100,000
Forklift 6 $ 30,000
Total Capex $ 125,000 $ 100,000 $ 130,000 $ -

Depreciation
Servers $ 15,000 $ 15,000 $ 15,000 $ 15,000
Custom Software $ 16,667 $ 50,000 $ 83,333 $ 66,667
Forklift $ 5,000 $ 5,000
Total D&A $ 31,667 $ 65,000 $ 103,333 $ 86,667
Balance Sheet Dec 31, Year 0 Year 1 Year 2 Year 3
Historicals
ASSETS

Cash $ 4,250,000 $ 3,957,988 $ 5,153,987 $ 6,057,467

Accounts Receivable $ 120,000 130,500 208,800 435,000
Total Current Assets 4,370,000 4,088,488 5,362,787 6,492,467

Fixed Assets $ 40,000 165,000 265,000 395,000

Accumulated Depreciation $ (10,000) (41,667) (106,667) (210,000)
Net Fixed Assets 30,000 123,333 158,333 185,000

Total Assets 4,400,000 4,211,821 5,521,120 6,677,467

LIABILITIES

Accounts Payable $ 75,000 156,600 250,560 522,000

Deferred Revenue $ 25,000 78,300 208,800 696,000
Total Current Assets 100,000 234,900 459,360 1,218,000

Long Term Debt $ 3,000,000 $ 2,400,000 $ 3,000,000 $ 2,100,000

Total Liabilities 3,100,000 2,634,900 3,459,360 3,318,000

EQUITY

Common Stock $ 50,000 $ 50,000 $ 50,000 $ 50,000

Retained Earnings $ 1,250,000 $ 1,526,921 $ 2,011,760 $ 3,309,467
Total Shareholders Equity 1,300,000 $ 1,576,921 $ 2,061,760 $ 3,359,467

Liabilities & Shareholders Equity 4,400,000 4,211,821 5,521,120 6,677,467

Balance Check - - - -

ASSUMPTIONS

Net Revenue $ 2,610,000 $ 4,176,000 $ 8,700,000

AR (% of revenue) 5% 5% 5%
AP 6% 6% 6%
Deferred Rev 3% 5% 8%

Net Borrowing $ 1,500,000

Debt Payments $ 600,000 $ 900,000 $ 900,000
Interest Rate 8% 8% 8%
Interest Payments $ 192,000 $ 240,000 $ 168,000
 Year 4

$ 8,761,135
783,000
9,544,135

395,000
(296,667)
98,333

9,642,468

939,600
1,566,000
2,505,600

$ 1,200,000

3,705,600

$ 50,000
$ 5,886,868
$ 5,936,868

9,642,468

$ 15,660,000
5%
6%
10%
$ 900,000
8%
$ 96,000
Cash Flow Statement Year 1 Year 2 Year 3 Year 4

Net Income $ 276,921 $ 484,839 $ 1,297,707 $ 2,577,401

Operating Activities
Depreciation 31,667 65,000 103,333 86,667
Chg in AR (10,500) (78,300) (226,200) (348,000)
Chg in AP 81,600 93,960 271,440 417,600
Chg in Def Rev 53,300 130,500 487,200 870,000
Operating Cash Flow $ 432,988 $ 695,999 $ 1,933,480 $ 3,603,668

Investing Activities
Capex 125,000 100,000 130,000 -

Free Cash Flow $ 307,988 $ 595,999 $ 1,803,480 $ 3,603,668

Financing Activities
Debt Repayment (600,000) (900,000) (900,000) (900,000)
Net Borrowings - 1,500,000 - -
NCF from Financing (600,000) 600,000 (900,000) (900,000)

Net Cash Flow $ (292,012) $ 1,195,999 $ 903,480 $ 2,703,668

Why doesn't my balance sheet balance?

Checklist:
Is your net income (P&L) linked to retained earnings?
Is your net cash flow (CF statement) linked to cash?
Have you included all of your balance sheet accounts in your cash flow statement?
Do your historical financials balance?