The 3-Statement Model: Full Tutorial for a Timed 90-Minute Modeling Test

Every financial model requires templates as its starting point. I need to work with a genuine case study that requires me to create an Excel model from scratch using no pre-existing data or layouts, or schedules.”

The main reason we used templates was to achieve faster work. The process of entering historical data and creating a clean workbook structure and layout requires at least thirty minutes but can extend up to several hours.

The process of creating a complete model from start to finish provides essential knowledge for any financial modeler.

This tutorial demonstrates how to transform financial reports and 10-K filings, and investor presentations into a complete linked model during a 90-minute 3-statement modeling test.

What is a 3-Statement Model?

The 3-statement model combines financial statements from the Income Statement and Balance Sheet, and Cash Flow Statement into one unified framework. The three statements together present a complete financial picture of a company by showing revenue and expenses and asset and liability values, and equity and cash movement patterns throughout time.

The model exists to explain the reasons behind changes in financial performance indicators. The analysis of historical data through five-year projections enables you to identify patterns and evaluate business expansion and financial stability.

Practical Applications

The 3-statement model serves three main purposes in business operations.

• The model helps determine investment and acquisition worth through fair value assessments.
• The model supports organisations during their merger and acquisition processes and financing operations.
• The model enables users to verify whether projected financial outcomes, including growth rates and profit margins, and cash flow amounts, align with realistic expectations.

The model evaluates the feasibility of a business plan that includes $5 billion in Free Cash Flow and debt repayment of $1 billion, and dividend distribution of $4 billion. Does the actual cash flow generation meet the projected amounts? The business requires outside funding for its operations. The model shows how different unfavorable market situations would impact the forecasted results.

Why It’s Critical for Finance Professionals?

The assessment of this skill by banks and financial institutions during interviews shows their need to evaluate candidates’ ability to:

• Financial statements from the past require proper reading and interpretation skills.
• The ability to create precise Excel models without mistakes.
• The ability to solve intricate financial problems through logical thinking.

The ability to perform complex financial analysis and handle major financial transactions becomes nearly impossible when someone lacks this skill.

Types of 3-Statement Modeling Tests

The three main types of 3-statement tests in financial modeling assessments assess different skill sets.

1. Blank Sheet with a Strict Time Limit

The tests require you to create an entire model from scratch while under time pressure. The assessment requires you to work without any pre-made templates or historical data structures because it focuses on:

• The test requires you to work fast while maintaining precision in your work.
• The test requires you to demonstrate expertise in Excel by using shortcuts and formulas and linking statements correctly.
• The test requires you to simplify complex problems and select essential inputs while working under time constraints.

The duration of this test type spans between 30 minutes and 3-4 hours, with increasing complexity as the time duration grows.

2. Template-Based with a Strict Time Limit

The assessment provides you with a workbook that contains some pre-filled content. The assessment requires you to:

• Input accurate formulas: You need to verify that all mathematical operations produce correct results.
• Justify assumptions: You need to explain the basis for your revenue projections and expense and cash flow projections.

An assessment requires you to analyze the completed model outputs while drawing meaningful conclusions and answering questions.

The template provides an initial advantage, but the time constraint evaluates your ability to perform under stress while demonstrating technical skills and analytical abilities.

3. No Strict Time Limit

The testing duration for these modeling exercises extends from several days up to one week or longer. The tests focus on two main areas:

• Research and analysis: You need to use external data and industry reports, and market trends to validate your assumptions.
• Strategic modeling: The process involves creating detailed forecasts for revenue and expenses, and cash flow.

The assessment requires you to create a professional deck or report that summarizes your findings.

The assessments have time constraints, but focus on achieving precise results and a deep understanding, and complete coverage rather than fast completion.

Key Takeaways

The success of your preparation depends on identifying the specific type of 3-statement modeling test you will encounter.

The test requires you to complete the task quickly while demonstrating strong Excel skills and logical thinking abilities.

The test assesses your ability to execute technical tasks and your capacity to understand and validate results from templates.

Your test performance will improve when you focus your preparation on the specific test format because it allows you to show both technical abilities and analytical skills.

The 90-Minute 3-Statement Model from a Blank Sheet

The process of creating a 3-statement financial model from scratch within a 90-minute time frame stands as one of the most demanding tasks in finance. The process begins with complete emptiness since you have no pre-established formulas and no formatting, and no existing historical schedules. The test requires you to demonstrate your Excel mastery and accounting expertise and analytical abilities, and time management skills all at once.

Why This Test Matters?

The finance industry requires professionals to handle situations that lack pre-designed templates during their work. The work of investment banking analysts and private equity associates, and corporate finance teams requires them to perform the following tasks.

• Interpret raw financial statements.
  
• The process requires analysts to create original financial models that present both past company data and forecasted business performance.
  
• The test requires candidates to perform quick scenario analysis and assumption-making while working against urgent time limits.

The 90-minute assessment evaluates candidates’ ability to work efficiently while making sound assumptions and maintaining precision when working under time-limited conditions.

Step 1: Prepare Your Excel Workbook

Start by organising your workbook structure for efficient work:

1. Establish different sheets for the Income Statement and Balance Sheet, Cash Flow Statement, and supporting schedules that include Depreciation and Working Capital, and Debt.
2. The setup includes clear labels and bolded totals and standardised indentation for subtotals in the document.
3. The time frame for historical data usually includes 3 to 5 years, while projections extend from 3 to 5 years ahead.
4. The use of Excel shortcuts for formula copying and sheet navigation, and row insertion will help users work more efficiently.

The initial 5-10 minutes spent on workbook organisation creates a clear structure which helps prevent confusion and minimises calculation mistakes.

Step 2: Input Historical Data

Begin by inserting historical financial statements that the company released through its public filings.

• The Income Statement contains revenue data along with cost of goods sold and operating expenses and interest and taxes, and net income information.
• The Balance Sheet contains information about cash and accounts receivable and payable and inventory and fixed assets and debt, and equity.
• The Cash Flow Statement presents three sections that include operating activities and investing activities, and financing activities.

The precision of this step requires absolute attention to detail. The accuracy of historical data entry remains essential because minor errors in historical data will disrupt both projection accuracy and statement interconnections.

Step 3: Link the Statements

The 3-statement model functions because the Income Statement and Balance Sheet, and Cash Flow Statement maintain direct connections between their financial data.

1. The Income Statement generates Net Income, which flows into the Cash Flow Statement while simultaneously raising Retained Earnings on the Balance Sheet.
2. The Cash Flow Statement includes depreciation and amortisation adjustments, which both restore these amounts to their original values and decrease the recorded value of assets on the Balance Sheet.
3. The changes in working capital affect both operating cash flow and the financial statements’ accounts receivable and inventory, and accounts payable sections.
4. The debt and interest schedules affect both the Income Statement through interest expense and the Balance Sheet through debt balances, and the financing section of the Cash Flow Statement.

The evaluation of Excel formula skills and logical consistency reaches its peak during this step. The correct linking of all statements depends on cell references and absolute vs. relative references, and basic formula verification methods.

Step 4: Build Projections

The next 3-5 years require the projection of historical data completion.

• The revenue growth assumptions stem from historical patterns and industry expansion rates, and management projections.
• The calculation of gross margin and operating margin, and net margin depends on historical data or expected operational improvements.
• The forecasted capital expenditures need to be synchronised with depreciation schedules that follow their planned timeline.
• The working capital projections should be based on either turnover ratios or revenue percentage calculations.
• The model should include debt repayment schedules and financing plans, and dividend distribution plans.

All assumptions need to follow a consistent pattern while receiving proper documentation. Reviewers need to understand your model through clear reasoning, even when you face time constraints.

Step 5: Error Checking and Reconciliation

Accuracy is non-negotiable. The following steps need to be completed after finishing the projections:

• The Balance Sheet requires verification to confirm that Assets match the total of Liabilities and Equity.
• The Cash Flow statement needs to match the information presented in the Balance Sheet.
• Review the model’s revenue projections and margin calculations, and cash flow generation to identify any unreasonable assumptions.
• Use red text to mark down all detected discrepancies while maintaining clear formatting.

The verification process requires 10–15 minutes of time, yet it remains vital for creating professional models with credibility.

Step 6: Answer Case Study Questions

The majority of 90-minute exercises require you to answer questions about your model outputs after completing the model development.

• The model predicts what amount of Free Cash Flow that will be generated.
• The company has enough funds to pay off its debts while continuing to distribute dividends.
• The model shows how changes in revenue or margin levels affect cash flow sensitivity.
• The analysis reveals both financial constraints and funding shortages that exist in the business.

Your linked model provides instant access to important information, which enables you to extract valuable insights without needing to perform manual value calculations.

How to Master the 3-Statement Model?

The 3-statement model serves as an essential skill for anyone who wants to work in finance or investment banking, or corporate development. The model unites the Income Statement with the Balance Sheet and Cash Flow Statement into a unified system that delivers complete financial performance insights about companies. The essential element for mastering this model requires students to merge their knowledge of accounting with analytical abilities and their Excel technical skills. A reliable model for business decision-making becomes impossible without understanding how revenue interacts with expenses and assets and liabilities and equity, and cash flows.

The initial step toward becoming an expert requires a complete understanding of accounting principles. The ability to understand financial statement components and their interconnections, and historical data representation of business operations, stands as a fundamental requirement for analysts. An analyst needs to understand how to analyse historical financial statements to detect patterns and unusual patterns and determine what drives revenue expansion and cost changes, and cash flow production. The knowledge base enables analysts to create realistic financial projections for future periods.

The main tool for building 3-statement models requires analysts to demonstrate expertise in Excel. A modeler needs to demonstrate expertise in formula creation and statement connection, and efficient handling of extensive datasets. The combination of Excel shortcuts with formula auditing and error-checking methods enables analysts to work quickly and precisely during timed assessments and actual business deadlines. The ability to create linked financial statements that update automatically when assumptions change distinguishes expert analysts from ordinary analysts.

The process of financial projection starts after verifying historical data entry through the development of appropriate assumptions. The model requires analysts to predict revenue expansion and margin levels and capital spending and working capital fluctuations, and debt repayment schedules through analysis of past data and industry benchmarks, and management forecasts. The justification behind each assumption matters because reviewers and decision-makers assess both the numbers and the reasoning methods used in the model. The accuracy of projections enables analysts to determine if business strategies are executable and detect funding shortfalls, and determine how different market situations and operational improvements affect the company.

A professional model requires effective integration between the three financial statements to produce accurate results. The Income Statement generates net income, which moves to the Cash Flow Statement before it modifies the Balance Sheet’s retained earnings figure. The Cash Flow Statement and Balance Sheet asset values both receive an impact from depreciation expenses. The changes in working capital affect both operational cash flow and multiple financial statement accounts, while debt and interest schedules affect both financing cash flows and the Income Statement. The model requires precise linkages between statements and perfect balance, which analysts must achieve through repeated practice and close attention to detail.

The process of model mastery includes both error detection and scenario evaluation as fundamental components. The analyst needs to perform three essential verification tasks, which include checking the Balance Sheet equality between assets and liabilities and equity, and validating cash movements against the Cash Flow points, which helps analysts prepare for actual financial analysis tasks.

The path to proficiency demands students practice their Statement and testing model sensitivity through different assumptions. The analysis process reveals unrealistic projections and model vulnerabilities and stress skills through authentic situations. The 90-minute blank-sheet modeling tests help analysts develop their speed, and decision studies enable analysts to develop their analytical skills by improving their assumption development and research abilities, and presentation skills.-making abilities while strengthening their understanding of financial statement connections. The combination of template-based exercises with extended cases. The development of speed and accuracy, and judgment skills requires analysts to practice continuously while receiving feedback and conducting reviews.

The 3-statement model requires knowledge beyond basic technical skills for complete mastery. The ability to master the 3-statement model requires knowledge of accounting principles and Excel proficiency and analytical thinking, and data interpretation skills. The ability to create and link, and test financial models with confidence, enables analysts to perform better company evaluations and strategic support and achieve success in demanding finance roles. The process of becoming proficient in financial modeling requires dedicated learning and purposeful practice, and continuous enhancement of skills, which results in transforming unorganised financial information into a structured professional financial model.

Conclusion

The 3-statement model requires more than technical proficiency because it needs financial knowledge and analytical thinking, and Excel mastery to transform financial data into organized professional models. The combination of financial knowledge and analytical skills, and Excel expertise enables analysts to develop the confidence needed for real-world finance challenges while achieving success in investment banking and corporate finance, and strategic planning roles.