Video summary

How to Build a 3-Statement Financial Model From Scratch (Expert Guide + Free Template)

Main summary

Key takeaways

Finance

Overview

The video explains how to build a 3-statement financial model—an Income Statement (P&L), Balance Sheet, and Statement of Cash Flows—from scratch. It connects the statements through key accounting line items, then uses spreadsheet links to automatically “plug” cash flow totals.

Financial statements: what each covers (and key metrics)

Income Statement (Profit & Loss)

Includes:

  • Revenue: money generated.
  • Cost of Goods Sold (COGS): direct costs of delivering the product/service.
  • Operating expenses: costs to run the business (e.g., rent, payroll, professional fees).
  • Other income / other expenses: non-core items such as:
    • Interest income
    • Interest expense
    • Depreciation & amortization

Key profitability/intermediate metrics:

  • Gross Profit = Revenue − COGS
  • Net Operating Income (NOI) = Gross Profit − Operating Expenses
  • Net Other Income = Other Income − Other Expenses
  • Net Income = NOI + Net Other Income

Balance Sheet (most emphasized as “most informative”)

Major sections:

  • Assets
  • Liabilities
  • Owner’s Equity

Core accounting equation:

  • Assets = Liabilities + Owner’s Equity

Assets

  • Current assets (generally convertible/consumed within 12 months):
    • Cash
    • Accounts receivable
    • Prepaid expenses
  • Fixed assets (long-term): equipment, computers, furniture, land
  • Intangible assets: patents, trademarks, domain names, copyrights, goodwill

Depreciation / amortization link

Example described:

  • $20,000 equipment, 5-year useful life
  • Straight-line monthly allocation is described (subtitles phrase “160th,” but the intent is straight-line monthly expense allocation).

Flow and balance treatment:

  • Depreciation expense flows to the P&L
  • Depreciation accumulates on the balance sheet in Accumulated Depreciation (a contra-asset)
  • Intangibles similarly use:
    • Amortization
    • Accumulated Amortization (contra-asset)

Liabilities

  • Current liabilities (within 12 months):
    • Accounts payable
    • Deferred revenue
  • Long-term liabilities:
    • e.g., debt

Owner’s Equity

Accounts include:

  • Common stock
  • Preferred stock
  • Additional paid-in capital

Retained earnings is emphasized as an accumulation of Net Income over time.

Statement of Cash Flows

Presented as either:

  • Direct or Indirect method

Note: most businesses use the indirect method because it’s easier—typically requiring only the income statement + balance sheet rather than extra cash-basis detail.

Structure:

  • Cash from operating activities
    • Starts with Net Income
    • Add back depreciation & amortization (non-cash)
    • Adjusts for net changes in current assets and current liabilities (e.g., receivables/payables)
  • Cash from investing activities
    • Cash spent/received from buying/selling fixed/intangible assets
  • Cash from financing activities
    • Cash from/used for financing (e.g., raising equity, taking/repaying debt)

Cash vs accrual disclosure

The video explains the difference between:

  • Cash accounting: record when cash is received/paid
  • Accrual accounting: record when economic activity occurs

Disclosure/caution:

  • Public companies must use accrual accounting (GAAP compliant)
  • Small businesses may use cash basis for simplicity

Step-by-step / methodology framework shared (model-building logic)

Step 1: Build P&L

Forecast:

  • Revenue
  • COGS
  • Operating expenses
  • Other income/expenses

Compute:

  • Gross Profit → NOI → Net Income

Step 2: Build Balance Sheet

Set up:

  • Assets
  • Liabilities
  • Owner’s equity

Implement logic:

  • Accumulated Depreciation = Prior period fixed asset balance − Depreciation expense

  • Accumulated Amortization = Prior period intangible balance − Amortization expense

  • Retained Earnings = Prior retained earnings + Net Income

Use 12-month logic to classify current vs long-term items.

Step 3: Build Statement of Cash Flows (plug-through)

Use indirect method logic:

  • Operating cash starts at Net Income
  • Add back non-cash: depreciation & amortization
  • Adjust for balance sheet changes:
    • Increase in accounts receivable → reduces cash
    • Increase in accounts payable / accrued liabilities → increases cash (not paid yet)
  • Investing cash: capex-like purchases/sales of fixed/intangible assets
  • Financing cash: changes related to debt/equity (credit line, convertible notes, common/preferred stock, etc.)

Spreadsheet “plug” technique

Cash flow totals can be computed by using algebra from the identity:

  • Assets = Liabilities + Owner’s Equity

Treat cash as the balancing plug: the implied difference required to make the equation hold.

Step 4: Link model tabs and enable error checking

Use a Drivers tab to feed projections into:

  • P&L
  • Balance Sheet
  • Cash Flows

Color coding:

  • Blue = editable assumptions
  • Purple = values pulled from other cells
  • Black = calculations (not editable)
  • Red = error checks/flags

Caution:

  • Editing computed fields (black) can break reconciliation.
  • An error check tab should flag inconsistencies (e.g., revenue and net income no longer matching expected formulas).

Step 5: Summarize projections for presentation

Create a Summary tab aggregating outputs on:

  • Annual
  • Monthly

Example mention: presenting projections such as a 2025 showcase.

Key numbers / explicit examples mentioned

Depreciation example

  • Equipment purchase: $20,000
  • Useful life: 5 years
  • Straight-line monthly allocation is described.

Illustrative cash flow demonstrations

  • Beginning cash 69,000 → ending cash 19,000
  • Cash flows computed: 133,000 (one period) and 25,000 (another period)

Scenario changes described:

  • Adds $120,000 (“additional 120,000”):
    • Retained earnings increases by 100,000
    • Ending cash increases by 100,000
  • Accounts receivable increases by 50,000 additional (from 50,000 to 60,000 in subtitles):
    • cash from receivables drops by $50,000 more (negative impact shown, e.g., −55,000)
  • Purchases additional $100,000 of laptops/computers (affects investing cash)

Projection year mentioned: 2025.

Tickers / assets / instruments mentioned

No market tickers (stocks/ETFs/bonds) are mentioned.

“Istruments” referenced are accounting/financing line items:

  • Line of credit
  • Convertible notes
  • Common stock
  • Preferred stock
  • Debt (general)

Asset category examples:

  • Laptops/computers
  • Furniture
  • Goodwill
  • Land
  • Machinery/equipment
  • Patents/trademarks (as intangible examples)

Disclosures / disclaimers

  • No explicit “not financial advice” disclaimer appears in the subtitles.

Presenter / source

  • Presenter referred to as Josh (CFO guy), including “Josh you’re a CFO guy.”

Original video