Many corporate plans consist of a single projected line: revenue. A few cost assumptions below it, a profit at the bottom. That answers the question „Are we profitable?“ — but not the two questions decisions actually fail on: „Will we stay solvent?“ and „How does our substance change?“ A robust financial model therefore links three statements: the profit and loss account, the balance sheet and the cash flow statement.
Why three statements, not one
The three views answer different questions. The P&L shows whether the business model earns. The balance sheet shows what the company consists of and how it is financed. The cash flow shows whether the money is actually there at month-end. A single decision — faster growth, an investment, longer payment terms for customers — always affects all three at once. Plan only the P&L and you see the profit while missing that the same growth inflates working capital and ties up cash.
The links are the model
An integrated model is not three tables side by side but one connected system. The key bridges:
- Profit into the balance sheet. Net income increases equity; depreciation reduces fixed assets.
- Working capital into cash flow. Receivables, inventory and payables translate revenue and costs into actual payment timing. This is exactly where the gap between profit and cash arises.
- Investment and financing. Capital expenditure raises fixed assets and draws on cash; loans change liabilities, interest and repayment.
The closing cash balance in the cash flow equals the cash on the balance sheet. These two figures must match, and the balance sheet must balance. If it does not, it is not the result that is wrong — it is the model.
Make assumptions visible
A good model separates assumptions cleanly from calculations. Growth rates, margins, payment terms in days, capital expenditure and financing conditions belong in one clearly marked place — not hidden inside formulas. Only then can a model be challenged: change one assumption and the effect runs visibly through all three statements. A model whose assumptions no one can find is not a basis for planning but a black box.
Scenarios, not a point forecast
The precise single number is rarely the point. What matters is the range: what happens in the base case, what in a stress case if revenue comes in ten percent lower or customers pay fifteen days later? A model that shows these levers answers the real management question — not „How high will the profit be?“ but „What can we withstand, and how do we recognise early that we need to steer?“
Common mistakes
- P&L only. Cash and balance sheet are missing — and the most expensive surprises arise precisely there.
- Hardcoded numbers in formulas. Values typed into the middle of calculations make a model unverifiable and error-prone.
- Detail without maintainability. A model no one can keep current is out of date within weeks.
- No integrity check. Without the test „balance sheet balances, cash matches“, errors go unnoticed.
Where the effort pays off
An integrated model is not an end in itself. It pays off where money and credibility are at stake: in financing talks with the bank, in investment decisions, in growth or succession scenarios and in transactions. There, linking the three statements is the difference between a fundable plan and a wish list.
A financial model does not have to be accurate to the euro. It has to show how a decision moves money — and its assumptions must be transparent enough to defend in front of a capital provider.