Three-Statement and Transaction Models

Overview

A three-statement model links the income statement, the balance sheet and the cash flow statement in a single integrated forecast, so that every assumption flows through to profit, financial position and cash. Because the statements are connected, the model reveals funding needs, covenant headroom and returns that a standalone profit forecast cannot show.

A transaction model adds the specific mechanics of a deal on top of the operating forecast. It shows how an acquisition, a buy-out, a refinancing or a merger would be funded, how the capital structure evolves and what the outcome is for each party.

What the service covers

We build models around the decision they support, and typically include:

• Operating drivers for revenue, costs, working capital and capital expenditure.
• Fully integrated income statement, balance sheet and cash flow, with balance and cash checks.
• Sources and uses of funds and the opening balance sheet at completion.
• Debt schedules for senior, mezzanine and revolving facilities, including interest, fees, amortisation and cash sweeps.
• Covenant tests and headroom analysis.
• Returns analysis such as IRR and money multiple for investors, and equity value for management.
• For mergers, pro forma combined financials and an analysis of the effect on earnings per share.
• Tax computation, including the tax effect of interest and of purchase accounting adjustments.
• Scenario and sensitivity analysis driven from a single set of inputs.

Key activities and deliverables

Key activities

• Agree the purpose of the model, the users, the time horizon and the level of detail required.
• Design the structure and the layout, separating inputs, calculations and outputs.
• Build the operating forecast from drivers, using historical data to calibrate it.
• Add the funding, debt and transaction layers, and link them through to the statements.
• Test the model with integrity checks, stress cases and independent review of formulae.
• Walk through the model with your team and provide documentation and training.

Deliverables

• A working Excel model with a clear inputs sheet, a summary dashboard and live scenarios.
• A written assumptions book and a model guide explaining structure, logic and how to update the model.
• Output pages for the board, investors or lenders, such as returns, covenant and funding summaries.
• A version-controlled final file, with check results.
• Training for the users and, where wanted, an agreed maintenance arrangement.

Our approach and methodology

We follow structured modelling practice. Inputs are kept in one place, calculations are consistent across time periods, formulae are simple enough to audit and the layout is the same on every sheet. Following recognised practice, such as the FAST Standard or the ICAEW Financial Modelling Code, makes models easier to review and less prone to error.

We build checks into the model so that errors show up immediately, and we test it under extreme as well as expected inputs. Assumptions are separated from mechanics and documented with their source, so you can see what the model says and why, and can update it yourselves when the facts change.

Benefits for clients

• An integrated view of profit, cash and balance sheet that supports funding and investment decisions.
• A tool to test different structures, prices and financing terms before committing.
• Clear covenant, liquidity and returns analysis for lenders and investors.
• A model that your team can understand, update and reuse, reducing dependence on its builder.
• Lower model risk, from transparent structure and built-in checks.

Who needs this service

Three-statement and transaction models are commonly needed by:

• Acquirers and investors evaluating a deal and its funding.
• Private equity sponsors and management teams structuring a buy-out.
• Companies negotiating debt or equity finance with a lender or investor.
• Finance teams that need a forecasting model that links through to cash and the balance sheet.
• Corporate development teams assessing mergers and acquisitions.