Three statement model

The three statements are linked rather than forecast side by side. Net income runs from the income statement to the top of the cash flow statement and into retained earnings. Closing cash runs from the cash flow statement onto the balance sheet. A debt schedule takes the cash generated, decides what repays debt, and hands back the closing balance and the interest charge. Because of those links, changing one assumption moves every figure that depends on it and leaves the rest alone.

The layout is what makes it usable by anyone other than its author. Inputs, calculations and outputs sit in separate areas, every assumption appears exactly once, and each row carries one formula copied across the forecast. A model that violates those conventions still produces numbers, but nobody can tell which numbers were chosen and which were derived.

The balance check is the proof that the links hold: total assets less total liabilities and equity, computed for every period and expected to read zero. It is a necessary condition rather than a sufficient one, since a model can balance perfectly and still assume a margin the business has never earned.

It is not the right tool for every question. An unlevered discounted cash flow deliberately builds cash flow before interest and holds capital structure constant, so it needs no balance sheet and creates no circularity. The full build earns its cost when capital structure changes over the forecast, which is why buyouts, credit analysis and any question about whether a company can pay its debts as they fall due reach for it.