The first thing to say when building a three statement model is to remember to have the iteration setting turned off before starting. Once that's done step one is to input your historical data for the income statement and balance sheet and from that historical data calculate ratios and statistics. So for instance in the past, you may have found that sales were up by 5% that will then help you forecast your assumptions, in the future sales may go up again by 5%. You've now got everything you need to actually start building the forecast figures and we start by building the income statement, which will include your sales going up by 5%. However, when we're building the income statements we do miss out a line or a group of lines being interest. We then go on to build the balance sheet and we miss out a couple of lines there as well cash and revolver, which could also be called an overdraft or short-term debt and potentially long-term debts. We then build the cash flow statements using the rules of cash. Now it feels like we've almost finished the income statement balance sheet and cash flow statements are all basically done. The only line items that haven't been filled in are all interest related cash, the revolver, and debt all involve interest expense or interest income. We now need to deal with them. So we now take cash from the cash flow statement and drop it into the balance sheet. That's one of those missing items dealt with. We then build the debt and interest calculations and once that's done you can plug the revolver and long-term debt into the balance sheet and your balance sheet is now done. Now you might be thinking hang on if I plug all of these in other figures are going to change. Well, that's absolutely correct.

These items we've now got into the balance sheet will flow into the cash flow statements, which will then change the cash number at the bottom of the cash flow statements that goes back up into the balance sheets. The balance sheet should now bounce perfectly. The only item now missing is interest. We need to link interest into the income statement and deal with any circular reference that may arise again your interest will lead to some changes in your net income that will affect your cash flow statements and cash in the balance sheet. Assuming you've built your model correctly, this should all bounce out and the model will still work.