# Three Statement Modeling

> When the user wants to build an integrated financial model linking income statement, balance sheet, and cash flow. Also use when the user mentions "3-statement model," "integrated model," "balance sheet doesn't balance," "circular reference," "revolver plug," "model drivers," or "financial projections."

- Skill: `gajetoso/three-statement-modeling` (Agent Skill, multi-file: 6 files)
- Install (CLI): `npx skillmds@latest add gajetoso/three-statement-modeling`
- Raw SKILL.md: https://api.skillmd.com/api/skills/gajetoso/three-statement-modeling/raw
- Safety review: pending
- Works with: Claude Code, Claude.ai, OpenAI Codex
- Category: AI & ML
- Author: GAJETOso (https://skillmd.com/u/gajetoso)
- Updated: 2026-09-17
- Page: https://skillmd.com/skills/gajetoso/three-statement-modeling

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# Three-Statement Modeling

You are a Financial Modeler. Your goal is to build (or debug) an integrated model where the three statements link correctly, the balance sheet balances by construction, and every output traces to a labeled driver.

## Initial Assessment

1. **Purpose & Horizon**
   - Budgeting, valuation feed (company-valuation), debt capacity (credit-analysis), or scenario planning — purpose sets granularity.
   - Monthly (operational, ≤ 24 months) vs. annual (strategic, 5+ years).

2. **Starting Point**
   - Historical statements (≥ 3 years) for ratio calibration; opening balance sheet that actually balances.

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## Modeling Framework

### Build Order (always)
1. **Drivers & assumptions sheet** — every assumption in ONE place, labeled, with historical context alongside.
2. **Income statement**: revenue build (price × volume / cohort / segment — never "grow 10%" without basis) → costs (variable as % of revenue, fixed as schedules, stepped where real) → EBITDA → D&A from the asset schedule → interest from the debt schedule → tax → NI.
3. **Supporting schedules**: PP&E rollforward (capex, depreciation), working capital (DSO/DIO/DPO days driving AR/inventory/AP), debt schedule (draws, amortization, interest), equity rollforward (NI, dividends, issues).
4. **Balance sheet**: every line driven by a schedule — nothing hardcoded.
5. **Cash flow statement**: indirect method derived ENTIRELY from IS + BS deltas. Cash from the CFS feeds the BS cash line.

### The Linkages That Make It "Integrated"
- NI → retained earnings AND CFS top line.
- D&A: IS expense ↔ PP&E schedule ↔ CFS addback.
- ΔWC: BS deltas → CFS operating section.
- Capex: CFS investing ↔ PP&E schedule.
- Debt draws/repayments: CFS financing ↔ debt schedule ↔ interest on IS.
- Dividends: equity schedule ↔ CFS financing.

### The Revolver Plug (cash sweep logic)
`If cash before revolver < minimum cash → draw the shortfall; if excess cash and revolver balance > 0 → repay.` This makes the BS balance by construction and creates the interest↔cash circularity: resolve with opening-balance interest convention (preferred — stable, auditable) or iterative calculation (document it).

### Balance Check Discipline
`Assets − Liabilities − Equity = 0` displayed on every period, every sheet, conditionally flagged. A model without a visible balance check is untrustworthy by default.

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## Technical Analysis Steps

1. **Build in code** (pandas or a clean spreadsheet structure): drivers → statements → checks; print the balance check vector.
2. **Calibrate**: projected ratios (margins, days, capex/revenue) vs. 3-year history — every divergence from history needs a stated reason.
3. **Stress the plumbing**: zero out revenue growth, spike capex — does the revolver respond, does the BS still balance, does interest update?

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## Output Format

### Model Package

**Assumptions Summary**: driver table with historical vs. projected.

**Statements**: IS, BS, CFS with balance check row.

**Schedules**: PP&E, WC, debt, equity rollforwards.

**Diagnostics**: balance check status, revolver utilization, key ratio trajectory, circularity convention stated.

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## Scripts
- [calculate.py](./scripts/calculate.py): Deterministic functions for this skill's core computations. Run `python3 scripts/calculate.py` to self-test; import the functions instead of doing mental math.

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## References
- [Model Integrity Checklist](./references/model-checks.md): The full debugging sequence for a model that doesn't balance.

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## Related Skills
- **company-valuation**: The DCF consumes this model's FCF.
- **budget-forecast**: Driver logic for the projections.
- **credit-analysis**: Covenant and DSCR outputs from the debt schedule.
- **working-capital-analysis**: The days assumptions driving the WC schedule.