We all know cash is king in keeping your business alive. As organisations continue to face supply chain constraints, the rising cost of raw materials and late paying customers — cashflow is an ongoing concern — especially for commodity-based industries.
While many business people are busy addressing these immediate cashflow issues, others are also turning to the 3-statement financial models to ensure the cash measure is accurate now, in a year, and how it might hold up as they plan into the future.
The 3-statement model has always been invaluable but is complicated to execute using spreadsheets. If you want to link the 3 statements, you can now use software to build a companywide financial model for your business and get a more accurate picture of your company’s financial position.
When the income statement (profit and loss), balance sheet, and cash flow statement are linked into one dynamically connected financial model, decision-making is clearer because you can cross-check growth, profitability and cashflow against all drivers – delivering the gold standard in financial planning.
Off the rack vs custom made 3-statement models
Let’s explain the difference in developing the 3-statement financial model in an excel template compared to custom-made software like Phocas - a business analytics platform that specialises in financial planning.
Any ‘old school’ finance manager will tell you there’s a valuable lesson in building the model. The beauty of using software to achieve this is that you still maintain the learning exposure, but without all the broken formulas and drawbacks. Phocas product specialists and developers worked with finance professionals to ensure the model was robust and the structure was clean (but with choice). The design intention was to make the model simple to populate, copy and customise.
Accountants certainly know their way around a spreadsheet but building a 3-statement model takes sophisticated skills where spreadsheets need to be joined, creative logic applied, and formulas are corkscrewed or chunked up for ease of management. Imagine all formulas, written in plain English, unbreakable and ready for you to select.
If you opt for a custom model, choose one that can be built on a data platform so that your three statements represent your consolidated data. Get the benefit of daily or hourly sales, operational and financial data drawn in from your ERP, CRM, ecommerce and inventory systems all in the one place.
A cashflow forecast is more accurate and has financial integrity when it is driven by real-time data in the balance sheet and P+L (income) statement.
How does a 3-statement financial model help with planning?
Another benefit of implementing a 3-statement model using custom made software is you can plan effectively. The model gives an accurate picture of how changing your business strategy will affect the income statement (profit and loss) and balance sheet but most importantly your cashflow.
In the current economic environment, businesses are being hit with multiple challenges at the same time. So, knowing how these issues affect cashflow today as well as in 6 months and 12 months takes a lot more focus and effort for finance leaders.
When making complex economic decisions, a 3-statement financial model gives the most certainty.
Let’s say, for example, an Australian manufacturing business creating natural medicines is finding the challenges in the current market much tougher than they have experienced before (sound familiar?). Demand is strong but the company continues to deal with lingering short-term issues like global supply change delays, inflation and labor shortages.
While effectively operating day to day is difficult, the owner knows that to stay viable in the long term he/she also must address some broader issues now.
Top of mind is the need to replace legacy business systems to enhance the go to market strategy and address changing customer preferences.
There is much to consider in this business and it’s difficult to decide where to concentrate the effort but by using an automated 3-statement model the manufacturer can see how these operational and financial changes will affect the big picture and give him/her direction.
The model can help the business leader to answer a range of questions like:
- How does hiring more salespeople and upgrading the CRM system impact the bottom line in 6 months and 12 months?
- What does profitability look like when throughput is slow for the next 12 months?
- Will the business be generating enough cash flow to cover the cost of new staff and pay back increased debt from investing in new systems.
- The impact of different accounts payable and receivable terms have on cash flow
…and give the business leader and his/her team the confidence to move forward.
Strong economic decision-making is enhanced with the full picture. Software that enables you to build a well-structured financial model with an integration of three financial statements (3-statement model) makes this much easier. If there is a change in one financial statement, the other financial statements adjust accordingly so ongoing analysis is accurate and clear.