In financial modeling, there are two common ways to structure a financial model – Direct Cash Flow Model and Three Statement Model. A direct cash flow model is a simple financial model structure which is a much simpler and more straightforward model towards its purpose which is simply projecting the direct cash flows of a business or an asset over the next years. A very basic way to conduct projections of a business, a project, or an investment.
On the other hand, the Three Statement Model is a more precise way to structure a model of a business or an asset’s future projections, which include more details and different derivations. It is also how you structure the three financial statements such as the Income Statement, Balance Sheet, and Cash Flow Statement, which serves as the core of the model. When utilizing the three statement model structure, you will be able to get a better overview of the financing situation of a business but as you build the financial model, it can be a bit more complex with many pre-calculations needed. Since a in a three statement model structure, you will be adding more key elements such as the Fixed Asset Schedule, Debt Schedule, and the three financial statements. Though it requires one to work through all the elements until the analysis can be completed, which in turn requires you to spend more time to build, it is still a more preferable structure of financial model that most users prefer to use.
Basically, a Three Statement Model is used to create a more detailed financial model, but it takes up a lot of time and more complicated compared to direct cash flow model. Nonetheless, it is still the best structure to choose as you build a financial model that is much more precise and a lot more helpful for running a business. In the end, it is up to the user on which structure they want to use in building a financial model. If you want learn more about the three statement model, you can check out this article about Two Basic Structures of Financial Models.
Once you learn about three statement model or three financial statements, you can start creating your own financial model by utilizing financial model templates which you can use as a base to start with. At eFinancialModels, you can acquire industry-specific financial model templates made by financial modeling experts so you can rely on it for you to use as the starting point of learning how to build a financial model.