Glossary
three-way forecast
Also called 3-way forecast, three way financial forecast, integrated financial model
A three-way forecast projects a business's profit and loss, balance sheet and cash flow statement together, linked so that the three always agree with each other.
It is called three-way because the three statements are not produced separately. They are connected, and each one explains something the others cannot.
What each statement answers#
The profit and loss answers whether the business model works: revenue less costs, ending in profit. The balance sheet answers what the business owns and owes at a point in time. The cash flow statement answers where the money actually went, which is a different question from what was earned.
How they link#
Profit flows into retained earnings on the balance sheet. Movements in balance sheet items, such as customers owing you more or stock building up, explain the gap between profit and cash. The cash flow statement ends at a bank balance, and the balance sheet has to show the same number. If it does not, something is wrong.
Why it is hard in a spreadsheet#
Building three linked statements by hand means wiring depreciation, tax timing, VAT, debtor and creditor movements and loan schedules across three sheets and keeping them in step. It is the part of a financial model that takes longest and breaks most quietly, because a broken link does not throw an error. It just produces a number that is wrong.