Milestone 10. Three-Statement Financial Model

Can you explain why the business made money while cash went down?

A profitable month can leave less money in the bank. Customers may not have paid, inventory may have grown or the company may have bought equipment and repaid debt. The income statement alone cannot explain those movements.

Milestone 10 connects your income statement, balance sheet and cash flow statement, then establishes a monthly package you can actually use. Your finance lead prepares and maintains the model. You understand the results, ask questions and make the ownership decisions.

Read the three statements together

Statement	What it shows	What to look for
Income statement	Revenue earned and expenses recognized over a period.	Which revenue, delivery costs and overhead explain profit?
Balance sheet	Assets, liabilities and book equity at a date.	What is tied up in receivables or inventory? What does the company owe?
Cash flow statement	Cash generated and used during a period.	How do operating, investing and financing movements reconcile beginning cash to ending cash?

Book equity is an accounting balance, not an estimate of market value. Retained earnings are not a separate bank account. Loan principal reduces cash and debt without appearing as an operating expense.

Consider a simplified hypothetical month. The company earns $100,000 of revenue and incurs $70,000 of expenses. It collects $60,000 from customers and pays all $70,000 of expenses. With no other movements, profit is $30,000, receivables grow by $40,000 and cash falls by $10,000. The statements explain the difference together.

That example is deliberately simple. Your company may also have inventory, supplier credit, depreciation, taxes, equipment and financing. Each movement needs the right period and supporting record.

Start with the condition of your actual model

No reliable model yet: gather the original history, confirm the company entities and accounting basis, and establish reconciled statements before relying on a projection.

An older model: have the finance lead review its accounting, definitions, opening balances and connections. Preserve useful company work and fix identified gaps.

A current reviewed model: maintain it, extend the history and test the monthly package against the five requirements below. Receiving a workbook does not by itself establish completion.

The financial build belongs in your existing company project and The Numbers in your Playbook. A finance professional needs to investigate the records, preserve corrections and complete the Financial Assessment. A distinct qualified reviewer accepts the file for financial use. A workbook that balances can still contain unsupported accounting.

Establish the history before projecting the future

Use clean accrual records with appropriate revenue recognition. Confirm the chart of accounts is useful for understanding how the business earns money and spends it. Reconcile bank accounts, receivables, inventory where relevant, payables, fixed assets, debt and equity.

The model needs three to five years of monthly history, or the period since inception for a younger company, through the latest required closed month. Preserve original sources. Explain material differences rather than inserting an unexplained number to make the statements balance.

Then develop the reported-to-normalized earnings bridge. It shows how reported EBITDA becomes Normalized EBITDA, with each adjustment’s amount, period, reason and support. The Owner Add-Back Worksheet organizes that explanation. A valid bridge can have no adjustments.

Owner compensation requires particular care. Removing an owner’s operating salary while ignoring the cost of replacing their work can overstate earnings. A supported replacement cost may reduce the normalized result; count it once. Normalized EBITDA helps analyze earnings, but it is not automatically cash available to distribute.

Make the close and delivery dates dependable

The Monthly Close Checklist names who prepares, reconciles and reviews the accounts. Installed means the monthly close operates within ten business days of month-end. Keep actual dates and evidence; there is no invented requirement to accumulate a particular number of closes.

The Monthly Owner’s Package carries all three statements, meaningful month/YTD/TTM views, the five-KPI view and the CFO’s explanation. TTM means trailing twelve months. Missing history must stay visible. Income and cash flows cover periods; a balance sheet is a position at a date and cannot be added into a TTM balance.

Deliver the package at least three business days before the owner review. Plan for three to five, with earlier delivery counting when the information remains current. Record the reporting cutoff, delivery date and meeting date using the company’s business-day calendar. A late or materially incomplete initial package does not meet the requirement.

Prepare your CFO Monthly Review

Bring the current reports, their dates and versions, normalization support, actual close information, adopted budget where available and latest forecast. Use one meeting record, whether you work on paper, in a document or in your Playbook.

Part of the review	What to prepare
The five dashboard groups	Payroll, net income, Normalized EBITDA, working capital and cash. Show actual versus the agreed budget or target, with consistent units and dates.
Explanation and forward view	What changed, why it changed, missing evidence and what the next cash periods permit or constrain.
Quarterly priorities	Progress on the current financial-function priority and the leader’s development priority, when established.
Discussion and commitment	What is working, what needs attention, your recommendation, the decision or help needed, responsible person and return date.

State what “working capital” includes. Current assets less current liabilities and receivables plus inventory less payables answer different questions. A larger balance does not automatically mean better cash performance.

The financial-function assessment and the finance leader’s readiness assessment each use their own /81 scale. Keep both separate from your owner’s Velocity Score. You can begin this monthly conversation before completing Module 7 or hiring a full-time CFO.

The Trust Test Worksheet supports the owner’s actual conversation with the finance lead. Open the reports, trace profit to cash and record your conclusion and follow-up. A supported decision to continue the current course counts. You do not have to memorize answers, build spreadsheet formulas or execute a new transaction to demonstrate use.

Complete the five owner actions

The historical foundation, close, package and actual review all matter. Annual budgeting and five-year valuation have their own requirements in M11 and M12.

Open the five actions and their completion requirements

1. Connect and reconcile the historical statements

Can we trace the reported results and cash movement to the underlying records?

Show: Reviewed monthly income statements, balance sheets and cash flow statements; original history, a usable chart of accounts, recognition policies and supporting reconciliations.
Supporting work: Build and review guide; your existing company financial project.

Confirm the entity, accounting basis and cutoff. Review revenue recognition, receivables, inventory where relevant, payables, fixed assets, debt and equity. Cash-flow movements must explain beginning to ending cash. A balance check alone does not establish accuracy; preserve original records and resolve material differences without plugs.