Understanding the 3 Statement Model is a crucial skill for anyone working in project finance, infrastructure investing, or renewable energy transactions. It’s the foundation for integrating financial logic, ensuring internal consistency, and producing investor-ready outputs in Excel.
Yet despite its importance, many modeling candidates — even advanced ones — struggle with how the income statement, balance sheet, and cash flow statement actually tie together, especially in project-specific models where the structure deviates from a traditional corporate finance setup.
In this post, we’ll break down each of the three core financial statements from a project finance perspective, show how they interact, and walk through a real modeling challenge used in technical interviews.
🎥 Watch: 3 Statement Model – Interview Test Simulation
Here’s a full walkthrough where we build and integrate the 3 statements step-by-step in Excel, just like in real project finance interviews:
Get the full course here: How to Ace the Toughest Project Finane Modeling Tests
What Is a 3 Statement Model?
A 3 Statement Model refers to a financial model that dynamically links:
The Income Statement
The Cash Flow Statement
The Balance Sheet
In project finance, the goal of the 3 statement integration is to ensure the model balances at every point in time and accurately captures the project’s performance, funding structure, and distributable cash flows.
Unlike in corporate finance, project finance models are built around the cash flow waterfall, so the cash flow statement typically takes the lead role.
1. The Cash Flow Statement in Project Finance
In project finance, the Cash Flow Statement (CFS) takes center stage. Unlike corporate models, where cash flow statements are typically derived from changes in balance sheet accounts, project finance models usually start with a pro forma cash flow — the lifeblood of the transaction. This projected cash flow is not just a reporting output but the foundation upon which funding, repayment, and returns are structured.
📌 If you’re new to building a pro forma cash flow from scratch, start with this foundational video walkthrough:
👉 Prefer a full downloadable Excel file and ad-free experience?
Get the full course here: How to Pass a Project Finance Modeling Test📌 Uses of Funds
This section captures how much money is required to build the project — typically capital expenditures (CapEx). In a renewable energy project, this could include the cost of wind turbines or solar panels, installation, grid connection, and early-stage development costs.
📌 Sources of Funds
To cover those CapEx needs, capital is raised via equity, shareholder loans, and senior debt. The structure may vary, but a common approach is to size debt using a target DSCR (Debt Service Coverage Ratio), with equity filling the gap. This top section ensures total sources exactly match total uses at the outset of the project.
💡 Net Cash Flow After Funding
This line acts as a checkpoint. It should be zero at the beginning of the model when sources equal uses. If it isn't, something went wrong — either too much or too little funding was raised.
💰 Revenue
Revenue is usually driven by a Power Purchase Agreement (PPA) or merchant sales. In the model, this is typically shown as a single aggregated line, but in more advanced models you might split this into multiple revenue streams (e.g., fixed and variable tariffs, ancillary services).
🔧 Operational Expenditures (Opex)
Operating costs keep the project running and are subtracted from revenue to determine operating cash flow (EBITDA). These costs often include:
O&M (Operations and Maintenance)
Insurance
Land lease
Other variable or fixed expenses
Depending on the complexity of the project, each of these categories can be further broken down.
📊 Operating Cash Flow (EBITDA)
This is revenue minus Opex. It shows how much cash the project generates before taxes, financing, or depreciation — a core metric for lenders and investors.
💸 Taxes Paid
Tax is calculated based on taxable income, not EBITDA. However, in most project finance models, cash taxes are calculated directly in the cash flow statement using adjusted earnings after depreciation and interest deductions (handled on the income statement).
💵 CFADS – Cash Flow Available for Debt Service
CFADS is a central concept in project finance. It tells lenders how much cash is available to repay debt. It's calculated as:
Operating Cash Flow (EBITDA)
– Taxes Paid
= CFADS
This metric is then compared against scheduled debt service (interest + principal) to test DSCR covenants.
🧾 Debt Service
Here we deduct both:
Senior Debt Interest
Senior Debt Principal Repayments
These amounts are modeled separately based on the amortization schedule defined in the loan agreement. If the model includes multiple tranches or sculpted repayment, this section may have multiple rows.
💰 FCFE – Free Cash Flow to Equity
This is the cash that remains after debt has been serviced. It's the key metric for equity investors, used to calculate IRRs and other return metrics.
CFADS
– Debt Service
= FCFE
🏦 Dividends
This section tracks equity distributions. In many models, dividends are assumed to match FCFE, meaning any excess cash is immediately distributed. In more complex setups, dividend constraints or cash sweep mechanisms may apply.
🔄 Net Cash Flow After Dividends
This shows the net movement of cash that remains (or is needed) in the project’s cash account after all distributions. It becomes especially important if the model includes cash reserve accounts, holdbacks, or minimum balance requirements.
💳 Cash Account
Finally, we track cash in the model through a simplified cash account:
Cash brought forward
Change in cash during the period
Cash carried forward
This final balance links directly into the balance sheet and ensures the model remains circular and complete.
💡 Pro Tip:
Building a clean, reliable cash flow statement first is the most efficient path to building a fully integrated 3 Statement Model. Once cash flows are calculated, the income statement and balance sheet can be derived from them — not the other way around. This is the approach taken in both our courses:
2. The Income Statement in Project Finance
Once the pro forma cash flows are complete, the next step in a fully integrated 3 Statement Model is to build the income statement (I/S). In project finance, this isn’t just about tracking profitability — it’s a supporting statement that ensures proper calculation of tax, retained earnings, and net income for equity holders.
Rather than being the centerpiece, the income statement plays a reactive role in project finance models. It reflects outcomes shaped by the cash flow statement and debt structure rather than driving decisions on its own. Let’s walk through the key components:
💰 Revenue and Operating Expenses
The top of the income statement echoes what we’ve already modeled in the cash flow: total revenue from power sales and total operating expenditures (Opex). The difference between the two gives us EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization — the same as our operating cash flow.
🏗 Depreciation & Amortization
This non-cash line reduces accounting profits but has no direct impact on actual cash flows. It’s especially important in a 3 Statement Model because it influences taxable income, and therefore, cash taxes.
In project finance, depreciation is usually calculated on a straight-line basis over the useful life of the asset, based on the capital expenditures modeled earlier.
📉 EBIT – Earnings Before Interest and Taxes
EBIT is EBITDA minus depreciation. It’s a key input to calculate interest coverage and tax obligations, but again — it’s not used directly to size financing or evaluate project returns. Think of it as an intermediate step between cash and book-based profitability.
💳 Interest Expense on Senior Debt
Interest is calculated on the outstanding debt balance and matches the inputs from your sculpted or scheduled amortization. This line is crucial not only for accurate accounting but also for determining EBT, or Earnings Before Taxes.
Note: in project finance, we usually model debt interest and repayments directly in the cash flow statement first, and then feed the interest amount into the income statement afterward.
🧾 Taxes
Taxes are applied to EBT based on the applicable tax rate. In renewable energy models, this may include adjustments for tax shields like interest deductions and depreciation benefits. Modeling this correctly ensures cash tax estimates align with accounting profits and tax rules.
✅ Net Income
This is the final profit number after all expenses, interest, and taxes. In a project finance context, net income isn’t the key performance metric (that’s usually FCFE which is used to determine the IRR), but it still matters for reporting and for linking to retained earnings in the equity section of the balance sheet.
📈 Retained Earnings and Dividends
After calculating net income, we deduct dividends (as per the dividend policy) to arrive at retained earnings. This retained earnings figure is tracked over time and becomes part of the equity section of the balance sheet in your 3 Statement Model.
Some models assume 100% distribution of FCFE, in which case retained earnings may remain static or negative. Others may include payout thresholds, reserve accounts, or equity sweeps.
The income statement helps reconcile accounting logic, capture tax implications, and inform the equity account — but it should always be built on the foundation of the pro forma cash flow. If you want to see how this is done in an actual case study, refer back to the embedded video where we construct a full 3 Statement Model line-by-line in Excel:
3. The Balance Sheet in Project Finance
The final component of the 3 Statement Model is the Balance Sheet — a snapshot of the project’s financial position at a specific point in time. In project finance models, the balance sheet plays a supporting role: it helps ensure consistency across sources and uses, tracks the accumulation of retained earnings, and validates whether the model stays balanced throughout the lifecycle.
Here’s how each part typically looks in a simplified project finance model:
🧱 Non-Current Assets
These are the physical assets of the project, such as wind turbines, solar panels, or transmission infrastructure. They’re often shown as a single line for Property, Plant & Equipment (PP&E), but may also include intangible development costs or capitalized fees.
→ Links directly from the capital expenditures modeled in the cash flow statement.
💰 Cash
Cash in the balance sheet usually reflects the cumulative outcome of modeled cash flows, plus any reserve accounts (e.g. DSRA, MRA) that are actively tracked. These are updated based on changes from the cash flow statement.
→ Cash at the end of each period = Cash at beginning + Net Cash Flow
📉 Debt (Liabilities)
Senior debt is shown on the liability side, based on the outstanding debt schedule over time. Depending on complexity, the balance sheet may break this into different tranches or include drawn balances of facilities like the DSRF.
→ Links directly to the senior debt schedule in the model.
📈 Equity
The equity section consists of:
Share Capital: Initial equity injections
Retained Earnings: Net income minus dividends
Other equity instruments: e.g., capitalized shareholder loans
→ Retained earnings tie back to the income statement, closing the loop in your 3 Statement Model.
🔄 Balance Check
To ensure your balance sheet is functioning correctly, many project finance models include a balance sheet check — a formula testing whether total assets = total liabilities + equity. Any deviation signals an error in circular references or linking logic.
💡 In more advanced models — like those taught in our Expert-Level Project Finance Modeling for Renewable Energy — the balance sheet can get significantly more complex, including:
Multiple reserve accounts
Shareholder loans with accrued interest
Sculpted or mini-perm debt tranches
Deferred tax assets and liabilities
Accrued dividends or unpaid interest
But at its core, the logic remains the same: every component must flow from the previously modeled cash flows and income statement. That’s the power of a properly integrated 3 Statement Model — you can always trace each number back to its source.
Final Thoughts: Mastering the 3 Statement Model in Project Finance
The 3 Statement Model is more than just a technical exercise — it’s the backbone of any serious project finance or infrastructure model. Whether you’re preparing for interviews, working on real transactions, or reviewing someone else’s work, understanding how the cash flow statement, income statement, and balance sheet fit together gives you a massive edge.
By starting with a clear pro forma cash flow, layering in the income statement for tax and net income logic, and closing the loop with a consistent balance sheet, you’ll build models that are not only correct — but also easy to audit, adapt, and present to stakeholders.
If you’re serious about becoming a top-tier analyst or financial modeler in the renewable energy space, there’s no better way to learn than through hands-on practice with real case studies and expert guidance.
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✅ Advanced Excel tools and macros
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Whether you're just getting started or preparing for high-level interviews, the RVA Certification Program gives you everything you need to build investor-ready models with confidence.
