Three Statement Models, Forecasting and Budgeting
The three statement model is the core from which almost everything else is built. It is also the model most often built badly, because it is the one people assume they already know how to build. This guide covers how the statements tie, how to choose drivers, what the accounting basis does to a forecast, and the checks that catch most errors quickly.
- How the three statements actually connect
- Driver design, and why revenue growth is rarely the right driver
- The accounting basis question, and the tax inputs that go with it
- Budget against rolling forecast
- The integrity checks worth running every time
The three statements are one model, not three
Profit after tax flows to retained earnings on the balance sheet and is the starting line of the cash flow statement. Depreciation is deducted in the profit and loss account, reduces the asset on the balance sheet and is added back in the cash flow statement. Working capital movements appear only in the cash flow statement and as balances on the balance sheet. Debt drawdowns and repayments move the balance sheet and the financing section of the cash flow statement, while interest moves the profit and loss account. Closing cash from the cash flow statement is the cash line on the balance sheet.
Two consequences follow. First, the balance sheet check is not a formality; it is the model's error detector, and it should be a visible cell in every period, not something checked once at the end. Second, the cash line should never be typed. If cash on the balance sheet is an input rather than a result, the model has been cut in half and the halves no longer talk to each other.
Forecast what the business manages, not what it reports
A revenue growth percentage is an output of a business, not an input to it. Nobody in an operating business decides to grow at eighteen per cent; they decide how many salespeople to hire, what to charge, how much capacity to add. A model built on a growth percentage cannot answer the only question worth asking, which is what has to be true for the number to happen.
So build the revenue line from the two or three quantities the business actually sets. Units and price. Capacity, utilisation and rate. Customers, retention and revenue per customer. Salespeople, ramp time and quota attainment. The test is whether the person responsible for the number would recognise the drivers as the things they manage.
Cost follows the same discipline. Split fixed from variable, and link the variable part to the driver it actually varies with, which is often not revenue. Headcount should be a schedule with joining dates, not a percentage. Working capital should be days, not a ratio to sales, because days are a thing a finance team can be held to.
The accounting basis question, and why it changes the forecast
An Indian company reports either under the Indian Accounting Standards or under the earlier Accounting Standards, depending on which applicability category it falls into under the Companies (Indian Accounting Standards) Rules, 2015. The choice is not a presentation matter for a forecast. Lease accounting, revenue recognition timing, financial instrument measurement and expected credit loss provisioning all differ, and each of them lands somewhere in a three statement model.
For FY 2026-27 the applicability thresholds under rule 4 are unchanged. The 2025 and 2026 amendment rules amend individual standards; they do not move the roadmap.
| Company | Position for FY 2026-27 |
|---|---|
| Equity or debt securities listed, or in the process of listing, in India or abroad | Ind AS mandatory, whatever the net worth |
| Listed or proposing to list only on an SME Exchange | Outside the mandatory listing trigger |
| Unlisted company | Ind AS mandatory where net worth is ₹250 crore or more |
| Holding, subsidiary, associate or joint venture of a covered company | Ind AS mandatory whatever its own net worth |
| Below the thresholds | May adopt voluntarily, and the adoption is irrevocable |
Non-banking financial companies run on a separate roadmap using ₹500 crore and ₹250 crore. Banks and insurers are outside rule 4 entirely and follow their own regulators.
The figure to be careful with is ₹500 crore. That was the first-phase threshold from 1 April 2016. The roadmap brought unlisted companies at ₹250 crore and the remaining non-SME listed companies in from 1 April 2017, so quoting ₹500 crore as the current general threshold is a decade out of date and still common. Where a company first crosses the threshold at a year end, Ind AS applies from the following financial year, and once it applies it continues even if the company later falls below.
Three sets of amendment rules are in force for financial statements for the year beginning 1 April 2026. G.S.R. 291(E) of 7 May 2025 brought the lack-of-exchangeability amendments, principally to Ind AS 21, for periods beginning on or after 1 April 2025, so they carry into FY 2026-27. G.S.R. 549(E) of 13 August 2025 amended a range of standards including Ind AS 1, 7, 10, 12, 28, 32, 101, 107, 108, 109 and 115. G.S.R. 725(E) of 12 August 2026 applies to annual periods beginning on or after 1 April 2026, so it governs the whole of FY 2026-27 despite being notified part way through it, and it deals mainly with classification and measurement of financial instruments, the related disclosures and hedge accounting terminology.
Whichever basis applies, say so on the face of the model. A forecast that does not state its accounting basis cannot be compared with the audited accounts it is supposed to continue.
The tax lines in a forecast, labelled by Act and by year
India is running two income tax statutes at the same time, and a forecast that spans the boundary has to say which one it is applying. The Central Board of Direct Taxes states the position directly: income of the period 1 April 2025 to 31 March 2026 is governed by the Income-tax Act, 1961 and assessed as assessment year 2026-27; income of 1 April 2026 to 31 March 2027 is governed by the Income-tax Act, 2025 and described as tax year 2026-27. They are two separate compliance obligations, not one renamed.
| Input | Position for assessment year 2026-27 under the 1961 Act | Where it goes in the 2025 Act |
|---|---|---|
| Domestic company, turnover based lower rate | 25 per cent where turnover or gross receipts in the previous year 2023-24 did not exceed 400 crore rupees | Rate for tax year 2026-27 is set by the Finance Act, 2026, which we were unable to read |
| Concessional regime without incentives | 22 per cent under section 115BAA, with a flat 10 per cent surcharge | Section 200 |
| Concessional regime for new manufacturing | 15 per cent under section 115BAB, with a flat 10 per cent surcharge. Closed to new entrants: manufacturing had to begin by 31 March 2024 | Section 201 |
| Any other domestic company | 30 per cent, surcharge 7 per cent above 1 crore rupees and 12 per cent above 10 crore rupees | Set by the Finance Act, 2026 |
| Minimum alternate tax | Not less than 15 per cent of book profit under section 115JB, and 9 per cent for a unit in an International Financial Services Centre earning in convertible foreign exchange | Section 206. Minimum alternate tax is not abolished; the Board confirms unutilised credits carry into the 2025 Act |
| Health and education cess | 4 per cent of income tax and surcharge | Set by the Finance Act, 2026 |
| Tax audit | Section 44AB thresholds | Section 63, thresholds unchanged, but Forms 3CA, 3CB and 3CD are replaced by Form 26 for tax year 2026-27 |
Sources: Income Tax Department rate pages for assessment year 2026-27, and the Board's FAQs on interplay and transition, questions 1.12, 2.25, 2.26, 4.31 and 4.32 to 4.34. Read 1 September 2026.
Two cautions. First, the rates for tax year 2026-27 under the 2025 Act sit in the First Schedule to the Finance Act, 2026 and are not reproduced here. Do not assume they are unchanged, and in particular do not carry an assessment year 2026-27 rate forward into tax year 2026-27: the published departmental rate pages cover assessment years 2025-26 and 2026-27 and are expressly stated to be under the 1961 Act, which is a different thing. Second, the widely repeated claim that minimum alternate tax disappears under the new Act is wrong: the Board's own transition FAQ confirms that unutilised minimum alternate tax and alternate minimum tax credits are eligible credits under the 2025 Act and can be used in later years.
The delayed-payment disallowance survives. It is section 37(2)(g) of the 2025 Act: an amount payable to a micro or small enterprise beyond the period prescribed by section 15 of the Micro, Small and Medium Enterprises Development Act 2006 is deductible only in the tax year it is actually paid. Section 37(1) carries the actual-payment rule for the sums listed in subsection (2).
The relief that applies to the other liabilities in section 37 does not apply to this one. Paying by the return due date does not preserve the deduction for the earlier year. The statutory period is ordinarily 15 days where there is no written agreement, and where there is one, the agreed period subject to an absolute maximum of 45 days from acceptance or deemed acceptance. Payment after that period but inside the same tax year is still deductible that year, because it was paid; what bites is the amount still outstanding at the year end.
Two things narrow it. It covers micro and small enterprises, not medium ones. And it applies by reference to the statutory concept of a supplier, including the registration requirement, rather than to a vendor who merely describes itself as an MSME. This matters for a forecast more than its size suggests, because it turns a creditor days assumption into a tax assumption.
Budget, rolling forecast, and the difference that matters
Budget
Set once, held fixed, and reported against. Its job is accountability: it is the line a manager is measured on. Changing it mid-year destroys the only thing it was for.
Rolling forecast
Updated every month or quarter, always looking the same distance ahead. Its job is decision support: it answers what we now think will happen, which is a different question from what we committed to.
Why you need both
A business that only budgets is managing to a number that stopped being true in month three. A business that only forecasts has nothing to hold anyone to. The variance between them is the useful management information, and it is lost if the two are merged.
The checks worth running before anyone else opens the model
| Check | What it catches | How |
|---|---|---|
| Balance sheet ties in every period | The single most common structural error | A visible check row across the whole forecast, not one cell at the end |
| Cash flow closing cash equals the balance sheet cash line | A model that has been cut in half | Difference row, formatted to show anything other than zero |
| No hardcoded numbers inside formulas | Invisible assumptions | Excel's formula auditing, or a search for digits inside formula text |
| Consistent formula across each row | A manual override that became permanent | Select the row and check for inconsistency, which Excel flags |
| No circular references | An answer that depends on calculation order | Iterative calculation switched off. If the model breaks, the circularity was real and needs resolving, not tolerating |
| Zero and extreme value tests | Formulas that only work in the base case | Set growth to zero, then to an implausible high, and see whether the model errors or quietly returns nonsense |
| Regulatory inputs dated | A rule that has been replaced | Every rate, threshold and statutory date carries a source note and a date checked |
None of these takes long. All of them are faster than explaining an error to a lender.
Questions about the operating model
Monthly or annual periods?
Monthly for the first one or two years if working capital or seasonality matters, which for most operating businesses it does. Annual after that. A five year monthly model is usually more precision than the assumptions can support.
Should the model include the group or just the operating company?
Whichever entity carries the decision. If debt sits at a holding company and cash is generated below it, you need both and the flow between them, because that flow is where the covenant risk lives.
How do we handle a mid-year change in the tax regime?
Split the forecast at the statutory boundary and label each side. India's current position makes this unavoidable: the 1961 Act governs financial year 2025-26 and the 2025 Act governs tax year 2026-27 onward, with different section numbers for the same concepts.
Where to go next
Financial Modeling Services
Back to the main page: what we build, how an engagement runs, and how to reach us.
Choosing the Right Financial Model for the Decision You Face
Which model answers which question, what makes a model decision grade rather than merely arithmetically correct, and the three questions a reviewer asks before reading a single number.
Scenario, Sensitivity and Risk Analysis
Turning one number into a defensible range: scenario architecture, what sensitivity does and does not tell you, covenant and debt service headroom, and how to put a range in front of a board without it collapsing back into a point estimate.
Fundraising Models: Investor Financials, Cap Table and Dilution
The model as an investor reads it: burn and runway, the cap table, convertible instruments under Indian exchange control, employee option pools and the tax that attaches to them.
Project Finance and Infrastructure Models
A different model shape: bankability rather than profitability, the Reserve Bank's project finance regime as it stands since October 2025, debt sizing and cover ratios, and where viability gap funding fits.
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Position as at 18 September 2026. Reviewed every six months.
This page is general information, not professional advice. A financial model is only as good as the rules it assumes will still be there when the forecast period arrives, and most of those rules moved recently. The Income-tax Act 2025 replaced the 1961 Act on 1 April 2026 and renumbered every section. The Reserve Bank's project finance regime was rewritten with effect from 1 October 2025. The external commercial borrowing framework was rewritten in February 2026. The treatment of a share buyback changed twice inside eighteen months. Take professional advice before acting on anything on this page. We are happy to be that adviser, but we do not act on a web page, ours or anyone else's, without one.