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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 which is much simpler and more straightforward towards its purpose, simply projecting the direct cash flows of a business or an asset over the next years. A basic way to conduct projections.

On the other hand, the Three Statement Model is more precise to create a model a business or an asset’s future projections, including more details and different derivations. It consists of the three financial statements such as Income Statement, Balance Sheet, and Cash Flow Statement, which serves as the core. But, in the financial model, it is a bit more complex with many pre-calculations needed. 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, thus, spending more time to build, it is still a more preferable structure of financial model that most users want to use.

Basically, both structures have its own pros and cons. For Direct Cash Flow Model, it is used for simple financial models which satisfies only the needed elements of a basic financial model, but creating it would take less time and much easier. While for 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.

In the end, it is up to the user on which structure they want to use in building a financial model. If you want to know more details about the differences of both structures, you can check out his article about Two Basic Structures of Financial Models.