Financial Modeling, Business Modeling, Simple rules and best practice
What we have learnt about Financial Modelling over the years.
Usually when someone comes to us to assist with financial models it is because they think it's very difficult to model or their frustration with Excel means they are not prepared to continue building Models in Excel. And therefore it must be hard because Excel is so simple. Two things, firstly business modeling and financial modeling is remains quite simple and secondly Excel is no longer a simple little spreadsheet programme, Excel is a semi industrially scaled computer application in its own right.
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Mind the Gap
Simple Rules usually ignored.
Working everyday on delivering financial modelling services and financial models, we have established some internal best practice guidelines for building models. They are simple, obvious and usually ignored.
1. Models Flow from the left to right - that is logical.
2. Explain the functionality and document in as much detail as possible.
3. Clear inputs and output. Whats the source file (where is it) and show clear postings to external files. And document this as well. failure to do so means the person coming after you won’t thank you.
4. Keep it "easy on the eye" and consistent throughout. Look and feel must be same throughout even when different Modellers involved.
5. Assumptions – Document them throughout and if not obvious explain them carefully and clearly
6. Financial Models should be free of error. It's not Excel so hopefully you will build in error checking and validate user imputs at point of entry.
7. Printer Friendly – Someone always wants a hard copy. So print it out regularly, keep it format friendly and printer friendly. Particularly if you want the funding, job etc.
8. Your Model must be easy to Navigate and manage.
9. RTFM – Read the manual – It can’t be read it if you haven't written one.
10. Learn how to use your modelling programme it's worth the effort.
11. Research or Google your questions, look for relevant youtube demo's for excel, formula writting, everything. There is tonnes of free helpful stuff and willing helpers on the net.
Financial Modelling - What's a successful outcome!
When we review Excel models we normally find that only 2 or 3 of the above have been followed. There is almost no documentation or helpful "end user" oriented explanations to guide novice users. If we get people to follow 6 of the above it's been a successful engagement. A business model which supports the decision process is a great outcome. That’s the point where financial modelling or business modelling becomes worthy of the description business intelligence because of its simplicity allowing users to test different scenario’s (or “what if analysis”).
