Building a financial model
Cortus Advisory Group
A truly independent business advisory group founded by a team of ex-Big 4 professionals
Because most people only ever occasionally build a financial model
Ben Whitworth who leads our financial modelling practice
1.??????Keep it simple.?A simple model
2.??????Split inputs, calculations and outputs.?Mixing them up can make a model harder to update, navigate and understand.?Be clear about where all your inputs are so a user can quickly see what is driving the model. Having well organised outputs enables users to focus on what the model is telling them
3.??????Clearly identify your inputs
4.??????No hardcoded figures in calculations.?Typed in numbers should only ever be put into clearly identified input cells.?This means the user can readily identify all the assumptions in the model and it is much easier to update them if needed.
5.??????One row, one formula.?Each row should ideally only contain one formula which is copied across the entire row.?It means you don’t have to remember to update multiple formulae in the same row if a change is required.?A common example would be the annual totals at the end of each 12-month period - a better solution in this case would be to have annual summaries to the right or left of the main calculations.
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6.??????Use 4 - line schedules.?By adopting this approach (opening balance, P&L movement, cash movement, closing balance) you stand a much better chance of making sure that your primary statements (P&L, Balance sheet and Cashflow) all hang together properly and reconcile with each other.?Also, drive your cash position from a direct cashflow (cash inflows and cash outflows) as this is more robust than an accounting style cashflow (which you can have as an additional output).
7.??????Only calculate things once
8.??????Include error checks
9.??????Adopt consistent signing conventions.?It makes it easier to interpret what the model is telling the user (e.g. income and assets as positive figures, costs and liabilities as negative figures).
10.??Format properly from the outset.?It’s tempting to think formatting is too time consuming, but the reality is getting it right from the very start (headers, units, titles) means less mistakes and a more professional result.
11.??Printing.?Finally, make sure your model is always set up to print readily as not everyone will access a model electronically. ?Remember to include headings, sensible page breaks, headers and footers.
A fully integrated financial model is an essential business tool.?They help provide future visibility based on what is known, or expected, today and are used to make key assessments of what needs to happen next. Particularly in the current environment, being able to adjust a forecast to take account of changes is incredibly helpful in that decision making process.
To learn more about how Cortus Advisory Group can help you build or manage a financial model appropriate for your business please contact James Groot at [email protected] or Ben Whitworth at [email protected]
Graduate from a top ten university | Currently working as a Graduate Analyst in Transaction Services | Seeking new opportunities and connections
2 年Great advice!