Financial Modeling Discipline

Topics: Model, Financial modeling, Financial services Pages: 3 (966 words) Published: December 8, 2010
Financial Modeling Discipline – Guiding Principles
A good financial analyst has the discipline of adhering to a list of guiding principles to help ensure that the development of the financial model achieves the desired results. By following these simple steps, a financial analyst should be able to build a financial model that is simple, accurate and most importantly consistent, to help build confidence in a financial decision making process. Financial Modeling Discipline can be acquired in all 3 stages of the financial modeling process: • Specification Stage

• Design Stage
• Build Stage
Specification Stage
1. Be very clear on the effort involved and the dependencies before committing to deadlines - the financial modeling exercise is usually on the critical path! 2. Get the algebra right — make sure all revenues, cash flow inwards and assets are positive while expenses, cash outflows and liabilities are negative.  This will ensure that we rarely use the minus sign in formulae and can use the sum() function. 3. Avoid all calculations that will cause circular references. Design Stage

1. Ensure that each assumption is input only once in a financial model. 2. Define scenario variables clearly in a separate “Scenario manager” section or worksheet in the financial model. 3. Define the time unit that is to be used consistently throughout the financial model. 4. Group all assumptions and inputs into one sheet and state units clearly in the financial model. 5. Avoid executing complex calculations in the “Output section” of the financial model. 6. Build an Interface sheet if you are working with a financial model with multiple workbooks. Build Stage

1. Always note all assumptions, sources and calculation methods in the financial model for future reference. 2. Avoid complicated macros in the financial model if possible – macros make it difficult to follow logic, spot errors or amend the financial model, besides bloating the...
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