Financial Modelling

pecuniary Modeling Discipline Guiding Principles A good monetary analyst has the discipline of adhering to a list of manoeuver principles to help retard that the development of the pecuniary model achieves the desired results. By following these simple steps, a pecuniaryanalyst should be able to progress a financial model that is simple, accurate and most importantly consistent, to help create confidence in a financial decision making process. Financial Modeling Discipline can be acquired in each 3 stages of the financial poser process Specification Stage instauration Stage wee-wee 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 argon positive while expenses, cash outflows and liabilities are negative. This will ensure that we rarely use the minus sign in form ulae 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 conductor section or work shred 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 iodin 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 hereafter 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 data file size. 3. Lay all finan cial model calculations in chronological order Avoid having calculations in one row refer to calculations in lower rows. 4. Do not try to do too much in one cell with a large complex calculation formula. Break the calculation into blocks.Lay the financial model calculations out in blocks, to enable copying formulae across columns or down rows saving time in developing and reviewing financial models. 5. All financial model calculation and output sections should be locked to avoid inadvertent data entry therein. 6. Include charts in the output section for easy understanding, analysis and auditing of the financial model. 7. Always keep back-ups preferably on separate disks and leave the autosave option on for your financial model workbook. 8. Stick to a consistent version labelling administration eg company xyz_2/2/09_V02_DC.Save several versions of your financial model each day and retain old versions. 9. Avoid jumping to conclusions / sharing results based on prelim financial mode l results. Common Mistakes in Financial Modeling While reviewing and auditing financial models, a good financial analyst should be alert to the cat valium types of errors that often plague financial models. These are often less ascribable to errors in Excel or other financial model applications you may be using, and more because of human error in formulating calculations or conversions in a financial model. Common Errors in Financial Modeling 1.Conversion factors (kilobytes to megabytes, monthly to annual, millionsto thousands, etc). 2. strand include in totals (certain rows not included). 3. Calculation formula not replicatedacross columns. 4. Wrong row references in calculation formula. 5. Wrong column references in startingtime period(each column should typically contain references only from that column). 6. Change in cell references in formulae referring to other workbooks. 7. Algebraic errors (wrong use of brackets, plus/minus errors). 8. Range limits not set (eg, having neg ativenumber of customers or negative distributor commission payments). . Hard coded dummy numbers / assumptions perpetuating in the financial model due to oversight. 3 Golden rules for Financial Analysts to Avoid Errors in Financial Models 1. Be diligent when building the financial model, a little concentration and attention to dot early on will save you a lot of time and work later.2. Ask another person not in the financial modeling police squad to conduct a detailed audit, very often a fresh pair of eyes may spot errors then arent lucid to someone whos been looking at the same spreadsheet for days or weeks on end. . Perform sanity checks on outputs through benchmarking exercises, always use your ordinary sense and business knowledge to ensure that the results of your financial model (e. g. individual product revenues or cost items, etc) are realistic and aligned with what you may take care them to be. Designing a Financial Model Making it Idiot Proof Always design a financia l model for people who did not build it and for people with limited understanding of financial modeling and analysis techniques.This will help you ensure the usefulness and relevance of the financial model, and preserve its giganticevity long after you have completed the financial modeling exercise. In each financial model workbook, you will typically need some or all of the following worksheets 1. Administration and documentation 2. Assumptions 3. Major blocks such as marketing or capital expenditure (CAPEX) 4. Calculation of revenues, costs, balance sheets, ratios, cashflows 5. Scenario managers and displaysTo enable modular team working, clarity in use and easy auditing, use a standard financial model design template and color codes developed specifically for your company, and ensure that everyone gets familiar with the standardized format. In that way, the entire company will have a single approach to formatting financial models. All users, be they aged executives or junior fi nancial analysts, will then be able to differentiate between cells in the financial model that are hard coded, calculations or outputs, and intepret different financial models from different teams without ambiguity.