Financial Modelling

966 WordsDec 8, 20104 Pages
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…show more content…
4. Wrong row references in calculation formula. 5. Wrong column references in starting time 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 negative number of customers or negative distributor commission payments). 9. 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 detail early on will save you a lot of time and work later. 2. Ask another person not in the financial modeling team to conduct a detailed audit, very often a fresh pair of eyes may spot errors then are’nt obvious to someone who’s been looking at the same spreadsheet for days or weeks on end. 3. Perform sanity checks on outputs through benchmarking exercises, always use your common 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 expect them to be. Designing a Financial Model – Making it Idiot Proof Always design a financial model for people who did not build it and for people with limited understanding of financial
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