Ten Financial Modeling Commandments

Updated on December 9, 2018
Source
So you shall keep my commandments, 
and do them, to give eternal life to your financial models...

A financial model is one of the essential project documents that is used by all stakeholders involved in the life of any project or deal. A financial model is mainly built in Excel. Like any other project document, the financial model should be transparent and readable. Unlike a Word document, it can be made flexible. This allows you to make changes as you review the document. In essence, a good financial model is an informative document. However, it can also be a tool for better decision making.

In life, I follow these three simple rules: "Good thoughts, good words, and good deeds." For my financial models, I follow these ten rules.

1. Thou Shalt Keep it Simple

It is horrible to receive a comment from a user and even worse from an auditor saying that your model is complex and heavy. However, keep in mind that simplicity is a relative term and must be considered in connection with the level of knowledge of the recipient. For example, a standard financial model might be labeled as complex by someone who has little knowledge of Excel and financial modelling. On the other hand, the same model reviewed by a spreadsheet engineer might be labeled as stupid.

2. Thou Shalt Separate Inputs From Calculations And Results

This is more like a Feng Shui exercise than financial modelling. For transparency and ease of access to model assumptions, dedicate a separate worksheet or a separate place on a single model worksheet for your assumptions. Also, categories your assumptions by type.

3. Thou Shalt Not Hard-Code Inputs Within Formulas

This is like an environment issue in financial models. It’s the same dilemma as why some people continue to throw their trash on the ground? Not that the input that you are hard-coding is trash but with hard-coding inside the formula, you are treating that piece of information as trash and burying it without a headstone or nameplate!

4. Thou Shalt Use Color Codes

Use a consistent color scheme to mark different types of cells and data.

Again, keep it simple. You don't want to overdo it with too much colors or crazy, over-the-top formatting.

5. Thou Shalt Avoid Long Formulas

Use the Feng Shui rule of thumb of financial models: “Do not write a formula longer than your thumb."

6. Thou Shalt Build In Error Checks

Everything might works perfectly fine in your base case but once you change any inputs, something might go wrong and you should be notified. Let me tell you a secret, I consider my models as my babies and the built-in checks as the baby monitor. So, once something is wrong in one part of my model, one of the checks will tell me that the baby needs attention. Check out my post and the Excel spreadsheet on this topic “Checkmate errors with Checks” in Financial Modelling Handbook.

7. Thou Shalt Include Sensitivity And Scenario Analysis

You need to do further modelling so that your model can start talking alternative future scenarios. Your model should be smart and should not suffice to a single worldview.

8. Thou Shalt Insert Summary Charts And Tables

The typical user should just validate and make changes to the inputs that you have clearly defined in your spreadsheet and then go to a summary sheet to see the main results. In this sheet, you can unleash your creativity and come up with dynamic and beautiful charts and tables.

9. Thou Shalt Avoid Circular References

They should have named this phenomenon “vicious cycle”. That’s what it does to a financial model.

10. Thou Shalt Not Be Selfish

Neglecting usability or user friendliness in a financial model is a costly mistake. A financial model should be easy to read and manipulate for users.

Questions & Answers

    © 2018 Hedieh Kianyfard

    Comments

      0 of 8192 characters used
      Post Comment

      No comments yet.

      working

      This website uses cookies

      As a user in the EEA, your approval is needed on a few things. To provide a better website experience, toughnickel.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

      For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://toughnickel.com/privacy-policy#gdpr

      Show Details
      Necessary
      HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
      LoginThis is necessary to sign in to the HubPages Service.
      Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
      AkismetThis is used to detect comment spam. (Privacy Policy)
      HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
      HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
      Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
      CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
      Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
      Features
      Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
      Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
      Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
      Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
      Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
      VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
      PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
      Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
      MavenThis supports the Maven widget and search functionality. (Privacy Policy)
      Marketing
      Google AdSenseThis is an ad network. (Privacy Policy)
      Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
      Index ExchangeThis is an ad network. (Privacy Policy)
      SovrnThis is an ad network. (Privacy Policy)
      Facebook AdsThis is an ad network. (Privacy Policy)
      Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
      AppNexusThis is an ad network. (Privacy Policy)
      OpenxThis is an ad network. (Privacy Policy)
      Rubicon ProjectThis is an ad network. (Privacy Policy)
      TripleLiftThis is an ad network. (Privacy Policy)
      Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
      Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
      Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
      Statistics
      Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
      ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
      Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)