The document discusses best practices for building effective financial forecasting models in Excel, including separating inputs, calculations and outputs; clearly defining and grouping assumptions; using consistent formatting and presentation; breaking calculations into simple pieces; and setting up scenarios and data tables without altering underlying formulas. The goal is to create models that are transparent, flexible, robust, and easy for others to understand and use.
2. Excel shortcuts
Using Excel shortcuts will help you:
• Increase your modelling productivity and save
time and therefore money
• Reduce your dependence on the computer
mouse which can improve your work posture
and prevent strain associated with RSI
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4. The six stages in model development
Scope Plan Design Build Test Implement
• In any Excel model build (e.g. forecast model), adhere to the tried and
tested six-stage, Best Practice construction method
• It will ensure models constructed are:
• Consistent
• Transparent
• Flexible
• Robust
5. How to build a financial model
Timing
Revenue Executive
Inputs Summary /
Costs Financials
Plots
Finance
Depreciation
Taxation
Equity
6. How to build a financial model
We want to get from…
Hidden rows Inconsistent formatting
7. How to build a financial model
to…
Flags to clearly define phases
Sections grouped
logically
Purposeful cell
formats
8. Best Practice Methodology
The methodology covers 3 main categories
Model Infrastructure
Formatting and Presentation
Formula Structure
9. Model infrastructure
Good design is the foundation of a good model
The rules
• Inputs, calculations and outputs are separate
• Clearly define each assumption and group assumptions together
• Worksheet tabs labelled, grouped, coloured and ordered
• Scenarios are applied without overriding the Base Case
• Time runs from left to right (across sheets)
10. Model infrastructure
Keep inputs, calculations and outputs separate
• Only inputs sheets should have to be updated
• Calculation sheets should all have the same timing resolution
• Show key financial and operational output on a Summary
• Have integrated financial statements
• Show key outputs annually
• Keep the end user in mind for information required in a Summary
11. Model infrastructure
Clearly define each assumption and group assumptions together
• Format each assumption with a Style
• Include units / date if applicable
• Consider splitting out time dependent and independent assumptions onto separate Input
worksheets
• Avoid overloading assumptions on just one sheet
• Avoid having assumptions on calculations sheets
• Keep actual data separate to assumptions and calculations to maintain integrity
12. Model infrastructure
Worksheet tabs labelled, grouped, coloured and ordered
• Worksheet names should be short and meaningful
• All sheets should be visible within one screen
• Arrange sheets in a logical manner from left to right
• Colour sheets based on its purpose - Assumptions, Calculations or Outputs
Assumptions Outputs Calculations
13. Model infrastructure
Scenarios are applied without overriding the Base Case
• Allows users to quantify the main risks in the project
• Good models have built-in infrastructure for sensitivity analysis of the main operating and
financial drivers
14. Model infrastructure
Time runs from left to right (across the sheet)
• Only 256 columns in Excel 2003 so daily models should run down
• Have column [x] correspond to same date on each worksheet
• Exceptions might include some bond or tax instruments or pricing
• Excel thinks from ‘left to right’ and from ‘top to bottom’
15. Formatting and presentation
A consistently formatted and well presented model makes a user’s life much
easier and less risky!
The rules
• Apply purposeful and consistent formatting
• Key outputs are presented clearly in a concise Output worksheet
• Use data grouping
16. Formatting and presentation
Formatting and presentation
Use data grouping
• Displays like a table of contents
• Allows deep sheets to be understood instantly
• Necessary for deep sheets such as with multi asset modelling
• More transparent than hiding rows and columns
17. Formula structure
Following these rules makes reviews much easier and reduces audit cost
The rules
• Keep formulae simple
• Break down calculations into bite-size pieces
• Apply one formula per row
• Do not use hard-coding
• Address circular logic & references
18. Formula structure
Keep formulae simple
• No more than one or two IF statements within a formula
• Avoid excessive use of Excel formulae
• Avoid formulae that are difficult to understand – INDIRECT, OFFSET, INDEX, MATCH,
VLOOKUP, HLOOKUP
• Avoid using too many named ranges
• The avoidance of mega formulae is key for keeping audit costs down and avoiding errors
19. Formula structure
Break down calculations into bite-size pieces
• Apply single line logic rather than combining many
• Understand calculations before you model them
• No formula should be longer than half the length of the Excel formula bar
• Binary logic flags reduce the number of IF statements required
20. Scenario Manager
Corality’s Method
• Set up a separate sheet for the scenario manager
• Flex implemented to inputs/calculations without altering underlying calculations
Different Scenarios
Flex cells controlled
from Scenario Manager
21. Data Table
Tips
• Key results to be laid out in the first line of table
• F9 to update table
• CAUTION : Too many data tables may slow down a workbook
Key Results
22. More resources
www.navigatorpf.com/resources
www.corality.com/web-resources
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