Building financial models can be confusing so to celebrate the launch of our new ‘Financial Modelling Essentials’ course we have put together what we believe to be the essential ’10 rules of financial modelling’.
Presenting financial modelling demands a mixture of keeping it simple and ensuring it‘s easy to understand. Following these rules of financial modelling, whether it’s to your boss, customer or colleagues, will allow better comprehension.
There are many reasons we have to demonstrate what may or may not happen with a financial model. For example, you may need to deliver a valuation, show possibilities in a real estate investment or present the finances of a project. So here we‘ve put together some of the basic principles to guide you to a winning presentation. Here‘s what to keep in mind:
1. Simplicity is best. Avoid presenting any financial data in a complicated manner. The simpler it is, the easier it will be for your users to digest and comprehend. The most effective approach is to break down the problem your model solves into small pieces with clear steps.
2. Consistency. Apply the same consistent use of colour, formulas and structure across your model, so there’s no confusion with your financial explanation.
3. Documentation. In addition to presenting your model most straightforwardly, it’s vital to explain what you’ve detailed. For example, detail what abbreviations are used and note where to find the model results.
4. Don’t try to be clever. Avoid over-engineering your model. Use the most basic techniques, tools, and functions to come to your conclusion so that your user can trust the information you’re giving as it’s easy to follow.
5. Error checking. A crucial part of any financial model, error checks can be part of the formula, and you can also invite a colleague to check your work.
6. Flow. The flow of the information needs to be logical. The best practice for flow is to start with the outcome and work backwards through the calculations to the inputs.
7. Left to right consistency. Use your spreadsheet in an obvious manner and place one formula per row. It’s not good practice to assume that something will happen on a specific date, so formulas need to account for delays.
8. Presentation. Make the best use of formatting, dashboards and charts to optimise understanding of your work. People would much rather see something that is attractive and visually communicative than a clutter of numbers.
9. Structure. The clarity of your design is vital in any good financial modelling. Inputs and calculations must be separate and the results laid out separately.
10. Timing. Timing is about more than just placing a timeline across your spreadsheets. It’s essential to keep periodicities separate by using separate sheets.
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