Let’s continue our exploration of the 10 Rules of Financial Modelling. This post examines why and how to keep your financial model easy enough for your users to understand and trust.

You’ve probably noticed that many people mentally switch off when things start getting complicated or ‘hard work’. For this reason, the winning financial model is not complex, and neither is it over-engineered. No matter who you’re presenting the information to, it’s imperative to lay it out so that it’s easy to follow and understand.

To create a simple financial model, we recommend that you use the most basic techniques, tools and functions so that your user can trust the information and make your model easy to follow.

You know your material, but they don’t

You may know your material inside out, but that’s not the case for most of the people who will be receiving your presentation. It may well be the first time they’ve seen any financial data related to the topic you’ve modelled.

It’s essential to avoid presenting information in a manner that your users will find complicated, and you can do this by breaking down the material into small pieces with clear steps.

When creating the financial model, a presenter would typically use Excel and its most basic functions. The primary functions are more likely to produce the correct answers without complicating the path.

Keep the financial model simple

Keep in mind that users may need to adjust the data in the spreadsheet by changing some of the numbers. The simpler you keep your models, the more people will understand your model. You may even simplify things for your users by adding an input sheet that clearly marks and provides guidance and notations to show them which cells are involved in any updating exercise.

Avoid  advanced functions

We recommend that you avoid some of the more advanced functions when creating your financial models. The more challenging functions can make it difficult for users to understand the steps you’ve taken to come to the results in your material.

As you build your model, keep in mind that most people who work in a professional capacity these days are likely to have a basic understanding of Excel functions.¬† Avoid adding functionality that you aren’t confident that your users will have seen before. For example, the OFFSET and INDIRECT are likely to be outside of their experience and knowledge.

The more complex the model is, the more impenetrable and difficult to understand, and that will affect your user’s confidence in using it. If anything goes wrong, they won’t understand enough to be able to fix it or to track through to the precedent cells. It needs to be straightforward, easy to use and feel comfortable.

Don’t be too clever with your financial model

Overall, the ultimate outcome is to resist the temptation to be clever. Of course, you likely know some very complex formulas that solve problems if you have had experience using Excel. However, you may not be there in person to explain and ‘teach’ about these formulas. The user will need to use your financial model without the level of knowledge you have.

In summary, take your time breaking down the issues into simple, bite-sized chunks so that whoever uses your model can follow the logic and trust the outcome. The more they understand, the more they can trust what they’re doing and trust you as the model author.

Over-engineered financial models will not get your message across.

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Erwan Fournis
Global Head of Financial Advisory

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Erwan Fournis
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