Financial models can be scary and even daunting – especially when they haven’t been built by you! Maybe you are a financier or model auditor trying to figure out what a model is trying to tell you. Using the 5 financial model tips outlined in this article, we can all make financial models we build easier to understand, use and be audited (a crucial step in obtaining funding). Financial models don’t have to be the complex beasts they are sometimes made out to be! Follow these five financial model tips to modelling glory.
A flag can be used to represent anything that changes over time! A simple 1 or 0 (with some conditional formatting) can then be used in other calculations, complex formulas can just multiply by the flag to ensure they are being used in the appropriate periods.
This is one financial model tip that makes a big impact!
When reviewing a financial model against term sheets, EPC contracts and other long documents, having one worksheet where all of the inputs can be found makes life much easier! Even better is when those inputs are segregated according to themes or headings (E.g. Financing, Operations, Construction, Forex, Macro-Economic Inputs etc.). Intelligently structuring the Inputs worksheet is not only a financial modelling tip, but a sign of a well thought out and strategically built financial model.
This financial model tip ensures that no-one spends hours looking for key assumptions!
Being humans, we tend to assess large amounts of data much more easily if it is presented to us in a pretty picture. Financial models are no different! Graphs illustrating construction sources and uses of funds, ratios vs. covenants and cashflows can be very useful for immediately understanding where stresses are in financial models.
This financial model tip means no-one even needs to look at the numbers to know that the financial model is saying!
Note that the above graph is slightly deceptive as the y axis does not start at 0! If it did, the gap between the covenanted DSCR and the actual DSCR wouldn’t appear at all:
This financial model tip ensures that the model is accurate.
So, there you have some very easy to implement financial model tips on making your financial models easier to build, use and check.
Now read why financial models matter!
Good luck and happy financial modelling!