When we build financial models 📈, there are three key properties that we should try to achieve. 👇 The first two, 𝗙𝗹𝗲𝘅𝗶𝗯𝗶𝗹𝗶𝘁𝘆 and 𝗔𝗱𝗮𝗽𝘁𝗮𝗯𝗶𝗹𝗶𝘁𝘆 are often what modellers put the most effort into: • 🤸 𝗙𝗹𝗲𝘅𝗶𝗯𝗶𝗹𝗶𝘁𝘆 - allowing the user to see best and worst possible outcomes through assumptions that can be easily manipulated to create different scenarios and sensitivities • ✂️ 𝗔𝗱𝗮𝗽𝘁𝗮𝗯𝗶𝗹𝗶𝘁𝘆 - preparing the model in such a way that it can be updated or modified in future, to track outcomes or incorporate new revenue/cost items But these two should never come at the cost of the most important trait: 𝗨𝗻𝗱𝗲𝗿𝘀𝘁𝗮𝗻𝗱𝗮𝗯𝗶𝗹𝗶𝘁𝘆 💡. In fact, by making your model 𝘂𝗻𝗱𝗲𝗿𝘀𝘁𝗮𝗻𝗱𝗮𝗯𝗹𝗲, you will probably go a long way to achieving the first two properties! But what does understandability mean in the context of a model, and why is it so important? The first thing to realise is that a financial model is all about 𝗰𝗼𝗺𝗺𝘂𝗻𝗶𝗰𝗮𝘁𝗶𝗼𝗻. Ultimately when we build any model, we are trying to 𝘀𝘂𝗽𝗽𝗼𝗿𝘁 𝗮𝗻 𝗶𝗻𝗳𝗼𝗿𝗺𝗲𝗱 𝗯𝘂𝘀𝗶𝗻𝗲𝘀𝘀 𝗱𝗲𝗰𝗶𝘀𝗶𝗼𝗻, whether that's investigating the size of a market, assessing the return of a new initiative, or preparing a quote in a bid process. In most cases, the people ultimately making that business decision aren’t the same people building the model. So our model must communicate clearly the answer, yes, but also 𝗵𝗼𝘄 that answer was arrived at. And we’re not just communicating with the 𝗱𝗲𝗰𝗶𝘀𝗶𝗼𝗻-𝗺𝗮𝗸𝗲𝗿. We’re also communicating with: • Our 𝗺𝗮𝗻𝗮𝗴𝗲𝗿, if we have one, who needs to know what we’ve done, and how (and how well!) we’ve done it. • A 𝗳𝘂𝘁𝘂𝗿𝗲 𝗰𝗼𝗹𝗹𝗲𝗮𝗴𝘂𝗲 or 𝗰𝗹𝗶𝗲𝗻𝘁 of ours who needs to edit and maintain the model • 𝗢𝘂𝗿𝘀𝗲𝗹𝘃𝗲𝘀 - how often have you come back to a model that you haven’t looked at for a while and completely forgotten how part of it works?! Creating an 𝘂𝗻𝗱𝗲𝗿𝘀𝘁𝗮𝗻𝗱𝗮𝗯𝗹𝗲 𝗺𝗼𝗱𝗲𝗹 makes that communication so much easier, with all parties. It’s not easy though, even for experienced modellers, so having a set of guidelines (𝘰𝘳 𝘦𝘷𝘦𝘯, 𝘦𝘳, "𝘳𝘶𝘭𝘦𝘴") to work with is super-important. I'll be posting some of mine here in future, but feel free to share yours in the comments!
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Finance optimization strategist | Optimizing finances for fast-growing brands to allow worry-free scaling | Founder at Fincelerity | MBA Finance & Banking
The devil lies in the details. When building a financial model, how you lay the foundations will dictate how good your model is. Of course, I'm talking about assumptions—the starting data and information available. These assumptions (and past performance) directly impact the accuracy and realisticity of the model. Do proper research and dive deep into every aspect of the business before you start modeling. Get a good understanding of how the industry and company you're modeling for work. Only then will you understand the frictions these companies face. That allows you to look at the problems through their eyes. A simple 0.5%-1% miscalculation in revenue, or COGS, will change the bottom line entirely. Take into account both macro and micro factors and different scenarios. Have a clear cost and CAPEX structure, along with industry-specific details included. Not every model will be a "one size fits all." Each should be different and tailored to the company's needs.
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A financial model is a critical decision-making tool that allows users to make accurate and informed financial decisions about a company. In order to clearly and effectively tell the story of a company to decision makers, a financial model needs to serve as a powerful communication tool. These goals can be achieved when a model is developed with 6 Key Attributes: 1. Flexible: The model contains scenarios with multiple cases (i.e. base case, best case, worst case) for the most critical variables. 2. Intuitive: The reader can easily follow and understand the model based on the flow of the pages. 3. Transparent: Every formula can be understood whether the reader clicks into the cell, or looks at a printout on paper. 4. Dynamic: Any changes to the assumptions should properly flow through the model. 5. Tells a Story: The model is a powerful communication tool that allows for optimal decision making. 6. Transferable: When a model is well designed and well built, colleagues and clients will be able to use the file as if they built it themselves. Like this post on Key Attributes? Let us know in the comments if you’d like to receive a PDF on Financial Model Best Practices. #financialmodeling #bestpractices #attributes #FinancialModelingInstitute
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A financial model is a critical decision-making tool that allows users to make accurate and informed financial decisions about a company. In order to clearly and effectively tell the story of a company to decision makers, a financial model needs to serve as a powerful communication tool. These goals can be achieved when a model is developed with 6 Key Attributes: 1. Flexible: The model contains scenarios with multiple cases (i.e. base case, best case, worst case) for the most critical variables. 2. Intuitive: The reader can easily follow and understand the model based on the flow of the pages. 3. Transparent: Every formula can be understood whether the reader clicks into the cell, or looks at a printout on paper. 4. Dynamic: Any changes to the assumptions should properly flow through the model. 5. Tells a Story: The model is a powerful communication tool that allows for optimal decision making. 6. Transferable: When a model is well designed and well built, colleagues and clients will be able to use the file as if they built it themselves. Like this post on Key Attributes? Let us know in the comments if you’d like to receive a PDF on Financial Model Best Practices. #financialmodeling #bestpractices #FinancialModelingInstitute
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🌟 Unlocking the Mystery of Financial Models 🌟 Ever wonder what exactly a financial model is? 🤔 Let's dive into the fascinating world of numbers, forecasting, and decision-making! In the corporate universe, a financial model serves as the North Star for businesses, guiding them through strategic decisions and illuminating the path towards financial goals. 💼✨ But what's truly behind this powerhouse tool? 🔍 **At its core, a financial model is essentially a mathematical representation of a company's performance.** It pulls together historical data to create forecasts and projections, helping businesses to evaluate risks, opportunities, and strategies with precision. Imagine building a bridge: every component must fit perfectly to ensure stability. Similarly, a financial model meticulously assembles components such as revenue streams, cost structures, and market trends to provide a comprehensive view of a company’s future. 🌉📈 These models are invaluable for: 1️⃣ **Investment Analysis:** Assessing the viability and potential returns of investment opportunities. 2️⃣ **Budgeting and Forecasting:** Crafting realistic financial plans and anticipating cash flows. 3️⃣ **Valuation:** Determining the worth of a business for mergers, acquisitions, or fundraising efforts. 4️⃣ **Strategic Planning:** Supporting long-term decision-making through scenario analysis and sensitivity testing. But, let's be real—there's a touch of artistry to the science of financial modeling. 🎨 While grounded in numbers, building a model requires creativity and insights to capture the complexities and nuances of real-world situations. For all the financial modeling enthusiasts out there: how has mastering this skill transformed your professional journey? Share your stories below! 👇 #FinancialModeling #CorporateFinance #BusinessGrowth #FinancialPlanning #LinkedInCommunity
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Before building a financial model, it is critical to have an effective plan. This helps to ensure that the scope, design, structure, level of detail, and flow are optimal. The following best practices for model planning will help you construct robust financial models, facilitating informed decision-making and driving superior outcomes. 1. Review historical financial statements Read the management discussion and analysis, and the notes to the financial statements. 2. Learn about the industry Read industry journals and equity research reports. 3. Understand the purpose of the model Ensure that the output calculations allow the model users to make the required decisions. 4. Determine the key drivers Key drivers are the most critical variables that will determine the success or failure of the company. 5. Make a list of assumptions This is usually a big list of every assumption needed to build the model. 6. Identify the required schedules and components Plan the order and flow of every section in the model such as revenues, costs, working capital, etc. Stay tuned for more insights into financial modeling excellence! Like this post on model planning? Let us know in the comments if you’d like to receive a PDF on Financial Model Best Practices. #financialmodeling #planning #bestpractices #FinancialModelingInstitute
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What Makes a Good Financial Model Cover? Here are 5 Key Elements I personally like to include: 𝟭. 𝗖𝗹𝗲𝗮𝗿 𝗢𝗿𝗴𝗮𝗻𝗶𝘇𝗮𝘁𝗶𝗼𝗻 𝗡𝗮𝗺𝗲 𝗮𝗻𝗱 𝗟𝗼𝗴𝗼 First impressions matter, and your model's cover is no exception. Clearly display the organization's name and logo. This not only reinforces brand identity but also assures the users about the model's origin and credibility. 𝟮. 𝗗𝗲𝘁𝗮𝗶𝗹𝗲𝗱 𝗧𝗮𝗯𝗹𝗲 𝗼𝗳 𝗖𝗼𝗻𝘁𝗲𝗻𝘁𝘀 A well-organized Table of Contents not only enhances the navigability of your financial model but also highlights the essential sections. Users can quickly locate the information they need, making the model more user-friendly and efficient. 𝟯. 𝗔𝗰𝘁𝗶𝘃𝗲 𝗦𝗰𝗲𝗻𝗮𝗿𝗶𝗼𝘀 𝗮𝗻𝗱 𝗖𝗼𝗻𝘁𝗿𝗼𝗹 𝗠𝗲𝗰𝗵𝗮𝗻𝗶𝘀𝗺𝘀 Financial models are dynamic tools. Showing active scenarios and control mechanisms right on the cover allows users to easily understand and adjust the model according to different financial landscapes. This adaptability is crucial for making informed decisions under varying assumptions. 𝟰. 𝗔𝗹𝗲𝗿𝘁 𝗦𝘆𝘀𝘁𝗲𝗺𝘀 Incorporate an alert system to immediately draw attention to critical issues or thresholds. This proactive feature helps in anticipating problems before they escalate, ensuring that decision-makers are not caught off guard. 𝟱. 𝗗𝘆𝗻𝗮𝗺𝗶𝗰 𝗖𝗼𝗺𝗺𝗲𝗻𝘁𝘀 Dynamic comments provide real-time, context-sensitive insights which evolve with the ongoing financial discussion. They add immense value by making the model not just a tool for viewing data, but a platform for interactive analysis and decision-making. An informative and well-designed cover sets the tone for the insights that follow. It’s the first step to ensuring your financial model is as functional as it is compelling. Do you agree with these elements? What else would you include on a financial model cover? Let's discuss below!
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Before building a financial model, it is critical to have an effective plan. This helps to ensure that the scope, design, structure, level of detail, and flow are optimal. The following best practices for model planning will help you construct robust financial models, facilitating informed decision-making and driving superior outcomes. 1 - Review historical financial statements Read the management discussion and analysis, and the notes to the financial statements. 2 - Learn about the industry Read industry journals and equity research reports. 3 - Understand the purpose of the model Ensure that the output calculations allow the model users to make the required decisions. 4 - Determine the key drivers Key drivers are the most critical variables that will determine the success or failure of the company. 5 - Make a list of assumptions This is usually a big list of every assumption needed to build the model. 6 - Identify the required schedules and components Plan the order and flow of every section in the model such as revenues, costs, working capital, etc. Stay tuned for more insights into financial modeling excellence! Like this post on model planning? Let us know in the comments if you’d like to receive a PDF on Financial Model Best Practices. #financialmodeling #planning #bestpractices #FinancialModelingInstitute
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Great Financial Model starts with great cover page
What Makes a Good Financial Model Cover? Here are 5 Key Elements I personally like to include: 𝟭. 𝗖𝗹𝗲𝗮𝗿 𝗢𝗿𝗴𝗮𝗻𝗶𝘇𝗮𝘁𝗶𝗼𝗻 𝗡𝗮𝗺𝗲 𝗮𝗻𝗱 𝗟𝗼𝗴𝗼 First impressions matter, and your model's cover is no exception. Clearly display the organization's name and logo. This not only reinforces brand identity but also assures the users about the model's origin and credibility. 𝟮. 𝗗𝗲𝘁𝗮𝗶𝗹𝗲𝗱 𝗧𝗮𝗯𝗹𝗲 𝗼𝗳 𝗖𝗼𝗻𝘁𝗲𝗻𝘁𝘀 A well-organized Table of Contents not only enhances the navigability of your financial model but also highlights the essential sections. Users can quickly locate the information they need, making the model more user-friendly and efficient. 𝟯. 𝗔𝗰𝘁𝗶𝘃𝗲 𝗦𝗰𝗲𝗻𝗮𝗿𝗶𝗼𝘀 𝗮𝗻𝗱 𝗖𝗼𝗻𝘁𝗿𝗼𝗹 𝗠𝗲𝗰𝗵𝗮𝗻𝗶𝘀𝗺𝘀 Financial models are dynamic tools. Showing active scenarios and control mechanisms right on the cover allows users to easily understand and adjust the model according to different financial landscapes. This adaptability is crucial for making informed decisions under varying assumptions. 𝟰. 𝗔𝗹𝗲𝗿𝘁 𝗦𝘆𝘀𝘁𝗲𝗺𝘀 Incorporate an alert system to immediately draw attention to critical issues or thresholds. This proactive feature helps in anticipating problems before they escalate, ensuring that decision-makers are not caught off guard. 𝟱. 𝗗𝘆𝗻𝗮𝗺𝗶𝗰 𝗖𝗼𝗺𝗺𝗲𝗻𝘁𝘀 Dynamic comments provide real-time, context-sensitive insights which evolve with the ongoing financial discussion. They add immense value by making the model not just a tool for viewing data, but a platform for interactive analysis and decision-making. An informative and well-designed cover sets the tone for the insights that follow. It’s the first step to ensuring your financial model is as functional as it is compelling. Do you agree with these elements? What else would you include on a financial model cover? Let's discuss below!
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Financial Modeling Best Practices While preparing a financial model, these practices may help you to create a robust financial mode: 1. Plan your Model - Define the objective of preparing your model 2. Invest Time in Assumption - Growth drivers, expansion Plan, portfolio 3. Use Separate Sheet for assumptions 4. Decide vertical or horizontal 6. Break down calculations into simple, logical steps 7. Use clear labelling (esp. units of measurement) 8. Include scenarios and 9. Built in error checks 10.Test it! Follow - LEXICON for more updates. Mention in comment other best practices you are following. Abdul Shakoor CMA, FFA-UK, LLB LEXICON LEXICON Institute LEXICON Trainings #lexicon #financialmodeling #financial #modeling
