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Bfs441 Unit 2 - Basics of Financial Modelling and The Business Environment

The document discusses best practices for financial modelling in Excel. It covers topics like structuring a model with tabs for drivers, calculations, and outputs, formatting models for clear communication, and auditing techniques like using consistent naming and avoiding hidden cells or sheets.

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Ngoza
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30 views

Bfs441 Unit 2 - Basics of Financial Modelling and The Business Environment

The document discusses best practices for financial modelling in Excel. It covers topics like structuring a model with tabs for drivers, calculations, and outputs, formatting models for clear communication, and auditing techniques like using consistent naming and avoiding hidden cells or sheets.

Uploaded by

Ngoza
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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BFS441 FINANCIAL

MODELLING AND
FORECASTING
UNIT TWO: BASICS OF FINANCIAL MODELLING AND
THE BUSINESS ENVIRONMENT

05/11/2024 [email protected] 1
Financial modelling is one of the most desired
skills in today’s corporate world
Essential skills required by finance
professionals is proficiency in financial
modelling

INTRODU Financial Modelling is the main core element to


take the major business decisions in a corporate
CTION world.
Financial models are the most valuable tools for
executing business choices to get perfect
solutions
Financial models are an indispensable part of
every company’s finance toolkit

05/11/2024 [email protected] 2
AIM

To explore the best practices that are required to develop a financial model in line
with the business environment

05/11/2024 [email protected] 3
OBJECTIVES
• Apply Ground rules to financial modelling in Excel
• Articulate the dos and don’ts of good financial models and the most efficient
techniques to model construction and review necessary to ensuring incorporation of
best models
• Effectively use keyboard shortcuts
• Customizing Excel for efficient modelling
• Formatting models for improved communication
• Use some of the modelling functions (IF, MAX, MIN, NPV, IRR, etc.)
• Validate the model for correctness and consistency

05/11/2024 [email protected] 4
REFLECTION

“The best financial models are simple enough for anyone to understand, yet
dynamic enough to handle complex situations.”
Tim Vipond.

05/11/2024 [email protected] 5
GROUND RULES FOR FINANCIAL MODELLING

Spreadsheet financial models are ubiquitous in the business world, and decisions
of all sizes are made based on their results.
Many spreadsheet users are self-taught or have picked up bad habits along the
way.
Improper practice, such as a lack of review and oversight, impacts the world
economy;
Guidance to support best practice in the sector. Following good practice should
result in a model that is robust, understandable, and less likely to contain errors.

05/11/2024 [email protected] 6
PLANNING YOUR MODEL
As with all things complex, the first step to building a financial model (“model”)
is to carefully layout a blueprint
1. Define the model’s end goal.

2. Understand the timelines for both building the model and for its useful life.

3. Determine optimal trade-off between “detail” vs. “reusability.”

05/11/2024 [email protected] 7
STRUCTURING YOUR MODEL
1. Cover Page (Tab): Project code name, a description of the model’s
intent, the author’s contact information, and any applicable
disclaimers.
2. Drivers Tab: Inputs and assumptions.
3. Model Tab: Calculations (i.e., the three financial statement
projections and calculations).

05/11/2024 [email protected] 8
FORMATTING YOUR MODEL
 First, it is important to note that each firm/group might have its own
preferences or internal practices.
 While building, it is important to first check in with—and adhere to
—whatever format your respective firm prescribes.
 In the absence of firm-specific practices, however, the content below
details Wall Street’s universal language for formatting a model

05/11/2024 [email protected] 9
FORMATTING YOUR MODEL
 There is no in-built automation functionality to Color code your
Excel spreadsheets according to the universal Color-coding standards
You may design your own macro(s) to achieve these outcomes, and
subsequently create shortcut combinations to automatically color-
coded your work

05/11/2024 [email protected] 10
BEST PRACTICES FOR AUDITING A MODEL
Series of best practices on how to build with an auditor mindset. As
follows
1. One Row, One Formula
2. No Hard-coded Numbers Embedded Within Formulas
3. Simple Is Always Better
4. Adhere Consistently to Your Sign Convention
5. Avoid Naming Your Cells, Instead Rely on Excel’s Grid Logic
6. Never Have the Same Input in Multiple Locations

05/11/2024 [email protected] 11
BEST PRACTICES FOR AUDITING A MODEL
Series of best practices on how to build with an auditor mindset. As
follows
7. Avoid Linking Files
8. Do not Hide Sheets or Rows
9. Fewer, Bigger Tabs Are Better Than Multiple Smaller Tabs
10. Create Checks Throughout Your Model via “Aggregated Error Checks”
Located in One Tab:

05/11/2024 [email protected] 12
SUMMARY
 Excel is omniscient, omnipresent, and omnipotent when it comes to corporate
finance, analysis, and data-driven decision-making.
 It does not have to be intimidating or painful, even for the novice or uninitiated.
 Like most things in life, practice, consistency, and attention to detail (an in
Excel’s case, shortcuts) will get you most of the way there
 Once you become familiar with the application, you will find it a powerful
productivity and numerical storytelling tool, that you will sparsely be able to
function without, even in your personal life.
 As you progress through the various stages of Excel fluency

05/11/2024 [email protected] 13
BFS441 FINANCIAL
MODELLING AND
FORECASTING

Questions???

05/11/2024 [email protected] 14

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