But a few words to sit alongside the model are still useful….
I think we can all agree that financial models should be built according to generally accepted best practice principles. At the top of a fairly long list for me are:
- consistent timelines;
- separate inputs, workings and outputs;
- consistent formulas; and
- no embedded constants.
These principles take you a long way towards building a robust financial model, but there’s a lot more to think about and to get right.
At F1F9 we also follow the FAST standard (www.fast-standard.org), which is a documented set of rules and guidelines for constructing robust financial models. We’ve been using it for over 15 years while building 400+ models for our clients. The majority of the standard deals with the best practice principles I’ve already mentioned, but importantly it builds on them with some additional rules that inform how the model should be structured. These rules and guidelines push us closer to where we need to be and one of the key benefits of FAST is that it forces us to build a much more accessible and transparent model.
But there’s still plenty more to do:
- How do I incorporate actuals?
- How do I organise my calculations?
- How do I make labels clear and meaningful?
- How do I structure the model so it can be easily adapted?
- How do I minimise the number of links and references?
If you’re a financial modeller you’ll have an answer to these questions but there will be a lot of different answers. We’ve developed, changed and refined our opinions over the past 400+ models and think we’ve got some good answers. They’re not the only good answers, but whatever your method it needs to be considered at the outset and implemented rigorously through the build.
We think that our approach is one of the best, but nobody should accept this based on words alone.