Under the bonnet of a best practice financial model

There is a myriad of tangible and intangible features, which make up a best practice financial model. Whilst the tangible elements are self-evident, such as the workbook structure, cosmetic presentation and model infrastructure flexibility. The key intangible aspects are less evident, such as observing the key accounting principles, maintaining strong attention to detail, applying expert spreadsheet skills, integrating thorough forecasting and minimising spreadsheet risks.

Accounting Principles 

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Arguably the cornerstone of a best practice financial model is a strong knowledge of accounting principles. Clearly a financial model, especially a strategic plan, demands the model developer to leverage the rich detail of the source financial statements to undertake a forecast. The model’s value will lie in detailing key principles such as a company’s forecast accounting and tax deprecation rates; receivables and payables’ days; tax and foreign exchange rates; inventory days; debt drawdowns, repayments and interest rates; equity raisings and buy backs; and dividends declared and paid.

Strong Attention to Detail

The financial model must be able to analyse and interpret financial and other types of information. The model developer must create a highly detailed financial spreadsheet, which can be broken down to asset, business unit or product level. It must be able to facilitate the generation of sensitivity or scenario analyses, executive dashboard summaries and graphing outputs. Rightfully the model must be built with comprehensive error and alert checks. The financial model needs to accurately forecast, summarise and interpret a company’s financials and key drivers.

Developed by an Expert Spreadsheet User

The best practice financial model must be built by a financial modeller with strong capabilities in Microsoft Excel©. The model needs to deliver added-value via financial analysis, strategic planning, scenario and sensitivity analyses, valuations and executive dashboards. Only an expert user can deliver this, along with creating a financial spreadsheet with a logical process flow.

Accurate forecasting, strategic planning

Thorough due diligence, expert stakeholder buy-in and consultation should be undertaken during the forecast or planning process of the financial spreadsheet build. The model must understand the financial impact of applying certain forecast assumptions. The model should be innovative and intuitively model sensitivity and scenario analyses. This will help to further articulate the model’s forecast assumptions, and educate executives of their impact on a company’s future financial performance.

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Manage and mitigate the various types of
Spreadsheet risk

The model’s consistency and marketing appeal will be lost if it is beset by various types of spreadsheet errors. A risk-free model will deliver deeper added value to the stakeholders, and greatly improve executive business decisions if it is a robust corporate governance tool.

Robust, consistent, flexible and user-friendly modelling approach

There is a consistent approach to fonts, column layout, naming convention and overall cell formatting. The financial model is user-friendly, in terms of its form layout and the process flow of information. It needs to be able to flex and accommodate corporate events i.e. divestment or new asset acquisitions.

Powerful marketing tool

It must be able to convey or sell the executive message of a company’s financial performance. Various stakeholders should be able to derive instant value from the use of the financial model. Finally, stakeholders should be able to leverage it for investor pitchbook presentations, investor relations use, board-level distribution, and internal corporate use.

Closing the bonnet

There is a variety of intangible aspects required in a best practice financial model: strong accounting foundation, attention to detail and developed by an expert Excel user. Additionally, the model must exhibit tangible benefits such as detailed planning and forecasting features, be error-free, be user-friendly and robust, and represent a value-adding marketing tool.