19 Mar 2021 Ankit Chadha

Here’s Your Ultimate Guide to The Best Practices Of Financial Modelling

Financial Modelling | TRC Corporate Consulting

With the increasing economic uncertainties, it becomes essential to work out your company’s finances and take decisions in a planned way. This is usually done with the help of the company’s financial statements to obtain accurate results. To get a better picture of the organization/company’s status based on which you can plan your future decisions, you should avail yourself of financial modelling services. After working with these financial statements, advanced financial modelling comes into play.

Financial modelers use the most advanced techniques and tools to make calculations and work on the analysis. For the same, they use various kinds of models. To mention a few of them, it includes analysis for mergers and acquisitions, sensitivity analysis, leveraged buyouts, etc. Before coming to financial modelling and valuation, you should clearly understand what financial modelling is precisely.

What is Financial Modelling? 

In Financial modelling and analysis, a tool built into spreadsheet applications such as MS Excel is used to predict the financial performance of a company in the future. The forecast is usually based on the company’s past results, expectations about the future, and the planning of the income statement, balance sheet, cash flow statement, and supporting schedules.

Financial Modelling and Valuation 

The financial models which are built vary in structure and purpose. Depending on the purpose and the depth of analysis required, the model varies. In financial modelling and analysis, the two primary determinants for an ideal model structure are flexibility and granularity.

Granularity financial model decides how detailed a model should be. As the granularity increases, the model becomes more critical because it gets difficult to work with a more extensive database. Also, the layout of the spreadsheet and individual sections are critical to work with. Financial modelling and valuation become more complicated in this case. In addition to complexity, the chances of errors increases.

Flexibility, the other major determinant of a financial model, determines how flexible a model should be. When financial modelling and valuation need to be done for a particular company or transaction, it doesn’t require much flexibility than one designed to reuse or use it as a template.

Best Practices of Financial Modelling 

In any financial model, transparency is the foremost thing that should be taken care of, which generally reduces while keeping up with the required granularity and flexibility. Despite using advanced financial modelling and analysis, transparency might get compromised.

Therefore, the analysis should be carried out while taking care of a few things.

  1. Formatting 

 

  1. Color Codes 

While working on an excel sheet, it is quite challenging to distinguish between the cells that need to be modified and not modified (generally, cells with formulas). Every expert has a different working style, but ideally, blue is used for inputs, and black is used for the formulas. Many other color codes are used for interlinking. It would help if you were wary about color codes.

  1. Comments 

Adding comments in cells becomes important to footnote sources and add more clarity to the data. This is necessary because while working on financial modelling and analysis, you require data in bulk, which might confuse you.

  1. Adhere to Sign Convention 

Before the model is built, you should decide whether to use positive or negative sign conventions. There are three conventions, out of which one is recommended and majorly used, which says, all income positive, all expenses negative. The chances of errors being made are less, and subtotaling is easier.

  1. Formulas 

In financial modelling and analysis, special care should be taken while entering formulas.

  1. Partial inputs should be avoided 

Hard-coded numbers or constants should never be used for cell reference because there are high chances that you might forget about the assumption inside a formula. There must be a separation between inputs and calculations.

  1. One calculation in one row 

Most of the financial models are dependent on historical data. They are usually prepared from left to right, and towards the right, there are forecast columns. Across the row, the formula in the forecast column should be consistent.

  1. Simple formulas should be used 

Working with complex formulas might seem creative, but you should avoid using them and work with simple formulas to prevent complications.

  1. Build-in error checks 

‘Aggregated Error Checks’ can be used to ensure that balances of financial statements are correct and mitigate other errors.

  1. Clear headings and subheadings 

It should be used to distinguish between different sections.

  1. Worksheets 

 

  1. One long sheet over small sheets 

One long sheet should be preferred over other small sheets because working on multiple sheets will mean more interlinking, which will be prone to errors. Instead, a long sheet with different sections exclusively marked should be used.

  1. Instead of hiding rows, prefer grouping them 

Rely on Excel Grid Logics rather than naming your cells as it gets difficult to locate the source input. In your formulas, you should rely on grid convention.

Why Choose TRC Consulting for Advanced Financial Modelling Services? 

Financial modelling and valuation involve critical analysis, which should be worked out with the assistance of experts from different backgrounds like finance, technical, etc. At TRC Corporate Consulting, we team with industry-specific experts who perform extensive research, communicate amongst them and work as a team to provide the best services to the clients. To name a few, we provide a fusion of services like business modelling, corporate restructuring valuation, and accounting valuation services. 

TRC prioritizes getting a proper understanding of the client’s business model and their requirement. Experts use innovative research methodologies to help clients get a fair valuation and take appropriate decisions accordingly. We have a record of providing more than satisfactory services of advanced financial modelling and other valuation services. Got any queries specific to your business model or advanced financial modelling services? Contact us now!

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