Scribd
Upload
34 views

Week6 Slides How+to+Build+a+Robust+Model

The document provides guidance on building robust financial models with best practices. It discusses that models should be flexible, appropriate, structured, and transparent. For appropriate models, they should reflect business reality accurately without unnecessary detail. Models should have a logical workbook structure with separate worksheets for inputs, calculations, and outputs. Formulas and formatting should be clear to make the model logic and flow transparent. The document also notes that models need flexibility for users to update inputs and run scenario and sensitivity analyses. Overall, the document outlines key considerations and standards for developing high-quality financial models.

Uploaded by

Kinnata Nikko
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
34 views

Week6 Slides How+to+Build+a+Robust+Model

The document provides guidance on building robust financial models with best practices. It discusses that models should be flexible, appropriate, structured, and transparent. For appropriate models, they should reflect business reality accurately without unnecessary detail. Models should have a logical workbook structure with separate worksheets for inputs, calculations, and outputs. Formulas and formatting should be clear to make the model logic and flow transparent. The document also notes that models need flexibility for users to update inputs and run scenario and sensitivity analyses. Overall, the document outlines key considerations and standards for developing high-quality financial models.

Uploaded by

Kinnata Nikko
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 27

Week 6

How to build a robust model?

- Modelling Best Practices

UTS CRICOS 00099F


Model Types

• Three-way Statement forecast


• Discounted Cash Flow (DCF)
• Merger Model (M&A)
• Leveraged Buyout (LBO)
• Portfolio tracking
• Budgeting
• Operational performance tracking
FINANCIAL MODELLING
BEST PRACTICES

UTS CRICOS 00099F


Financial Modelling Best Practices

• Flexible

• Appropriate

• Structured

• Transparent

The FAST Standard - https://www.fast-standard.org/


Appropriate

• It is a good representation of reality, not


reality itself
• It reflects key business characteristics and
relations truthfully
• It is not built with unnecessary detail
• Different components are specified
consistently and with balance
Appropriate | Model Design
• Model audience
• Personal use
• Internal business use
• External client

• Model purpose
• Set data size
• Rolling window
• Growing data set

• Time series
• Which frequency? Annual, Quarterly, Monthly, Weekly, Daily, Hourly

• Data collection
Appropriate | Steps to building a model

• Design the high-level structure

Document as you go
• Design outputs: summaries, charts, and reports

• Design inputs

• Plan calculations by breaking larger problems into smaller ones

• Finalise outputs

• Design sensitivities and scenario analysis


Structure

• Overall workbook design


• Layout of individual worksheets
• Writing formulas that help to link different
parts of the model
Structure | Workbook Layout

• Single-purpose worksheets
• Separate Inputs, Calculations, and Outputs

• Group worksheets by type


• Left-to-right Inputs Calculations Outputs

• Right-to-left Outputs Calculations Inputs

• Model-user-friendly Outputs Inputs Calculations


Structure | Workbook Layout

• Structural consistency

• Same column structure and


time ruler across sheets

• Re-usable templates

Source: Financial Modelling Institute - https://fminstitute.com/learning-resources-afm/


Structure | Worksheet Design

Inputs
• Organising inputs worksheets
• Constant inputs and series inputs
• Historical inputs vs forecasting assumptions
• By business units, asset type, company, debt instrument, etc.
• Source data should be entered only once
• Use direct links to reference inputs in other worksheets
Structure | Worksheet Design

Calculations
• Logical on-sheet flow
• Formulas should reference only the cells above and to the left
• Calculate only once | Then drag horizontally or vertically
• Consistent formula blocks | Re-usable
• Minimise calculation dependency trees | Direct link inputs
Structure | Worksheet Design

Dedicated sections for flags and factors


• Time
• Actuals / Forecast
• Pre-production/Production/Post-production
• Escalation factors
• Inflation
• Discount factors
Transparent

• A clear logic structure and a layout that


enables the model logic
• Separate worksheets with a clear purpose
• Separating calculations by their nature –
monetary, timing, escalation
• Formulas that are short, simple and easy
to understand and review by other model
builders, reviewers and users
Transparent | Formats

• Formatting using cell styles


• Create your own template
• Format types
• Inputs
• Input cells linked to dashboard
• Imported line items
• Exported line items
• Calculations Source: The IGF Financial Model - https://www.igfmining.org/beps/resources/igf-financial-model/
Transparent | Formats

• Format and label clearly


• Format cells appropriately
• Include a dedicated column for units
(e.g., $, ‘000s, MWh, litres, headcount)
• Don’t hide rows and columns
• Use Data/Outline to Group/Ungroup
rows and columns

Source: The IGF Financial Model - https://www.igfmining.org/beps/resources/igf-financial-model/


Transparent | Formulas

• Formula simplicity
• Having shorter formulas (less than 1 line) is preferred
• If longer, split into two or more steps
• It makes it easier to review and understand formula content
• Limit hard-coded values
• Only standard values that will not change: 24 hours in a day, etc
• Best to have an input
• Same worksheet reference
• Remove sheet name
• Relative, absolute and mixed referencing
Transparent | Validation and Error Checking

• Error Types
• Formula mistakes
• Incorrect assumptions
• Logic errors

• Data Validation
• Helps prevent errors
• Drop-down menus
Flexible

• Users to update the model content as new


information arrives
• Other model builders to modify and adapt
the model as required
• Users to be able to run scenarios and
sensitivities
Flexible | Sensitivities and Optimisations
• Goal Seek and Solver
• Optimisations
• Static
• Lacks transparency

• Data Table
• Sensitivities
• Very useful to build charts
• One or Two-Way tables
Flexible | Scenarios
• Scenario Manager
• The built-in tool has limitations

• Build your own Scenarios


• Build multiple scenarios
• Include all relevant assumptions
• Drop-down menu to select a scenario
• Limitation: you can only see one live scenario at a time
DECISION-MAKING
BIASES

UTS CRICOS 00099F


Poll

What would you prefer to receive:


• Option 1: $50 twelve months from now
• Option 2: $100 eighteen months from now
Poll

What would you prefer to receive:


• Option 1: $50 now
• Option 2: $100 six months from now
Hyperbolic Discounting

▪ Tendency to choose smaller, immediate


rewards rather than larger, later
rewards.
▪ This occurs more when the delay is
closer to the present than the future
Hyperbolic Discounting

$50 ≻ $100 $50 ≺ $100

Now 6 12 18

▪ Short-term: we are impatient and prefer immediate rewards

▪ Long-term: we are more patient and wait for better rewards


IN-CLASS ACTIVITY

UTS CRICOS 00099F

You might also like