www.f1f9.

com

How to build
a financial model
Like thousands of other analysts, accountants, bankers, students and other
professionals, you’ve identified that you want to build financial models.
It’s a smart move. Whether you are seeking a position or in a position that
calls for relevant skills, financial modelling is seen increasingly as core.
At F1F9, we have been working with people like you to share our
expertise. And this is the place to find the basics: the core design and
construction skills and techniques that you will need to build financial
models that will mark you out as a true professional.

10 things to Adopt a financial

remember modelling standard
Keen to cut to the chase? Check out and stick to it
the essentials of what we want to Some financial modellers will tell you that standards
share with you in this guide. constrain creativity. Be suspicious of such statements.
Adopting a standard is a critical first step. And there are a few
• Where possible, build up calculations to choose from.
in blocks
At F1F9, we have been working with the FAST Standard for years.
• Make sure you have only one calculation We like it because once you master it you become a super-fast
in each block ninja modeller.
• Use placeholders to indicate temporary
code We also like it because it makes our financial models extremely
easy to review. That’s because the FAST Standard eliminates the
• Format is meaningful 3 major causes of poorly designed models:
• Use flags to answer “when?” questions
• Mark imported and exported line items
 Lengthy formulas that are difficult to understand;
• All links should be row anchored Formulas
 that refer to cells that are far away from the
calculation; and
• Don’t link to a link (also known as a
“daisy chain” Links to links (known as “daisy chains”). Daisy chains are
• Use a corkscrew to model balances a major source of #REF errors in financial models.

• Model logic flows from left to right and

top to bottom
Adopt the FAST Standard
and stick to it
Developed over many years, FAST is a shared modelling language based
on a series of trademark characteristics that promote transparency,
efficiency of implementation, ease of navigation and maintenance.
Financial models must be built under short lead times, free
from important errors, easily understood and changed without
difficulty. A model built with
the FAST Standard is:
Flexible – easily adapted when new information is made
available
Appropriate – the level of detail is matched to the business
assumptions and commercial logic
Structured – model integrity is preserved through consistency
in design and construction
Transparent – calculations are simple and clear

Get into the right Get good at typing /

frame of mind wean yourself off the
When you build a financial model, you are building it for
someone else. This is the most important single change in
mouse
mindset you need. Getting good at a motor skill like typing, even if it’s typing
Too many financial models that we see are difficult to read, in Excel, requires you to be disciplined enough to do things
difficult to understand, difficult to change and just plain difficult the same way each time.
to use. That’s because they are built with little regard for anyone It sounds simple. But being consistent and applying rigorous
other than the modeller. discipline to your modelling isn’t easy to do.

Your model should be transparent – which means it is easy to There are some things you can do, though, to make some quick
navigate and easy to review. progress. The first is to be disciplined about using the keyboard
rather than the mouse. If you focus on learning Excel keystrokes,
The good news is that it’s not hard to create models that are you’ll simply be faster at the job and make fewer mistakes.
readable and usable, but the techniques are also not obvious.
Your keys on the keyboard are always in the same place and over
The way you make a model useful and readable is to keep it
time you’ll forget about operating the machine and you’ll focus
simple. It’s important to understand that the complexity of the
on what it is that you want to do. This will only happen if you do
transaction you model and the complexity of the model itself are
things the same way each time so they become habitual.
two different things.
That’s the bit that takes time and practice and that’s not easy.
Businesses and projects that you’re modelling are financially and
commercially complex. Done properly the model is a valuable
tool to help us make sense of that complexity. If you build a
model that is complex and poorly structured, it can’t do its job of
helping you to understand more about the reality.
Work with columns consistently
A column in a worksheet should have a specific purpose. And every purpose
should have its own column. And a column on one worksheet should have
the same purpose as the same column on every other worksheet in the
model.
As a minimum, you should have dedicated columns for the
following:

• Row labels (rows are also known as “line items”)

• Constants (a number – either hardcoded or calculated by
the model – that is independent of any timing logic)
• Unit labels
• Row totals
• Horizontal timelines (our “time-based columns”)

Write formulas so Include row totals

they can be read for line items
easily
Put spaces in between the arguments of your formulas. Row totals are for presentation only. They should be on the
Why? It makes formulas easier for someone else to read. left where you can see them. It astonishes us to see lots of
models with row totals on the right of the time-based data
– completely out of view.
If you are writing a time-based formula, then design a single
formula in the first time-based column that can be copied across. Avoid using row totals to drive other calculations. If they are for
presentation only we don’t want other parts of the model relying
Keep formulas short. Consider the rule of thumb: make your on them being there.
formula no longer than your thumb. It’s a useful rough
benchmark in a world where lots of modellers think that long Use them for flows only, for example revenue flowing into the
business or expenses flowing out of the business. Don’t use
Leonardo Da Vinci said: them to add up balances (where the row total makes no sense).

“Simplicity is the ultimate

sophistication”
It’s hard to design a model that’s simple for others to
understand.
Make sure your formulas are consistent
across the columns
When writing formulas to produce a series of data across a timeline, start in
the first column of the timeline and copy all the way across. Avoid:
Inconsistent formulas; and
Missing out sections and then hacking something in at different
points across the timeline.

It’s important to have assurance that a formula in the first column of

the timeline is the same all the way across. If we ensure formula
consistency, when somebody looks at your model they only need
check that first column.

In a FAST model, only two columns matter: the constant column and the
first column of a timeline series.

Use quick charts to Include heading

step back from the columns to add
detail signposts
Throwing up a quick chart of line items is something that F1F9 models are set up with a minimum of 3 heading
we recommend you do regularly. It’s going to give you a columns. In our template model you will find those in
much stronger sense of what’s going on in your model. columns A to C.

Once you’ve highlighted the data you want to review, try: There are three reasons to include heading columns:

• F11: to throw up a quick chart; or • Visual: headings act as important signposts. The indentation
of headings indicates main section headings, sub-section
• Alt + F1: to see the chart as an object on your worksheet headings, and sub-sub section headings;
Charting is great for spotting trends in the data. When you hit
your F11 quick chart, you want to be particularly on the look-out • Navigation: jump from section to section using the headings
for discontinuities in the data. Look out for: – and the short-cut keys Ctrl + up arrow (to move up) and
Ctrl + down arrow (to move down);
• spikes in the data
• Ease of formatting: By highlighting the whole column you
• changes in slope can change the formatting of every cell in that column – all
at once.
• a sudden step-up or step-down

Make sure you have commercial explanations for those

discontinuities.
Mark inputs clearly
Would having inputs scattered around the model be useful for users?
No. When a model is finished, you’d expect to see the inputs on their
own dedicated worksheets that have been properly organised
and structured.
When we’re in the process of building a model, however, it can be useful to have the calculations and the inputs
next to each other so that we can easily change the inputs to test the calculations. This saves up paging back and
forth from the input sheet to the calculation sheets as we’re building our model.

But don’t start modelling by focusing on the inputs.

Start by focusing on the structure of outputs and work backwards from there. That way it is easy to identify only
the inputs that you need (based on the modelling you have just completed).

We recommend standard formatting for inputs. It always used to be the case that blue font was the standard
formatting convention for inputs. This, however, is not appropriate for standard input marking for the simple
reason that if you have no inputs in a cell, there’s nothing to show that it’s an input cell at all.

So we recommend a light yellow background shade and black font.

Format your Work with calculation

financial model blocks
consistently
We have two objectives in formatting our models: Most modellers think of a calculation as being a formula.
Modellers following the FAST Standard will build
calculations in blocks. The calculation block is a core
• Make the formats we use consistent between element of the FAST approach to modelling.
modellers and between models; and
• Make the process of applying formatting easy, so that Calculation blocks aid readability because everything required for
we can do it as we go along and don’t have to come the calculation – including labels, units, row totals and data – is
back to it later. close by.

In a calculation block, each ingredient is positioned next to the

Which is best achieved through additional keyboard shortcuts calculation itself. The formula then refers to the ingredients.
not available by default in Excel. We suggest that you download
F1F9’s keystrokes and get used to what they do within your In order to display the ingredients, we create links.
models.
Calculation block rules:
• one calculation per block;
• the calculation is the last item in the block;
• the formula should only refer to ingredients in the
calculation block.
Navigate through your model using links
Ingredients in a calculation block are called up as links. Links may be used
for navigation. In any column of a link that we have created, we can hop to
the source of that link using Ctrl + [.
Using Ctrl + [ on a link will take you back to the source of any given link even
if it’s worksheets away. To return from where we jumped, use F5 + Enter.

Calculation blocks and their links have two more benefits:

• You have the precedents to the calculation right next to the
calculation itself (avoiding all the hunting around the model
when we want to understand what the calculation is doing); and
• when we do want to understand what’s going on with a given
ingredient and where it’s coming from, we can get ourselves
straight to the source.

Avoid daisy chains / Apply row anchoring

links to links when establishing
links to calculations
Links to links, known as daisy chains, should A cell reference (“A1”) may be row anchored using the
be avoided in your models: dollar sign: “A$1”. This means that the cell reference,
when copied and pasted, will continue to point to row
number one.
• From a navigational perspective, if you’re using Ctrl + [ to
navigate using links, the return routine that you access with On calling up ingredients for a calculation block, we recommend:
F5 + Enter only remembers one position. If you had to follow
a chain of links to get back to a source, you would only be • Linking to the label;
able to return to the last link in the chain – not very useful;
and • Row anchoring the link (best achieved by hitting the F4 key
twice); and
• A more serious problem occurs when you try to delete
sections from your model. A deleted section with daisy • Copying the link across the columns.
chains will most likely generate #REF errors elsewhere in
the model. If you always do that, then your link will itself be available to
copy and paste when you need a duplicate of that link.
Copy calculation blocks to improve your
productivity
It’s easy to copy calculation blocks and then replace ingredients as required.
For example, if you’ve spent some time modelling Tranche A of debt and
Tranche B has the same structure, you can just copy the calculation blocks
for Tranche A and replace the ingredients to set up Tranche B.

You can then replace the ingredients simply by overwriting the existing links
with new links.

Remember to change the label on the calculation.

Use minimal Use placeholders

anchoring in your to mark temporary
cell references code
For calculation blocks to be available to copy As a financial modeller, you don’t always have all the
and paste, they need a minimum of anchoring in information that you need for a given section that you
the calculation’s formula. You want to avoid row are working on. So it is important to be able to mark
anchoring in your formula so that a copied block will temporary solutions.
refer to the new ingredients in the new block. Placeholders denote work that you are going to back to. They
mark work-in-progress.
Constants should be column-anchored only (tap the
F4 key three times). It’s important that you distinguish placeholders from finished
work. We recommend:

• Visual marking: mark the whole line item in bright yellow;

• Square brackets: put square brackets around the label (this
is a trick we have borrowed from lawyers when drafting
contracts); and
• Add a comment (using the keyboard shortcut: Shift + F2)

Apply these markings to all temporary line items and you will be
confident that you know what is left to be done.
Answer the question “when?” with flags
For every line item that we model, we should be able to answer:
How much?
and
When?
Separate the “when?” logic from the “how much?”. Do that with a dedicated
Time sheet and flags.
A flag is a data series consisting of “0” and “1”. A number multiplied by a
flag will either return “0” or the number itself. So flags can be used to show
numbers only when the timing is right.

Mark imported links and exported

calculations
The complexity of the average financial model goes beyond what any one person can keep
track of in their head.
So when we collaborate with others, we want to make it easy for others to understand our
models: it helps if we put as much intelligence as possible into the model itself. Showing
clearly how each of the worksheets in the model is interacting with other worksheets
contributes to that intelligence.

Links imported from other worksheets can be copied anywhere in the model; same worksheet links can only be
copied and pasted on the same sheet. This is because links imported from other worksheets have a worksheet
reference, while same worksheet links don’t.

Marking calculations linked to other worksheets is important because:

1) they tend to be significant line items on the sheet and the immediate visual identification of that is useful; and
2) deletion of these line items is going to cause #REF errors elsewhere in the model that should be managed
proactively.

Mark imported links in blue font; mark exported calculations in red font.
Model balances Keep a template
using a standard worksheet handy in
structure your model
There are two basic types of line item in our model: Never introduce a blank worksheet to your model.
Instead, keep a formatted template worksheet
• flow – an amount of value passing in and out of
close by.
the business within a period; and
• balance – the amount of value present at a point The template worksheet has two purposes:
in time.
• Storing template code such as the balance
All balances have the same three essential corkscrew. That’s for you to copy and paste when
properties: you need it; and
• upward flow – the flow that makes the balance • Being a formatted worksheet that can be copied
go up and pasted when you require new sheets in your
model
• download flow – the flow that makes the balance
go down
• initial balance – at a point in time

Since all balances have a common structure, we can

use the same modelling structure for all of them. This
standard structure is called a “corkscrew“.