Financial Modelling Group Articles

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This article provides guidance on use of hyperlinks & Workbook structure as follows:

1. Inputs (data and assumptions);

2. Workings (line by line logic/calculations);

3. Outputs (raw answers coming out);

4. Analysis (e.g. trends & ratios);

5. Application (value?, deal?, raise debt?, IPO?, buy or sell company?)

Data sourcing is the process of gathering the data necessary to build a financial model. Key parts include: sourcing data; data quality; interpreting & using the right data; automated data extraction; & a data dictionary. They're all necessary to develop a holistic approach to understanding & sourcing the appropriate or best data.

Corporate finance theory is very broad, but we believe theory and application of strategy, planning, M&A, finance, valuations and financial modelling are all connected and need to function coherently if you want to be successful.

Making financial models User-friendly should be a key focus for model builders. Always beginning with the end user in mind & applying a few standard concepts are key (e.g. design unique Inputs & Outputs, ensure the model meets client's expectations in a way that abides by published standards, ensure flexible key value drivers & assumptions are easy to find & update). 

The Development stage is a crucial part of building a financial model, which should be built using one of the recognised standards or methodologies (e.g. Best Practice Modelling (BPM) Standards). A detailed scope should be developed (see previous article), and the model be built optimising the trade-offs and balance of Robustness, Flexibility and User-friendliness. The model should also be developed and constructed with various end-users in mind, building in quality and accuracy (e.g. error checks and alerts) from the start. 

Scoping a model for business valuation purposes is about assessing the work that needs to be done & data that needs to be collected for a valuation to be undertaken. We need to understand the reason for building the  financial model and how large and complex the business operations are. Another critical element of Scope is time: the time series (e.g. monthly -v- annual, actual -v- forecast); and the time frame that things need to happen (including the date the valuation relates to).

The fundamentals of 3-way cashflow modelling is essential to helping businesses achieve their goals and is a key tool needed to forecast the future. It refers to modelling the 3 financial statements (P&L, BS and CF) that are integrated through formulas and assumptions. They provide a significantly higher level of accuracy into the net changes in the cash position period on period. A 3-way cashflow model allows us to forecast and analyse changes in the P&L, BS & CF Statements.

Project Finance models are complicated models to build with many inputs from across the project. What happens when a project reaches Financial Close? The model maybe converted into an Operational Financial Model. It's not practical to go back and re-create the model from scratch, but there are some useful steps to make a hybrid PF-Operational Model easier/faster to work with.

Underlying nearly every deal is a Financial Model that holds the complexity, logic & structure. It is often said that if you understand the financial model, you understand the deal. Project Finance is arguable one of the most complex forms of financial modelling, but the outcomes most beneficial to the public.

If we are going to push the boundaries of our skills today, which is what the SS to FM series is all about, then we need to think of new possible & alternative approaches to explore. Tables can add a ‘physical’ structural element that facilitates organizing our model’s ‘logical’ structure with dynamic ranges that automate formula documentation & consistency.

Continuing to use a Deal Model as an Operational Model post financial close may not be the wisest choice & might create a significant risk of errors. A “re-purposed” model may cause internal issues & incorrect management decisions. So, it's important to understand the differences between them.

The difference between a Spreadsheet and a FP&A Model is that the Spreadsheet is a simplified tool to manipulate and report data (static) whereas a FP&A Model can be used to test assumptions, predict and analyse future outcomes of business decisions (dynamic).