Top 8 questions to ask when planning a financial model
What is the most important aspect of the process of developing a financial model? The answer is probably PLANNING. The planning phase is one of the most neglected phases in the design, construction and proving of financial models. Whenever there is a new requirement for a financial model, the temptation is to rush to open a spreadsheet and start to enter headings and formulas. Even experienced modellers can make this mistake. The wiser thing is to put aside your computer in favour of a blank sheet of paper. Sitting down with a blank sheet of paper helps to focus the mind on the key issues relating to the model. Remember, financial ‘models’ have been created and used for centuries and only in the last few decades have they been created on a computer.
Planning a financial model involves seeking the answers to many critical questions about the proposed model. Like all planning, planning a financial model helps to ensure that nothing critical is forgotten, problems are anticipated and solutions formulated as necessary. Here are examples of relevant questions to ask:
- Do we really need a financial model or can the need be met more quickly and cheaply some other way?
- Is the need for the model a short-term (one-off) one or a long-term (continuous use) one? Depending upon the longevity of the need for the model there can be differences in approach to designing and constructing the model.
- What functionality or outputs (information, analysis, etc.) is the financial model intended to provide now and in the future?
- What inputs (standing/static data, assumptions, etc.) are going to be needed to produce the information and analysis that the user requires? How is the standing data going to be sourced, e.g. the company’s accounting system, the Internet, etc. How accessible is the data and how is it going to be made available in the required format?
- What business logic, accounting rules, mathematical/statistical techniques, etc. are going to be needed to convert inputs to outputs?
- How is the model going to be structured internally in terms of worksheets (input, calculation, output/reports, etc.)? What are the data flows going to be from one worksheet to another?
- How is the model going to be tested and what tests are going to be required?
- What resources are going to be needed, e.g. accounting, mathematical, macro skills, etc.?
Spend more time on planning and you will find you spend less time later on fire-fighting. Enjoy your financial modelling experiences.
Guest post by Ranjit Naik, trainer on the 5 Day MBA in Financial Modelling. If you’d like to hear more from Ranjit, and find out how to plan, develop and test reliable financial models, you might be interested in attending one of his financial modelling training courses:
- 24 – 28 February 2013 in Dubai: download brochure >
- 11 – 15 March 2013 in Johannesburg: download brochure >