Key Takeaways from Financial Modeling Webinar

Jul 30, 2024

Notes on Financial Modeling Best Practices Webinar

Introduction

  • Hosted by CFA Society Nigeria and the Financial Modeling Institute.
  • David Brown co-hosted the session.

Webinar Overview

  • Topic: Financial Modeling Best Practices
  • Speaker: Ian Schooners, Executive Director of the Financial Modeling Institute.
  • Focus on creating effective financial models that are well-structured and easy to understand.

Importance of Financial Modeling

  • Financial modeling is crucial for decision-making in finance, accounting, and business.
  • Effective financial models can help in:
    • Valuations
    • Investments
    • Mergers and acquisitions
    • Operational decisions
    • Credit analysis

Common Issues in Financial Modeling

  • Many financial models are poorly designed and difficult to use.
  • Financial modelers often self-taught, leading to inefficiencies.

Key Themes of the Webinar

  1. Discipline of Financial Modeling:
    • Financial modeling should be regarded as a formal discipline.
  2. Best Practices for Financial Modeling:
    • Simple design and logic.
    • Clear communication of financial statements.
  3. Skills Required:
    • Strong Excel skills, accounting knowledge, and financial understanding.

Ian Schooners' Background

  • Over 20 years of experience in financial modeling training.
  • Founder of the Marquis Group, which specializes in financial modeling training and consulting.
  • Passionate about teaching and known for his interactive approach.

Financial Modeling Best Practices

1. Planning and Designing the Model

  • Crucial to have a clear plan before starting to build a model.
  • Identify the model's purpose and key metrics.
  • Create a scoping document to outline key drivers and assumptions.

2. Keep Assumptions Upfront

  • Clearly display all assumptions at the beginning of the model.
  • Use blue cells for input assumptions to differentiate them from calculated values.

3. Build a Scenarios Page

  • Create a scenarios page to test various cases (base, best, worst).
  • Allows flexibility in analysis and forecasting.

4. Tab Structure

  • Use a vertical tab structure for models to keep formulas simple and organized.
  • Limit the number of tabs to avoid complexity.

5. Avoid Hard-Coding Values

  • Never hard-code numbers in formulas; always link to input cells.
  • Use consistent color-coding (e.g., blue for inputs) to clarify.

6. Build Schedules

  • Avoid complex calculations on financial statements; use separate schedules instead.
  • Keep calculations and links clear and organized.

7. Regularly Check for Errors

  • Use Excel tools to identify dead numbers or hard-coded values in formulas.
  • Regularly audit models for inconsistencies.

8. Use Dynamic Formulas

  • Keep formulas dynamic by using references rather than static values.
  • This helps maintain accuracy when assumptions change.

9. Presentation of the Model

  • Design models to be clear and presentable, akin to a PowerPoint presentation.
  • Ensure readability for users who may not be familiar with the model.

10. Continuous Improvement

  • Always seek to enhance modeling skills and incorporate feedback.
  • Engage with resources and communities focused on financial modeling.

Conclusion

  • Financial modeling is a critical skill in finance and business that requires practice and adherence to best practices.
  • Participants encouraged to implement learned strategies and continue improving their financial modeling capabilities.