Guiding principles of Financial Modelling

The publication explains the general principles of building financial models with practical examples

by Andrei Okhlopkov
Associate Director, Private EquityFollow 164

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Description
This is an attempt to list and explain the key concepts of developing financial models (also applicable to any other kinds of reports, budgets or forecasts). I hope that after studying this guide and the accompanying Excel examples you will be able to start modelling on your own.

The publication serves two purposes:

1. Explain the general principles and demonstrate how to structure a model, setup the timeline, format cells by their purpose, make scenarios, create checks and controls, use flags.

The underlying Excel file contains a comprehensive demo model showing the most common working sheets (capital expenditure, funding, working capital, economic assumptions) and explaining how the income statement, balance sheet and cash flow statement are built and tied together.

2. Give specific examples which cause complexities to many analysts. Such examples include circular calculations, proper demonstration of variances, calculating IRR and NPV with a few zero cashflow periods in the beginning etc.

You will also find references to other publications I have posted. These publications dig deeper into various aspects of financial modelling and Excel and provide additional examples.

This publication is a work-in-constant-progress. Help me make it better – send me word what else you think I should add.

Pricing: free. But your appreciation of how much time and effort have gone into this is welcome.

This Best Practice includes
1 Excel file, 1 pdf file