Guiding principles of Financial Modelling

The file explains the general principles of building financial models with a few practical examples.

by Andrei Okhlopkov
Associate Director, Private EquityFollow 47

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Description
The file explains the general principles of building financial models, gives a comprehensive example of a demo financial model and a few practical examples which cause complexities to many analysts:

- General requirements (key principles, model structure, sheet and cell classification, inputs and formulas)

- Report formatting (cell styles, lines, number formats, alignment, indents etc.)

- Using flags (designated symbols which indicates whether a certain condition is met or not. Flags are used mostly in timelines. For instance, we can use a flag to show if a period in the model to the project period, or whether in this period the project starts or ends etc.)

- Checks and controls (cross-checks, "instant" charts, controls for inconsistent formulas)

- Breaking circularities in calculations (e.g. the cash available for debt service depends on the amount of tax, the amount of tax depends upon the interest expense, the interest expense depends on the average loan balance, the average loan balance depends on how much loan we repaid during the period, and the amount we can repay depends on the available cash we have from step 1)

- Linked cells (recommended for additional control and clarity)

- Miscellaneous (calculating IRR and NPV when cash flows don't start in period 1, calculating duration of the project in years and months, calculating other investment parameters)

This Best Practice includes
1 Excel file