To Model or not to Model
Originally published: 22/03/2019 09:06
Publication number: ELQ-78808-1
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To Model or not to Model

A REFERENCE SHEET on why and how Finance Models are constructed

Finance model design conforms to Gall's Law namely:

"A complex system that works is invariably found to have evolved from a simple system that works. The inverse proposition also appears to be true, a complex system designed from scratch never works."

The schematic shows how this law applies to the construction of a financial model and aims to help the understanding of non accountants of the discipline .
It breaks down the process into the three constituent parts - Inputs / Processing / Reports.

It shows in outline form the inter-relationships between Data Inputs, Iterative Inputs, Control Inputs.
Outlines how these are processed and then lists the various output types that the model generates and their uses.

From a normal financial model the user can :
* generate standard finacial reports - Income Statements, Balance Sheets, Cash Flow Statements.
* produce one off reports for different scenarios
* outputs than can be used as uploads for other data processing applications
* dashboards for quick visual comprehension of complex data

A few uses of models are also listed as examples :
* planning - business plans , company & departmental budgets
* project control - evaluations, business cases, supplier evaluations, management
* financial and management accounting - evaluating annual and monthly accounts
* other varied tasks - break even analysis, company valuations, portfolio analysis , risk analysis etc

This Best Practice includes
A one page explanation of the types of inputs / processes / outputs of financial models

David Hubbard offers you this Best Practice for free!

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