World Class Financial Modelling – starts with a simple rule of thumb
Financial models underpin so many important business decisions the world over. Why then are they often such a challenge to get your head around? How can we do better?
Firstly, consider the arbitrary nature of spreadsheet layout and style. Financial Models from different developers can be as unique as their fingerprints, or thumbprints. Think about where and how the process of model building all begins.
Financial Modelling starts with a blank spreadsheet and a question; eg ” When will break-even sales volume be reached and what is our forecast market share at that point?”
Next, a financial modeller gets on with the job, applying their own unique layout and style.
Standardisation does exist
What about World Standards for good financial modelling? Do they exist and would they embody a consistency and best practice for layout and style? The answer is yes! One such standard goes by the Acronym FAST, which stands for Flexible, Appropriate, Structured & Transparent. Standardisation in Financial Modelling aims to reduce risk and improve collaboration. The standard is a set of rules prescribing how compliant financial models are fashioned.
For example, here is a style rule from the FAST standard; called the “rule of thumb”…
Do not write a formula longer than your thumb
So, according to FAST 3.03-01, a formula longer than your thumb likely means that it should be broken into more than one step. Have you encountered overly long formulas within financial models?
The value of such standardisation is real; not only for individual modellers but more importantly for groups of modellers. Also for consumers of the information. Organisations across the globe who are recognising this value are signing up and endorsing the FAST standard. But even small teams can start getting value right away just by adopting the standard themselves.
Are you aiming to share your model with others? Are you developing this on your own or co-creating this with other financial modellers? Do you expect that from time to time your modellers will come and go, even when models are incomplete? Would you expect that the next modeller who picks up this unfinished work will try to re-model much of it into their own unique style?
Benefits are real
For me, those days are gone. I adopted the FAST standard within my teams years ago. It has meant that all of us could quickly read, understand and extend a model built by anyone else within the team. So readability was a quick win. Next the FAST standard provided best practice at the modelling construction level. It reduced risk, improved efficiency and collaboration.
In conclusion, the mechanics of financial modelling can be optimised quite easily by adopting a standard like FAST. The only thing left for you and your team to focus on are the more important aspects of financial modelling. Not the mechanics but rather getting the business logic right, and getting out all of the salient financial insights.
Want to find out more?
If you are in Melbourne, join us on the 17th of August for the next Melbourne Financial Modellers’ Meetup for “Quest for Best Practice – Introduction to the FAST Standard” where I will be speaking further on this topic.
About the author
David Taylor is Senior Consultant (Freelance) at FAST LANE BI, a Microsoft partner and focused on modern Excel and accessible Business Intelligence. Talk to David about in house training, consulting and development of financial and data models using Microsoft Excel, Power BI and Azure.