Financial Modeling Discipline – Consistent Scales, Units and Labels

Financial Modeling Discipline - Consistent Scales, Units and Labels

A good financial analyst gets the time scales and units right, and labels clearly and consistently throughout the financial model. Such good practice will help eliminate human errors in a financial modeling exercise, and ensure that results are robust and accurate.

Be explicit about assumptions related to inflation indices and percent changes in your financial model, for instance, Do you mean:

  • Year-end to year-end?
  • Mid-year to mid-year?
  • Year average to year average?

Interest

  • When exactly is your starting date for interest calculations in your financial model?

Be consistent when using and transferring data from one cell to other cells

  • Always use the financial model’s base units unless it is too cumbersome.
  • Always note the unit of measure in the variable description of the financial model.

Labeling the financial model clearly and consistently will help you to answer queries from financial modeling team members, users or the eventual audience of the financial model results, even after a period of time.  So, always note the source of any assumption or complex calculation formula by inserting notes and labels in adjacent spreadsheet cells of your financial model.

Hidden notes may be attached to a cell using ‘Formula Notes’.  However it is normally far clearer to display labels in adjacent cells, so use hidden notes sparingly in a financial model.


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