Financial Modeling Discipline – Never Use Magic Numbers

Financial Modeling Discipline - Never Use Magic Numbers

A good financial analyst never uses “magic numbers” in forming calculation formulas when performing financial modeling; always make implicit assumptions explicit.

Instead of using numbers in a formula, use the “name” of the number.  For example in the case of exchange rate conversion:

Exchange rate

  1. State clearly in a separate assumptions section the value of the number
  2. Name the assumption  cell (e.g. EUR_USD_exrate).
  3. Use the name in a formula, e.g.   =sales * EUR_USD_exrate.

However, this rule does have one exception: the constant 1 is allowed for growth, and date series, for instance:

  •  = ( 1 + growth ) * previous_years_sales
  •  = last_year + 1  where last_year is a relative reference to the values of the previous year.

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