How to effortlessly manage large Financial Models
Image by John Barkiple via Unsplash
Managing massive, complex Financial Models can be challenging. But it doesn’t need to be.
Here are three tips I learned along the way:
#1 Prepare for possible questions with sensitivities
Outline questions each of your key stakeholders may ask. Determine what your model needs to include to answer them. Next, change those assumptions and see how much the result moves. Build the model so you can quickly change the assumptions that influence the result the most.
For the top 3-5 assumptions:
Calculate a rule-of-thumb for how much a swing in the input influences the final result.
Memorize them - now you can navigate tough, on-the-spot questions with ease.
#2 Separate Inputs from Outputs
Create a clear, visible separation between assumptions and calculated outputs. The easiest way is to have all inputs on one tab and calculations on another.
Now you can quickly make changes to assumptions without accidentally overriding a formula.
#3 Document and align assumptions
Worst case scenario: You are wrongly accused of using incorrect or outdated assumptions.
Keep a tab detailing all major assumptions. Include the date when each one was last edited, who provided it, and a sentence or two about the background.
An added benefit: you can use the documented assumptions to run a post-mortem analysis after the investment has concluded to learn what worked and what didn’t.
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