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How to Analyze Financial Models When Clocks are Ticking – Part III

January 9, 2014
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Understanding and inferring a financial model can be a grueling task for any analyst. The complexity of a financial model can be a put off to any investor at the outset. But then, what if the things go the other way around? What if our analyst is the modeler and he has to set the required model. Well, many of the personnel who are involved in analysis of these models would invariably argue that there must certain measures which allow the analysis at easier level.

Advertently, here are a few tips that a modeler can harness so as to reach a simplified financial model.

1) How about the segregation of responsibility! That is if someone needs a model, he should illustrate the requirements to someone else who will build the model for him. The alpha version of this model maybe tested by altogether different person to finalize the model. The result from this segregation would be that model so developed would have passed certain level of understanding and eventually seem less complex.

Advertently, here are a few tips that a modeler can harness so as to reach a simplified financial model.

2) Mention the assumptions. Absence of assumption details can lead to a confused analyst. For instance, consider a model where in a parameter increases monthly by every 2%. If this point is duly mentioned somewhere in the model, say a separate sheet to accommodate all such assumptions, then the model is simplified to a large extent.

Advertently, here are a few tips that a modeler can harness so as to reach a simplified financial model.

3) A table stating the formulas and calculations won't hurt. In the sheet where the assumptions are stated, a table may also be incorporated declaring the formulas and calculation logics. This would help ease the burden on the analyst as he will be exempted from the enormous brainstorming that would have been certain in absence of mention of logics.
4) Add a little colour.They say that colours make you look vibrant. In our case, the desired result would rather be more of simplicity. Add distinctive colors and formatting to the different agenda of cells. Make sure the computed values can be easily distinguished from the input value in the first look of model.
5)External links- not the smartest thing to do!;Nothing is more painful for a analyst than a window prompting up demanding the verification of external links. The problem here is that the external links have a tendency to become corrupted over a period of time. Moreover, the externally linked file maybe missing from the analyst’s system and the model is rendered incomplete.
6)Team work is the need of hour.When different departments are involved in formation of a model, it is always in the best of interest to form a consolidated model from the scattered individual department’s model. The task may seem mundane and may not attract any modeler, but then going a little out of your comfort zone is the key to have smile adored with content of good work.

BOTTOMLINE: What goes around comes around!

All these simplifications are merely add-ons that will bring some convenience to the analyst. And some modelers might develop a notion that why should I take up the pain when it can simply be passed on. I am not asking you to be generous, selfless or benevolent, for these traits might be increasing your work load. Now let us consider a situation where a modeler himself needs to review the model sometime later in his life. Think about the entire mind boggling that a modeler can save for himself if he has followed these little suggestions. No doubt, it certainly will be highly embarrassing to not to understand your model. And the point that you have sharp memory is of no use for your tremendous work load will only desert you in the land of confusion.


About the Author

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