Many finance personnel develop their own Excel spreadsheets in order to make their day to day life easier. A common scenario is that a group of finance personnel or a single person develops these financial models using different financial modeling techniques and then hands it over to someone else for interpretation.
However, for many companies the problem is that these financial models become massive and complex as the business grows making it very error-prone and tedious to maintain. It then becomes a necessity that the finance department invests in a capable financial modeling tool.
The truth of the matter is that despite a wealth of advices online about investing in good financial modeling software, many finance departments are still hesitant to invest time and resources in deploying these modern solutions.
If your department is aware that in order to perform advanced financial modeling, you need to have invest in new technology or new financial modeling tool but your CFO or finance manager hasn’t gotten far enough yet in terms of finding one that works for the team, no need to worry. Below are some practical tips that you can use for the time being to improve your financial modeling exercise.
- Design your model in separate modules for every part of the calculation
Doing this this makes it very easy to modify and update certain parts of the model or to add new calculations.
- Use consistent color scheme throughout your model
This makes it easier to differentiate input fields, parameter fields, etc.
- Use consistent naming convention and number formats
Even when you invest in financial modeling tools, you will notice that these solutions use a consistent naming convention and formatting in order to promote consistency and standardization. Do this as well in your spreadsheets to make it easier to follow models and to avoid the pitfall of different formats on different sheets.
- Use Insert comments function
It is safe to assume that there will be more than just one person looking at the financial models you are building. Therefore, if your manager wants to go in and look at reasons for certain deviances for example it is good to have comments that explains just that.
- Use Short Formulas
As a rule of thumb when you are creating a financial model, use short formulas. You need to make sure that every formula can be explained in under 30 seconds.
These are just five simple yet very useful tips in improving your financial models. That being said, investing in new technology is still the way forward as these new solutions have now incorporated these best practices. A more capable financial modeling tool is more sustainable in the long run as it can scale better than spreadsheets can ever accomplish.
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