Excel tips for financial modeling

Financial modeling is really as much an art as it is a science, but there are some basic tips that you should adhere to when you're building financial models. 

First of all, you need to understand that Excel is the main tool used by a variety of institutions, banks, corporations, et cetera, to really do financial modeling. And the reason for this is that it's so versatile. Excel can be tailored to whatever the specific situations or needs are of the company and the financial model they're trying to build. That's both its benefit and its drawback. There are no rules or checks in place to ensure accuracy unless you build them in. For that reason, you want to adhere to some common rules that are broadly used across industry. Try to color code your data so that you can distinguish between inputs and formulas. For example, maybe use blue and black for one and the other. Try to incorporate your standalone three-statement model on a single worksheet. Don't separate it into different sheets or it becomes harder to read. Then, go through and separate your assumptions and drivers from the rest of the model. Have a section at the top so that anyone reviewing that model can easily go through and review what assumptions you've made. Moreover, you want to go through and use clear headers and subheaders with something like bold shading, as an example, so that people can follow what's going on in your model. Where needed, include comments to help people to understand the assumptions that you're making or why you're doing various calculations. It's also helpful to go in and put in error checks to ensure that your balance sheet balances, as an example, or to ensure that you're not making some sort of an error in moving from one period to another. Moreover, you want to make sure that users can follow where that information is coming from and the logic for the model. So make sure that you're being consistent with your formulas over time. And certainly, avoid linking to other Excel workbooks unless absolutely necessary. It's very, very hard to follow what goes on if you're linking to third-party sources. Similarly, circular references are very common in financial models. You want to avoid them unless it's absolutely necessary. The problem it becomes that those circular references create a real headache if you want to change anything, and they can actually create inaccurate output. Finally, consider using tables, charts, and graphics to summarize any important information.

 Follow these steps and your models will be much more effective and easier for outside users to evaluate.