Spreadsheet Conventions for Financial Models

Caution: You do not always have to conform to these conventions

Foolish consistency is the hobgoblin of a petty mind

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Model Layout and Structure

If somebody else picks up your model, can they easily verify that
the model is correct.
If other people cannot work through your model and
understand it in a couple of hours, there is a problem
When you pick up your model after not using it for a couple of
months, can you replicate and explain it.
If you start sweating when you think about opening the
model, there is a problem.

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Oct 1, 2015

Layout and Review

If you are reviewing a model, you would like:

To see what the inputs to the model are (you do not want to search
around spreadsheets to find the model results).
To be able to quickly understand calculations in the model.
To be comfortable that the model does not have errors.
To add calculations of added revenue and expense, deferred
debits and other components to the model (add rows to template
models).
To supplement the model with additional time periods (add
columns to template models).
To be able to perform sensitivity analysis, scenario analysis and
Monte Carlo simulation
Re-use the model in future years.

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Oct 1, 2015

Objectives of a Well Designed Model

A well structured model:

Should be flexible (easy to change formulas, model delays, added expense
items, alternative forecast horizons, different assumptions)
Should be presentable and transparent in a way that is convincing to
readers of the model that it is accurate
Should allow risk analysis with sensitivity analysis, scenario analysis, breakeven analysis and Monte Carlo simulation
Should model alternative decisions (investment, lending, contracting,
selling)
Should effectively present results where the key drivers and the key outputs
are clearly demonstrated
Should be accurate as demonstrated by balancing accounts, extreme
scenarios and other tests
Should be stable where macros, range names or circularity do not create
errors in the model

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Oct 1, 2015

Programming, Accounting and Engineering

Using excel with if statements, combo boxes, range names, look-up tables, macros
and switch variables is a necessary, but easy to learn skill

Construction of a basic financial model requires knowledge of accounting principles

-- cash flow, depreciation, balance sheets and financial ratios

Working through value drivers requires knowledge of how the business process
what drives value, how the cost components are developed and how the production
process is modeled

Effective Modeling
Mechanics and Accounting 25%
Assumptions and Value Drivers 45%
Presentation 15%
Auditing 15%

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Oct 1, 2015

Spreadsheet Organisation and Conventions

Organization:

Model drivers and cash flows should be clearly laid out

Inputs should have a different colour (Colour and then Move)

Periods in different sheets should correspond to the same column

Simple Formulas

Use max and min instead of if statement

Financial statements should only have simple formulas

Financial Calculations

Positive number convention

Use switches and cork-screws

Excel Tools

Named ranges may be appropriate for variables which have a single value such as the
life of the plant

Try to avoid circular references

Describe column titles and macros in detail

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Model Organisation

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Model Organization
Clear progression of inputs and assumptions to outputs
Use of the Financial Model as a Database
Presentation of assumptions that drive value
Organization of sheets in financial statements with inputs,
workings, financial statements and outputs
Table of Contents and Settings
Necessary and unnecessary complexity

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Oct 1, 2015

Do Not Make Important Inputs Difficult to Find and

Adjust
The key drivers should be easy to change and should be easy to
find
All inputs should be in one or a few sheets and should be
coloured
Dont put the key inputs in sheets that are far from the
beginning
The inputs should be easy to change (use combo boxes or
spinner boxes so the inputs can be changed from more
than one sheet)

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Example of Spreadsheet Organisation and Database of

Financial Information

There is no set rule for organising spreadsheets. But the following list provides and example of
how a financial model is a database of financial information on the value of a company.

Historic Financials

Assumption Book

Revenue Working

Operating Cost Working

Other Working

Aggregation

Financial Statements

Financial Ratios

Valuation

Graphs

Input Back-up

Background Sheets

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Virtually all of the information that

drives the value of a company can
be found somewhere in the
model.

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Oct 1, 2015

MODEL ORGANISATION: Meaning of Colours in

Inputs and Outputs

Colorus should mean something that makes the spreadsheet easier to

follow
Inputs in a color
Links to another sheet
Links from another sheet
Key outputs

Dont Simply Colour to Make the Spreadsheet Pretty!

Formulas should not bounce from sheet to sheet without
clear direction Collect items earlier sheets at the top of
subsequent sheets.

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Oct 1, 2015

Example of Moving Between Sheets

Macro named
spreadsheet colors all
sheets will perform this
function automatically

Colors
correspond
to sheet
names

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Oct 1, 2015

Colors Should Mean Something

There are yellow, red, blue and

black codes.

There is no documentation of
what the colors mean

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Oct 1, 2015

Example of Non-transparent Model No Idea where

projections come from

What is the value

What drives value (sales,
ROIC, etc.)
What are inputs and what are
formulas

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Oct 1, 2015

Sheet Organization and Table of Contents

PUT THINGS IN ORDER!

Too Many Sheets,

Not Organized

Investment banks like many sheets so that you can see

the components of each page
Many sheets can be easy to to print

Each sheet prints as page

Too many sheets can make the links difficult to

follow

No clear rule on the number of sheets

The sheets should be organized in a logical
order

Input sheets

Working Sheets

Financial Statements, etc

For consolidation in mergers, keep at least all

financials on the same page

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Use the Table of

Contents Macro
Provided on the CD

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Oct 1, 2015

Model Organisation: Make Inputs Easy to Find and

Calculations Easy to Follow

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Making Calculations Easy to Follow

Inputs should be on a single sheet
Drivers should be gathered together
Show outputs next to inputs to make sure the model is working
using combo boxes, spinner boxes and scenario titles
Repeat combo boxes in different sheets and key outputs in
different sheets whilst developing the model
Dont over-use fancy excel formulas and excel functions when
you could solve the same problem with a simple function
Present the formula components so that the trace precedent and
trace dependent can be used

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Oct 1, 2015

When Presenting Financial Ratios, Present the

Numerator and the Denominator

The numerator and the denominator are shown so that the reader can see precisely
how the calculation is made.

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Oct 1, 2015

Use Data Tables with Row Incidies to Describe when

Values Occur

Show the explicit value so one

does not have to guess what cell
the value goes into.
One does not know
when the long-term
and when the shortterm occurs
Corrected Case Use a table
with the year specified

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Oct 1, 2015

See the Results of Inputs and Outputs on the Same Page

Keep key results and inputs in sight using Boxes

Often, a spreadsheet will have settings for valuation methods, covenants,

interest rate methods and so forth. It is nice to see the how the results vary
when inputs change, even though the inputs should still be on one page. In the
example below, the sensitivity factors are shown along with the graph and the
IRRs, so that you can see what happens when you change the factor.

While working on a model,

keep key results in sight.

This can be done with

spinner boxes and combo
boxes

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When you use boxes to test

sensitivity analyses and to
develop risk analysis, make a
macro that re-sets the
assumption to base case
values

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Oct 1, 2015

Model Formatting: Comments, Column Set-up

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SPREADSHEET CONVENTION: Setting-Up Sheets

with Indentation Columns

Add Three or Four Narrow Columns at the beginning of the

sheet

Make a long column for the name of the row

Add a column for units

Add a column for formula definition

Make all time periods start in the same column in different

sheets

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Oct 1, 2015

Formatting

Use rules from accountants

Rule of lines
Coding of Accounts
Double Entry

Use grouping instead of hiding rows or columns. This can be done by

holding the SHIFT, ALT, keys.

Title accounts as either detailed, or total and use the auto filter selection
from the data option.

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Oct 1, 2015

Effective Use of Comments

While using comments is obvious, using comments that describe
what a spreadsheet does can be very effective. I suggest using
a comment in the A1 cell of each sheet as illustrated below.

A comment in A1
that describes what
the sheet does is a
pain, but it is worth
it later on and it
forces each sheet
to be organised.

Note how you can

format the
comment and make
it like a help screen

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Oct 1, 2015

Efficient Layout with Indents

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Oct 1, 2015

SPREADSHEET CONVENTION: Formulas Should

Be the Same Across Columns

If you repeat a column, it should not change the spreadsheet

You can use switches to keep the formulas the same for historic
and future periods

An exception is the construction period in project finance models

A well build model will use the same formulas

for historic and forecasted periods without any
modification

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Oct 1, 2015

SPREADSHEET CONVENTION: Formulas Should

Be the Same Across Columns

Example: If 2008 is column H in the input

sheet, 2008 should also be column H in other
sheets such as the financial statements.

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Oct 1, 2015

Formulas Not the Same Because of Blanks

If you insert a column or

change the life of an asset,
the blank columns will not
automatically adjust

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Oct 1, 2015

SPREADSHEET CONVENTION: Keep Row Spacing

Consistent for Aggregation
A painful part of modelling is aggregating debt issues. To make
this less painful and less subject to problems, keep the spacing
the same for different issues as shown below.

Issue 1 and Issue 2

have the same format
so that aggregation is
much easier

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Oct 1, 2015

Problems with Inserting Columns Vlookup and Macros

Say you have used a look-up table

with an index value, a table and
where the column selected is defined
in the vlookup function. If you insert
a column between the vertical index
of the look-up table and the column
defined in the look-up table, the
results of the look-up table will
change.

Notice that inserting a column

changed the result

A better way is to combine match and

index functions

When using match and index, first

show the result of the match
statement and show the result of the
index somewhere on the sheet. Then
use the index.

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Notice the
different
result of
the look-up
table

The match and

index command
is more flexible
(allows sorting
from low to high)

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Oct 1, 2015

Example of Inconsistent Periods

Where there are inconsistent periods,

Financial ratios and returns are more
difficult.

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Oct 1, 2015

Corrected Approach with Replacement and Retirement

Instead of blanks, this

sheet has formulas with
zeros.
Automatically retires and replaces
assets

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Oct 1, 2015

SPREADSHEET CONVENTION: Labels should be

Consistent, Concise and Have Similar Names
Choose names that are as concise as possible. Names greater
than 10-15 characters become cumbersome to type and more
prone to errors.
Note difference in the way
737s are defined and no
definition of 747 in second
column. This makes use of
look up tables very difficult

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Oct 1, 2015

SPREADSHEET CONVENTION: Repeating Inputs

to Make Calculations Clear to Readers

In Order to Keep Formulas Simple, it can be beneficial to repeat

the inputs
Inputs are near the formula
Inputs are also in a separate sheet allowing for value drivers
etc.

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Oct 1, 2015

Simple Formulas

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SPREADSHEET CONVENTION: Keep Formulas as

Simple as Possible

Keep formulas simple

Separate complex formulas into components
Document the flow of the formulas
Manager should be able to read the printouts and understand the model
Show the formula computations in a cell

Make the presentation transparent by showing components near the

formula
Formulas should not extend past the formula box
The longer the formula, the likelier it is that a sign could be reversed
when calculating things such as interest expense and interest
income.

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Oct 1, 2015

Keeping Formulas Simple

When you first program a sheet, the formulas are often too
complicated
This occurs when you add features to a spreadsheet
Sometimes there are macros when the computations can be
accomplished in other ways.
It is easier to add classes for different types of plant, sales, etc.,
than to try an interpolate.
Bad Cell Risk
When working in a team environment, it is advisable to
assign one person to be responsible for the master
spreadsheet and for making all changes and updates.

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Oct 1, 2015

Try not to Make the Models and Formulas too Complex

In reviewing a model, it is a lot easier to audit relatively simple
formulas.
Show revenues, expenses and capital expenditures
separately
Present the financial statements
Compute various outputs
Complex models with range names, macros, long if statements,
numerous sheets can be difficult to review
Dont try to do multiple things in one section of the spreadsheet

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Oct 1, 2015

Example of Too Complex Formulas

When formulas are this long, it is

very difficult to audit them

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Oct 1, 2015

Use of ALT-ENTER to Layout complex Formulas

If you cannot avoid complex formulas, you can use the ALTENTER command to lay-out a complex formula and make the
components easier to read.
Putting the formula
on different lines
can make a long
formula somewhat
easier to read.

The ALT,ENTER
creates a line
break.

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Oct 1, 2015

Example of Complex Formula

If Statement and Difficult to Follow Look-up

tables

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Oct 1, 2015

Documented Lookup Table

Look-up table inputs are near

the look-up table and are
illustrated, range names are
used

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Oct 1, 2015

Simplified Formula

Formula is still a little complex, but it is

illustrated from lines above and it is
documented with range names

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Oct 1, 2015

Try Not to Use Too Many Excel Functions

Excel functions can be very helpful, but they can cause confusion
if people reading the model dont have the same background as
you.

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Oct 1, 2015

More Readable Excel

The following example still uses the excel commands, but at a bit
more understandable

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Oct 1, 2015

Example of Non-Transparent Calculation

You do not know which Rate is the driver of
revenues.

You do not know whether to change one

year or multiple years

Calculations are not in logical order

Which quantities and prices determine
the revenues of 20,000 You need to know
which one drives the revenues

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Oct 1, 2015

Improved Sheet with Logical Order and Coded Inputs

Re-order to show
calculation process

Indents

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Oct 1, 2015

Example of Long Formulas and Other Problems

There are a couple of problems

here

Inputs should be
in color
Formula Difficult to
Follow and Too
Long

Formulas with
blanks
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Oct 1, 2015

Multiple Links from the Same Source

If you are re-using a number

from an initial source, link to the
original number in the source
rather than using links to the
prior link. This enables the trace
precedent and trace dependent
keys to be used more effectively.

Before you
delete a
number, use
the trace
dependent
function

With direct links to the

source instead of indirect
links, the dependent
functions work more
efficiently

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Oct 1, 2015

Use of Arrows for Auditing

Some people believe strongly in using the precedent and dependent arrows. For
example, before deleting a cell, check whether it is a dependent for other cells.

You can also use the CNTL, [ and the CNTL, ] key stroke sequence.

In the example below, the trace dependent shows that deleting a cell will cause
problems

Notice the trace

dependent buttons
are shown on the
excel bar

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Use the trace

dependent and
make sure
nothing depends
on the cell
before deleting a
cell.

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Oct 1, 2015

Put Things in Correct Order in Cash Flow Waterfall

Modeling a cash flow waterfall can be complex
Defaulted debt
Covenants
Debt Service Reserves
Show details of minimum and maximum tests
Put the waterfall in logical order
Make calculations refer to lines above, if possible

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Oct 1, 2015

Waterfall Example

The example below illustrates the model of a cash flow waterfall. Note that you
should put the cash balance back into the waterfall and then subtract it at the end
of the waterfall.

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Oct 1, 2015

Illustration of Problems with Formatting of Waterfall

This example shows a typical

example of a cash flow page
that does not order the
waterfall. It is very difficult to
determine the default
probability on the loan without
seeing the cash flow to each
issue.

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Oct 1, 2015

SPREADSHEET CONVENTION: Max, Min rather

than If Statements
When possible, use max or min statements rather than if
statements
The max and min statements are easier to audit
If statement
If (EBT > 0, EBT x tax rate, 0)
Max(EBT x tax rate, 0)

The max and min are more difficult to think through, but
much easier to audit later on

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Oct 1, 2015

SPREADSHEET CONVENTION: Positive Number

Convention

In the financial statements, input all formulas as positive numbers, even if

the item is a subtraction from net income or cash flow.
For example, even though capital expenditures and debt repayments are a reduction in cash flow, the numbers should be
positive and the totals should subtract the numbers

This is helpful for audits and makes sub-totals and summations much
simpler you dont have to remember whether to add or subtract the
numbers.

This does not mean that every number is positive (e.g. negative W.C.)
The idea is that subtotals should be consistent with the logic of the
calculation e.g. capital expenditure is a subtraction from cash flow.

When you use the positive number convention, show what

is deducted and added to the total in the title of each row.

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Oct 1, 2015

Example of Positive Number Convention

In this example, the draws are

added and the repayments are
subtracted even though all
numbers are shown as positive
numbers.

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Oct 1, 2015

SPREADSHEET CONVENTION: Model Switches

Models often have switches

Switch for time periods
Time period of explicit cash flows in valuation
Time period for terminal value in valuation
Construction period in project finance model

Tax carryforward methods

Interest Timing
Depreciation Methods
Dividend Methods

Put the Switches Together and Make them Easy to Understand

Use logical statements to create switches

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Oct 1, 2015

Use Excel Conventions

Excel Uses a Number of Conventions such as:
Logical Variables
True = 1
False = 0

Row first and Column Second

For example, in setting a switch from a question make

sure that true is 1.
For example, in reading in a table, use the row first and
column second convention

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Oct 1, 2015

Example of Using Switches

The sheet below uses

switches to define
various calculations.
The switches are part of
the calculation where
TRUE = 1 and FALSE =
0.

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Oct 1, 2015

Example of Switches Difficult to Find

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Oct 1, 2015

SPREADSHEET CONVENTION: Presentation and

Use of Cork Screws

Cork Screws involve:

Laying out the beginning and ending balance
Showing retirements and new additions
Beginning balance = ending balance from previous period
Ending balance = Beginning balance + Additions - Deductions
Cork screws are useful for balance sheet accounts and capacity
balance
LIFO Inventories
Number of Planes by Type
Debt issues and cash reserves

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Oct 1, 2015

Example of Problems without Cork Screws Cannot See

Flow of Capacity

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Oct 1, 2015

Corrected with Cork Screws

Clearly lay out the beginning

balance and the ending balance

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Oct 1, 2015

Use of Cork Screws

Beginning Balance of current year

is the ending balance of the last
year

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Oct 1, 2015

SPREADSHEET CONVENTION: Show units in

working calculation

You should show the units in each calculation where the production portion
of the spreadsheet is developed. The use of units is illustrated below:

Show the units in a

separate column

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Oct 1, 2015

Range Name Advantages, Disadvantages and Optimal Use

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SPREADSHEET CONVENTION: Appropriate Use of

Range Names

Some suggest that each cell in a spreadsheet should be named for

documentation.

Problems with Range Names

Cannot trace the calculations
Models become unstable
Difficult to add to models

Benefits of Range Names

Macros
Look-up Tables
Switches
Combo Boxes

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Oct 1, 2015

Moving Between Sheets

Given the number of sheets in a financial model, it is important to

keep track of where the numbers come from:
Mark which rows are to be transferred to another sheet
Use one color for rows that are to be transferred out
Use another color for rows that are transferred in
Transfer Inputs at the top of the page

If you are using range names, then use a range name code
for each sheet
E.g.
INPUT_tax_rate
WORKING_Revenue

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End of the code is the sheet

where the range name is
located

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Oct 1, 2015

Range Name Conventions

Document name of the range in the spreadsheet
Can color named ranges
Clean-up range names
Use range names in macros

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Oct 1, 2015

Use of Named Ranges

Some people believe every range should be named in the

spreadsheet

A convention is to name every variable in the sheet with the same

prefix

You cannot have spaces in named ranges

Find named ranges with the Insert, Name, Define Command in Excel

If you are using a range name, show the name of

the cell, row, column or table in the spreadsheet so
it is easy to see where the range name is located.

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Oct 1, 2015

Example of Range Names

Example of Using Range Names

in the model

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Oct 1, 2015

Problem with Range Names Delete a Name and You

Get Errors

Name Box

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Oct 1, 2015

SPREADSHEET CONVENTION: Circular Reference

Problems
Circular Reference Solutions
Use the Iteration Check Mark on the Options, Calculations
menu
Use macro to work through equations
Compute the equations
Problems with iteration
Cannot use the undo key
Goal seek does not work
Model is unstable

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Oct 1, 2015

Spreadsheet Convention: Keep Top of Sheets in Same Format

when Working with Multiple Sheets

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Consolidating Sheets
With multiple assets it is sometimes more effective to work with
multiple sheets rather than a single sheet.
Keep track of the age of each plant
Measure the real costs by the age of the plant and then
inflate the real costs later

If you are copying the same sheet, do

not use range names!

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Oct 1, 2015

Working with Dates in Models

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Show the Age and the Number of Operating Days

Explicitly in the Model

A difficult problem in models is coming up with start dates and end dates
This can become complex if the project begins in the middle of a year.
Use switches, cork screws and many rows to model the beginning date
and ending date

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Oct 1, 2015

Excel Tools

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SPREADSHEET CONVENTION: Do not force different

inputs to be the same
Example:
Book life and economic life
Book depreciation and tax depreciation

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Oct 1, 2015

Macros
Keep Complex Macros to Minimum
Use Range Names in Macros
Otherwise cannot insert or delete columns and rows
Makes documentation of macro more straightforward
Uses of Macros
Sensitivity analysis
Goal seek (although can use solver)

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Oct 1, 2015

Location of Macros

Create a button for macros

Keep the macros in separate sheet

Keep programs in the same module

Put functions between programs so they can be found

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Oct 1, 2015

Documentation of Macros

It is good to
explain exactly
what the macro
does and use
excerpts from word
or from power
point to explain the
process

Insert documentation by
creating a word
document and copying
and then pasting
special into a
spreadsheet.
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Oct 1, 2015

Auditing and Documentation

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Model Checks

Standard and Poors

Simple checks can go a long way to limit errors
Always keep the operating margin (EBITDA/Sales) in sight

McKinsey
If the ROIC exceeds WACC, then the market value should be
more than book value
Steady state growth should occur when the terminal period is
reached
Check valuation with the multiples

For Project Finance Models

Keep IRRs, cash flows and DSCRs in sight
Project IRR should equal Equity IRR with no debt

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Oct 1, 2015

Documentation of Models

Document the models with comments, descriptions, range names,

or columns.

Think about titles of columns and make them as descriptive as

possible.

Include the units on all the columns.

It would be good to place comments in each line of a model to

describe the source of data and the calculation.
Titles difficult to interpret

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Oct 1, 2015

Auditing Suggestions

Mechanical Checks

Compute Comparative Ratios

Test Extreme Values

Perform Sensitivity Analysis

Compare Forecasts to History

Do not be afraid to re-do models

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Oct 1, 2015

Mechanical Checks

Balance Sheet Balances

Use abs() function
Check in each year

Project Finance
Positive Dividends
Ending debt and asset balance
Source and use statement balance

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Historic Income Reconciles
Historic Balance Sheet Ties

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Oct 1, 2015

Example of Mechanical Checks

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Oct 1, 2015

Comparative Ratios

There is no magic formula

Compute and Graph
Interest/Debt
Depreciation/Gross Plant
EBITDA/Sales
Dividend Payout Ratio
Return on Investment
Return on Equity

Put in very simple cases

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Oct 1, 2015

Test the Model with Extreme Values

Put in 100% Equity and make sure cash flow before financing
equals free cash flow

Put in beginning and end of year to test year fraction inputs

Put in large negative cash flows to see what happens

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Oct 1, 2015

Auditing

Keep Inputs from Formulas in the same sheet

Use Range Names for Scalars and Arrays

Use Sensitivity Analysis

Try Model with Extreme Values

Check Balance Sheet, Sources, Total Construction, Total Debt,

Ending Balances, Dividends etc.

Total Debt Issues = Debt on Balance Sheet

Historic Assets = Modeled Assets

Historic Income = Modeled Income

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Oct 1, 2015

Use of Sensitivity Analysis and Tornado Diagrams to

Check Model

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Oct 1, 2015

Two Methods for Audit

Method 1: Trace the formulas

Use F2 key

Method 2: Test model with extreme inputs

Example Move the cash up and down and make sure the
debt and cash are working

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Oct 1, 2015

Reference: Modeling Concepts

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Time Periods in Models

Reasons for small time increments
Accurate interest expense
Accurate revenue or expense accounting
Timing of capital expenditures

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Oct 1, 2015

Method for Accounting for Small Time Increments

Keep track of dates

Insert time annual and periodic time periods at top of the sheet
Use look-up tables
Use if statement to increment time periods
If prior quarter < 4, increment by 1, otherwise reset to 1
If prior month < 12, increment by 1, otherwise reset to 1

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Oct 1, 2015

Use of Sumif to Aggregate Small Time Increments

The sumif command can be used to aggregate monthly or quarterly figures into
annual amounts

Sumif (sum range, year, periodic range)

Use absolute cell reference for the sum range
Use the absolute reference only on the row number for the year
Use the absolute reference only on the column name for the periodic range
Sum Range

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Year

Periodic Range

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Oct 1, 2015

Debt Modeling Concepts

Use cork screws
Look-up tables for installments and interest rate
Look-up tables with TRUE where use less than or equal to
for the period
Periodic computations
In project finance, combine with monthly source and use
statement
Test re-payment using min statement and beginning balance
Min beginning balance, scheduled repayment

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Oct 1, 2015

Model Checks

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99Oct 1, 2015

More Issues

How can we make the models flexible enough to incorporate inevitable

delays in construction and alternative retirement dates?

What are some of the excel rules that guide accurate and efficient
development of models?

How can project finance models be audited to check errors that we will
make?

What should we do to incorporate alternative debt structures and interest

during construction into the model?

Corporate Modeling

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Oct 1, 2015

Model Checks
Add a balance sheet and check to make sure that it balances
Lower assumptions and see what happens when there is
negative cash flow
Check the final balances of assets to make sure they are
depreciated
Make sure the sources of funds equal the uses of funds
Check the ending debt balance

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Oct 1, 2015

Income Statement Checks

Relate various lines from the income statement to the balance sheet:
Consistency of expenses and revenues with history if possible
Check average interest rate: Interest expense divided by the
average debt
Compute depreciation rate: Depreciation expense divided by the
gross plant
Growth rates on prices and expense ratios

Corporate Modeling

102

Oct 1, 2015

Check the Financial Statements

Read the financial statements
Be able to explain trends in EBITDA and Operating cash
flow relative to historic data
Evaluate the capital expenditures as compared to historic
amounts

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Oct 1, 2015

Other Checks

Dividends should be logical -- there should be no dividends during the

construction period

Logical dividend checks - you must not allow negative dividends

Vary the economic assumptions and see if the results change as

expected. Dont try to explain away illogical results

Print out the financial statements and read them. This is old fashion, but
it is the best check.

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Oct 1, 2015

Model Transparency

Transparency is not a precise concept, but in general, the model

should
Show the key drivers
Allow an audit that can be performed in a couple of hours
Clarify what are inputs and what are outputs
Financial statements should be a primary part of the model

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Oct 1, 2015

Simple Example

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Oct 1, 2015

Circularity

Columns

Solver try by hand

Solver number of iterations

Complex
IDC
Plant Additions
Plant Retirements

Redundant Stuff

Subtotals

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Oct 1, 2015