Reducing the Risk of Error in Financial Models

Danielle Stein Fairhurst

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• Time will be allocated in the end for the Presenter to

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About Your Speaker

Danielle Stein Fairhurst, Principal of Sydney-based consultancy Plum

Solutions, is an MBA qualified financial modeller with many years'

experience as a financial analyst. She is the author of "Using Excel for

Business Analysis: a Guide to Financial Modelling Fundamentals",

second edition, John Wiley & Sons, April 2015. With her professional

background and analytical approach, she helps her clients create

meaningful financial models in the forms of business cases, pricing

models and management reports.

She has hands-on experience in a number of industry sectors,

including telecoms, information systems, manufacturing and financial

services.

For supplementary material & updates, visit:

www.plumsolutions.com.au/book

You will find:

DOWLOADABLE RESOURCES

• Online resources & Weblinks (Chapter 1)

• Excel Versions (Chapter 5)

• Shortcuts (Windows Version) (Chap 5)

• Shortcuts (Mac Version) (Chap 5)

• How to Create a Break-Even Chart (Chapter 9)

• QA Log template (Chap 10, Appendix 10.1)MODELS

• Model Assessment Checklist (Chap 3)

• Salary Sacrifice Calculator (Chap 7)

• Scenario Comparison (including both Exercise and

Completed Versions) (Chap 11)

Types of Model Error

1. Formula errors are the easiest to

make, but the easiest to fix. Also the

most career-damaging!

2. Incorrect assumptions or inputs

3. Logic error can be very difficult to

identify

Ten Strategies for Reducing Error1. Use the enter key

2. Check your work

3. Check it again (sense-check)

4. Have someone else check it!

5. Validate assumptions

6. Document methodology

7. Stress-Testing

8. Sensitivities & Scenario analysis

9. Take note of Excel Errors

10.Build Error Checks

Strategies for Reducing Error

1. Use the enter key

During the model build process,

get into the habit of using the enter

key rather than clicking somewhere

else.

See “Using Excel for Business Analysis”, Chap4, p75

Strategies for Reducing Error

2. Check your work

After hitting the enter key, look at

the formula. Does the value look

correct?

Strategies for Reducing Error

3. Check it again

Fill the block of data, and go back

and check it again. Use the F2

key, and a calculator to sense-

check make sure the values are

correct.

Strategies for Reducing Error

4. Have someone else check your

work!

When you’ve finished your financial

model, and checked, have a

colleague check it before it gets

published.

Strategies for Reducing Error

5. Document and validate

assumptions

Financial models are garbage in and

garbage out. Clearly lay out and

document assumptions for any

decision makers using the model

output.

Strategies for

Reducing Error

6. Document your

Methodology: Flow

charts of the model

methodology can

identify logic errors

See “Using Excel for Business Analysis”, Chap4, p79

Strategies for Reducing Error

7. Stress-Testing

Put some nonsensical inputs into

your model. If price is set to

zero, revenue should be zero for

example.

See “Using Excel for Business Analysis”, Chap4, p77

Other Examples of Stress-Testing

• Double headcount. Do staff costs

double?

• Change growth rate to zero. Do

forecasts remain flat?

• Chart metrics over time. Does cost to

serve each customer or price per unit

remain constant for example? Explain

any anomalies.

See “Using Excel for Business Analysis”, Chap4, p77

Strategies for Reducing Error:

8. Scenarios & Sensitivity Analysis

Strategies for Reducing Error

9.Take Note of Excel Errors

######The railroad tracks; not really an error - just make the

column wider

#DIV/O! You’re trying to divide by zero

#N/A No value available

#NAME? There’s a name in the formula Excel doesn’t recognise

#REF! Your formula refers to a cell that no longer exists

#VALUE! The formula uses a wrong type of operand or argument

Circular

Reference

This means you are trying to link a formula to itself

somehow. Circular references often cause models to stop

calculating

How much profitthe company

earns will impact their cash and

need for funding

Funding requiredis how much debt the company has,

which impact their interest

Interest payments are an

input to profit

Circular References in Interest Calculations

See “Using Excel for

Business Analysis”,

Chap4, p90

Strategies for Reducing Error

9. Error Checks

• A good financial modeller always looks

for opportunities to include error checks.

• Checks will identify errors in inputs

when using the model, not errors

created during the model build.

• Error checks should not replace good

modelling practiceSee “Using Excel for Business Analysis”, Chap4, p87

Ten Strategies for Reducing Error1. Use the enter key

2. Check your work

3. Check it again (sense-check)

4. Have someone else check it!

5. Validate assumptions

6. Document methodology

7. Stress-Testing

8. Sensitivities & Scenario analysis

9. Take note of Excel Errors

10.Build Error Checks

• Any questions?

• Thank you very much for attending!