Over the years, financial modelling has been in the news for the wrong reasons, as we know only too well if we think about Enron, Aegon and more recently in the UK, the West Coast rail contract, where the Laidlaw report highlighted that the Government’s poor financial modelling cost tax payers £50M.
Regardless of the size of your company, if good practice when building financial models is shunned, spreadsheets will contain errors and can’t be relied upon to make decisions.
This is why the Institute of Chartered Accountants for England & Wales (“ICAEW”) have published the Financial Modelling Code, a high-level set of standards.
Excel definitely remains the universal modelling tool of choice, but as was discussed widely by the focus group behind the Code, the skill set required to use it effectively isn’t often taught in formal training within the Accountancy profession. This is where many of the problems stem from. Model architecture is also key, but it remains the case that many models aren’t often thought out in advance.
The Code, therefore, is meant for anyone who comes into contact with financial models in one form or another and enables the conversation to start about what makes a good model. For clients in particular, it is a useful tool to check if whoever has built your model has done a good job.
The Financial Modelling Code Guidance, Summary:
- Determine the scope of your financial model.
- Use consistent approaches, structures and formulas.
- Create clear and logical sections.
- Use clear labels.
- Make navigation simple with easy to find input sections.
- Try and keep calculations as simple as possible.
- Include instructions for users so they understand what they need to fill in.
- Clearly identify various sections, including forecasts, scenarios and historic data.
- Include data checks.
- Test the model.
- Review the model.
At Forward Financials, we view it as a very positive step that this guidance has been published. It brings to the forefront the conversation about good models and modelling practises and their importance in decision making.