What Is the Best Practice for Financial Modeling in Excel?

In this article, you will learn about the best practice for financial modeling in Excel. In order to comprehend this article, you need to possess some basic knowledge of finance. However, the article is written in such a way that anyone can understand it. You will need to know the SUM function, prepare financial statements, link those statements, apply accounting number format, and change background and fill color to understand how to apply the best practices in your model. All of these features are available in Excel 2003 and onwards. So, there is no chance of facing any compatibility issues.


Download Practice Workbook

You can download the Excel file from the following link.


Problem Overview

In our Excel file, we have created a financial model for an online consumer company. Using this model, we will forecast the financial position of the company for the years 2022, 2023, and 2024. We have created an income statement, a balance sheet, and a cash flow statement. Additionally, we have added the assumptions for each statement in a separate table. Here is a partial snapshot of the file showing only the income statement portion.

What Is the Best Practice for Financial Modeling in Excel

Now, the most common practices for financial modeling in Excel are given below. Your task is to apply these practices in the

  • Firstly, create everything in the financial model on the same sheet.
    • This will speed up our navigation time. Additionally, this practice will reduce the risk of linking to unintended cells.
  • Secondly, use color coding.
    • You need to distinguish the hard coded values with a different font color. Blue color is widely used to denote this.
  • Thirdly, make the assumptions in a separate table.
    • There are a lot of assumptions in a financial model. If you create those in a separate space, it will be easier to change in the future.
  • Then, use different types of cell references but avoid circular references.
  • After that, make the headers and sub-sections easier to read.
    • You can make the headers and subsections bold to easily identify later.
  • Next, ensure the balance sheet balances.
    • This will make sure your model is working correctly. The formula is Asset = Liability + Owner’s Equity. You can subtract Total Assets from the Total Liabilities and Shareholders’ Equity. If the output is 0 or “$ –” incase of the accounting number format, your model is fine.

  • Lastly, it is best to denote all income as positive and all expenses as negative.


Conclusion

Thank you for reading this article. We hope you have learned about some best practice for financial modeling in Excel. You can find more articles similar to this on the ExcelDemy website. If you have any questions or suggestions, feel free to comment below. However, remember that our website implements comment moderation. Therefore, your comment may not be instantly visible. So, have a little bit of patience and we will solve your query as soon as possible. Keep excelling!

Rafiul Haq

Rafiul Haq

Hello! This is Rafiul. I have an engineering degree and an MBA (finance) degree. I am passionate about all things related to data, and MS Excel is my favorite application. I want to make people's lives easier by writing easy-to-follow and in-depth Excel and finance related guides here at ExcelDemy.

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