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What Makes a Good Financial Spreadsheet?

July 31, 2007 by


What Makes a Good Financial Spreadsheet?

We’ve seen hundreds of spreadsheets, and frankly, some are just painful to look at. In our experience, an excellent model is both “correct” and “user friendly,” and typically exhibits the following characteristics:

  • Generates useful insights that the intended audience(s) can quickly grasp
  • Engenders confidence that the model is working as intended
  • Easily understood and manipulated by its intended audience(s) without requiring extensive modeling experience (e.g., all assumptions/inputs are segregated and identified, rather than buried within formulas)
  • Easily modified and maintained by its owner as the underlying conditions change
  • Focuses on the big picture and gives priority to the most material aspects of the business by employing numerous simplifying assumptions and by relegating details to separate but related sub-models
  • Based on reasonable and justifiable assumptions
  • Based on logically correct economic and financial principles
  • Avoids errors of implementation, such as incorrect or overly complex formulas

Quite often, it is difficult for the author of a spreadsheet to look at their own work objectively and decide whether or not it meets these criteria. When in doubt, have a colleague perform a thorough audit of your work before showing it to your intended audience.

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  • http://www.caycon.com Ryan Chester

    I absolutely agree. A good financial spreadsheet must be error free and easy to understand. One of the most important driving forces in a superior financial model is the quality and depth of the underlying assumptions. Forecasting is not based on the number of units sold or the number of subscribers acquired and measured exponentially over time. It is also not focusing on a revenue model to the exclusion of a rigorous operating model. The majority of forecasts that I see are focused on revenue generation with minimal-to-no operating costs. A simple profit and loss statement just does not provide a good enough view of business expenditures.
    Investors of all types look for a financial forecast that focuses on the big picture, which identifies and explains all root assumptions, and above all demonstrates competence that the strategy is attainable and executable. In my opinion, the financial strategy is the most important part of the business planning process.
    Marc Suster, venture capitalist with GRP Partners and former entrepreneur, has written a good synopsis on the importance of financial modeling and particularly its’ underlying assumptions. He writes, “Financial models are the Lingua Franca of investors. But they should also be the map and the Lingua Franca of your management discussions.”
    Source: http://www.bothsidesofthetable.com/2009/11/03/are-business-plans-still-necessary/

  • Blacher, Josh

    All valid points. Also keep in mind that no matter how much homework you’ve done on the underlying assumptions and how defensible they are, your perspective investors will always want to beat you up on them. For that reason, it’s a great idea to preempt this by stressing a number of the key assumptions. And when I say stress them, really take a hatchet to them. Make sure your model has built-in sensitivity tables which analyzes the major output items (DCF, NPV, IRR, etc.) relative to the key revenue and expense drivers.