Best Practices in Developing a Financial Model in an Spreadsheet
Abstract
This abstract delineates a systematic approach to workbook development, offering comprehensive guidelines for purpose, classification, structure, and content. It emphasizes clarity at various levels, categorizing purposes into overarching workbook goals, individual sheet objectives, and specific component functions. The classification extends to sheets, cells, and assumptions, ensuring visual identification and differentiation. The importance of a structured workbook organization is underscored, advocating for cover sheets, logical sections, and a user-friendly table of contents for efficient navigation. The text stresses consistency in formatting, alignment, and denomination representation, contributing to a visually cohesive user experience. It highlights the segregation of inputs and outputs, suggesting dedicated sheets and summaries for checks, sensitivity assumptions, and errors. The abstract culminates in promoting a transparent and organized workbook design that facilitates effective interpretation, analysis, and management.
Time to Read: Approximately 8 to 10 minutes.
Level: Intermediate.
Category: Techical Note.
Workbook Development: A Systematic Approach to Purpose, Classification, and Transparency
The purpose of a workbook holds paramount importance for a model developer at every stage of its development. This purpose is systematically categorized into three levels: firstly, the overarching purpose of the entire workbook; secondly, the purpose specific to each sheet; and thirdly, the purpose of each individual component within those sheets.
To ensure clarity and effective organization, the content and purpose of every sheet in a workbook should be visually identifiable at all times. Each sheet is further categorized into distinct types, such as cover sheet, contents sheet, section cover sheet, schematics sheet, time series sheet, blank sheet, lookups sheet, or chart sheet, making it easier to navigate and understand the workbook's structure.
Furthermore, each sheet in a workbook is assigned a specific purpose – either collecting assumptions or not collecting assumptions. This distinction allows for clear identification, with sheets being visually recognizable as either Assumptions sheets or Outputs sheets.
Moving down to the granularity of individual cells within worksheets, the content and purpose of each cell should be visually identifiable at all times. Cells are classified based on content into constant, formula, or a combination of both (Mixed). Similarly, cells are assigned a purpose – either collecting assumptions or not collecting assumptions – making it visually clear whether a cell serves as an Assumption cell or an Output cell.
The concept of assumptions is defined as elements within a workbook intended to be manipulated by model users to affect outputs. Every assumption in a workbook is further classified into two types: Base assumption or Sensitivity assumption. This classification aids in understanding the role and impact of different assumptions.
Finally, to maintain consistency and transparency, every assumption cell in every worksheet should contain constant cell content.
Workbook Organization for Clarity and Efficiency
Every workbook containing more than one sheet should adhere to a structured organization, starting with a separate cover sheet as the first sheet. This cover sheet serves as an introduction to the workbook, providing essential context.
To enhance clarity further, workbooks with multiple categories or similar types of information should be logically divided into sections. Each section, whether it comprises a single sheet or a group of sheets with related information, should begin with a section cover sheet. This practice helps users easily identify and navigate through distinct sections within the workbook.
Ensuring easy navigation, a comprehensive workbook with multiple sheets necessitates the inclusion of a table of contents. This table of contents serves as a roadmap, outlining the structure and composition of the workbook. Specifically, the table of contents should display sections, reference sheet titles, clearly number sections and sheets, and be strategically located near the front of the workbook—typically as the second sheet.
Facilitating seamless movement within the workbook, a dedicated table of contents sheet should be present, detailing all sections and sheets. Additionally, hyperlinks should be incorporated from the table of contents to each sheet, streamlining access. To maintain constant visibility, every sheet in the workbook should feature a hyperlink leading back to the table of contents.
Optimizing Clarity and Uniformity in Sheet Presentation
To ensure seamless comprehension and navigation, every sheet within a workbook should feature a prominently displayed and consistently formatted sheet title. This title should adhere to uniform formatting across all sheets, maintain a consistent location, and remain visible on the screen when the sheet is active.
Consistency extends beyond individual sheets to sheets of the same type within the workbook. Sheets sharing the same classification should exhibit uniformity in various aspects, including sheet title formatting and positioning, heading styles and spacing, column and row dimensions, data entry points, hyperlink positioning, visibility of gridlines, grouping levels, zoom and viewing properties, window panes and splits, as well as formats and colors. This standardized approach enhances not only visual coherence but also aids users in understanding and interacting with similar types of sheets.
In the practice of hiding rows or columns within a worksheet, a crucial guideline emphasizes the use of grouping instead of mere hiding. This ensures that users can easily identify and manage hidden elements, promoting transparency and efficient data manipulation.
Enhancing Print and View Consistency for Effective Documentation
In the realm of workbook documentation, maintaining consistency in the presentation of information is key. For workbooks featuring multiple sheets, the inclusion of a table of contents becomes imperative, displaying corresponding printed page numbers for each sheet. This not only aids in navigation but also ensures that the printed Table of Contents aligns seamlessly with the page numbers on individual sheet pages when the entire workbook is printed.
Within each sheet, meticulous attention should be given to page numbers, ensuring they align with the printed page numbers stated in the workbook table of contents during the printing process. This synchronization enhances the coherence of the printed material.
Consistency extends to the layout of each sheet, emphasizing uniform page margins. A standardized approach to page margins across all sheets contributes to a polished and professional presentation.
Furthermore, maintaining consistent print view settings, including print scaling settings and content size on each printed page, is advisable wherever feasible. This approach enhances the visual uniformity of the printed material across different sheets.
Consistency in the type of view for each sheet is crucial. Ensuring that the view type is the same across all sheets in a workbook fosters a cohesive and user-friendly experience for those navigating the document.
Before handing over a workbook to a model user, it is recommended to set the view of every worksheet such that the top-left corner (cell A1) is in view. This proactive measure ensures that users start their interaction with each sheet from a standardized perspective.
Efficient Management of External Workbook Connections
For seamless integration and management of external workbook connections, it is essential to adhere to specific guidelines. All links originating from an external workbook into a workbook should be established through dedicated and separate import sheets. This practice ensures a clear and organized structure, facilitating easy tracking and maintenance of external links.
Conversely, links from a workbook to an external workbook should be established through dedicated and separate export sheets. This systematic approach enhances transparency and allows for efficient monitoring of outbound connections.
When dealing with workbook outputs, it is crucial to maintain direct links from export worksheets to the workbook calculations. Formulas on an export worksheet should always be directly linked to the underlying calculations in the workbook. Avoiding the movement of content from one workbook to another in ways that create static data—such as copying and pasting as values—ensures that the exported data remains dynamic and reflects changes made to the source workbook.
Ensuring Clarity and Uniformity in Workbook Design
Within the realm of workbook design, certain principles contribute to clarity and consistency. A crucial aspect is the inclusion of a Formats and Styles Key in every workbook, providing a legend that elucidates the purpose of each applied format and style in the cells.
Consistency in data alignment is pivotal. Data of the same type on a worksheet should be uniformly aligned, either down rows or across columns. This systematic approach enhances visual coherence and facilitates easier interpretation of data.
Denomination identification is another key consideration. Every number in a workbook should explicitly indicate its denomination. This can be achieved by stating the denomination in corresponding headings, title columns, rows, or labels. Alternatively, formatting the number to display its denominator (e.g., $20, 20 tonnes, 20%, or 20.0x) ensures clarity.
Establishing a primary denomination consistently throughout the workbook is recommended. Any deviations from the primary denomination should be clearly labeled, serving as essential information for other model developers and users.
Maintaining hyperlink consistency is integral to visual clarity. All hyperlinks within a workbook should adhere to a consistent, dedicated style or format, ensuring their easy identification. In the context of ongoing work, any cell within a workbook that is subject to further work or remains unfinalized should be visually identifiable as a work in progress. This designation aids in distinguishing areas that may undergo revisions.
Optimizing Assumption Management and Control Usage in Workbooks
Efficient workbook management involves strategic placement of assumptions and controls. Assumptions, integral to the modeling process, should be exclusively housed on dedicated and easily identifiable assumptions sheets. It is imperative to refrain from locating assumptions on outputs sheets, ensuring a clear separation between input assumptions and output calculations.
To avoid redundancy and maintain clarity, a fundamental guideline dictates that any single assumption should never be duplicated within a workbook. This practice streamlines data management and prevents potential discrepancies.
For controls linked to cells in a workbook, precise placement is crucial. Every cell link associated with a control should be positioned in the top-left cell of the range over which its control operates. This structured placement enhances control functionality and ensures seamless integration with associated ranges.
In scenarios where a control necessitates input range data (lookup data), a dedicated lookups sheet should be utilized. This segregation enhances organization and simplifies the management of control-related data. Additionally, when employing data validation to create in-cell drop-down lists, the corresponding cell should always be formatted as an assumption cell. This ensures consistency in data handling and reinforces the clear identification of cells requiring user input.
Enhancing Sensitivity Analysis in Workbook Design
In the realm of sensitivity analysis within workbooks, structured organization is crucial. For workbooks featuring sensitivity analysis functionality, a dedicated sensitivity assumptions section should be incorporated. This section serves as a distinct entity separate from the base assumptions section, facilitating a clear demarcation between base and sensitivity assumptions.
Maintaining consistency in the sheet type for sensitivity assumptions entry interfaces is essential. All sensitivity assumptions, integral to the analysis, should be positioned on dedicated assumptions sheets. This standardization ensures a cohesive approach to handling sensitivity-related data.
Furthermore, a best practice is to have separate sensitivity assumptions entry interfaces. Sensitivity assumptions should always be located on dedicated sheets, specifically designated for sensitivity assumptions. These sheets should be distinct and separate from their corresponding base assumptions sheets. This segregation enhances clarity and streamlines the management of sensitivity-related inputs.
Efficient Organization of Outputs and Presentation Sheets
Effective workbook design involves a strategic approach to the location and presentation of outputs. Outputs sheets, encompassing tables, graphs, diagrams, or other visual representations, should be systematically placed to enhance clarity. They should be situated either in a separate, clearly labeled section within the workbook or in an entirely dedicated outputs workbook. This segregation streamlines access and ensures a focused space for interpreting and analyzing outputs.
While adhering to standards and conventions is encouraged, allowances are made for sheets that deviate from these norms, provided they serve as presentation sheets. A presentation sheet is a permissible exception in a workbook, introduced to present outputs exempt from standards and conventions for aesthetic or corporate requirements.
However, the usage of presentation sheets should be judicious. They should only be included when it is not feasible to achieve the same objective using non-presentation sheets. This measured approach ensures that presentation sheets serve a specific purpose and do not compromise the overall structure and functionality of the workbook.
Promoting Formula Consistency and Avoiding Circular References
Maintaining consistency in formulas is paramount for efficient workbook functionality. When multiple adjacent cells contain similar types of output, the structure and components of the formulas within these cells should consistently align. This ensures that the cells can be copied across or down the relevant range without requiring adjustments, streamlining the replication process and minimizing errors.
To preserve clarity and prevent complications, assumptions should not be embedded in cells containing mixed content. Cells that encompass a combination of constant and formula content should not house assumptions. This practice helps in maintaining a clear separation between input assumptions and calculated outputs.
A critical guideline emphasizes the avoidance of circular references within a workbook or a group of linked workbooks. Circular references occur when a formula refers back to its own cell, creating a loop. Eliminating circular references is essential for accurate calculations and preventing potential errors in workbook calculations.
Enhancing Clarity through Thoughtful Workbook, Sheet, and Range Naming
For effective organization and differentiation, each workbook should bear a name that fulfills three key criteria. Firstly, the name should allow for different versions of the workbook, accommodating updates and modifications. Secondly, the name should remain consistent across versions, ensuring continuity. Lastly, the name must clearly differentiate the workbook from others, facilitating easy identification.
Similarly, every sheet name within a workbook should convey its type, contributing to a clear and organized structure. This practice aids users in quickly understanding the purpose of each sheet.
Naming ranges within a workbook should involve descriptive terms that articulate the content or use of the range. This ensures that users can easily interpret the purpose of each range.
To further enhance clarity, each range name should carry a standardized prefix, indicating the type or purpose of that range. This standardized approach streamlines identification and understanding.
A workbook should maintain exclusivity when it comes to certain check summaries. Specifically, there should not be more than one of each type of check summary, including error checks, sensitivity checks, and alert checks. This restriction ensures that summaries remain focused and avoid redundancy.
Ensuring Clarity in Time Series Analysis Workbooks
In the realm of time series analysis, maintaining clarity and consistency is crucial for effective interpretation. For each distinct time series within a workbook, it is imperative to clearly state the time series start date and its periodicity. This information provides a foundational understanding of the time series being analyzed.
Consistency extends to the labeling of time series periods. Each time series should consistently feature labels and counters, including period start date, period end date, and period number (counter). These labels should be consistently located in the same position across all relevant worksheets in the workbook.
To enhance visibility and comprehension, the period end date label for each period in a time series sheet should always be in view on the screen. This ensures that users can easily reference the end date for each time series period.
The periodicity of each time series sheet should be clearly identified and always in view on the sheet. This practice aids users in quickly understanding the structure of the time series being analyzed.
Additionally, a workbook undertaking time series analysis should always include a cell or cell range indicating the number of periods in each distinct time series. This information provides valuable context for the analysis. Maintaining uniformity is key. Time series sheets for each distinct time series should always contain the same number of periods, and the first period should consistently start in the same column (or more rarely, row). This standardization ensures a cohesive and predictable structure across all time series sheets.
Comprehensive Checks Management in Workbooks
In the realm of workbook checks, a systematic approach is essential for effective identification and resolution. All checks within a workbook should be diligently classified into one of three types: error checks, sensitivity checks, or alert checks. This classification provides clarity on the purpose and function of each check.
Every workbook should incorporate appropriate error checks to facilitate the identification of errors within the workbook. These checks serve as a proactive measure to ensure the integrity of the workbook.
Workbooks containing sensitivity assumptions should include sensitivity checks, specifically designed to identify the activation of operative sensitivity assumptions. This practice ensures that the impact of sensitivity assumptions is effectively monitored.
For checks that do not fall under the categories of error or sensitivity checks, alert checks should be implemented. Alert checks serve the purpose of identifying when a specific condition, not covered by error or sensitivity checks, has been triggered.
To enhance transparency, the outcome of each type of check—error, sensitivity, and alert—should be displayed in dedicated and separate summaries. These summaries provide a consolidated view of the status of checks, aiding in efficient review and resolution.
Additionally, a clear check indicator flag or message should always be in view on every worksheet, notifying the model developer or user when a check has been triggered. This ensures immediate awareness of any issues that require attention.
Furthermore, each check cell in a workbook should be formatted to visually indicate when an error, sensitivity, or alert check has been triggered. This visual formatting aids in quick identification of issues within the workbook. Maintaining a streamlined approach, a workbook should not contain more than one summary for each type of check—error checks summary, sensitivity checks summary, and alert checks summary. This ensures a focused and organized presentation of check outcomes.
By implementing these guidelines, workbook creators contribute to the development of well-organized, transparent, and user-friendly systems.
Recommended Reading to Learn More on Related Topics:
Benninga, Simon. Financial Modeling. 4th ed. Cambridge, MA: MIT Press, 2014.
Rees, Michael. Principles of Financial Modelling: Model Design and Best Practices Using Excel and VBA. 1st ed. Chichester, UK: John Wiley & Sons, 2018.
Valentine, James. Best Practices for Equity Research Analysis. New York: McGraw-Hill, 2011.
