A financial model is a tool that can be built in Excel to forecast a business’s financial position. It is typically based on the company’s performance in the past, and predictions for times to come. It requires preparing the basic financial model, which is the three statement model composed of the income statement, balance sheet, and cash flow statement. From the three statement model, you can do more financial analyses such as the break-even point analysis, sensitivity analysis, IRR analysis (definition), DCF valuation, and other relevant financial analyses. Financial professionals believe that their proficiency with Excel is crucial to their success, as it is still the most widely used spreadsheets software. Excel provides a solution for simple and sophisticated data analysis across industries. So, here are six reasons why build your financial model in Excel.
1. Keep your Spreadsheet Private – Spreadsheets with Excel can be stored on your local PC and are not stored in the Cloud. This keeps confidential and sensitive data private and protected. Also you can better control who has access the files.
2. Excel is widely used and accepted – Excel has millions of users nowadays. With its easy to use functions, it is highly adapted in the corporate world. Users include administrative assistants, sales managers, accountants, business analysts, financial analyst, digital marketers, etc.
3. Simplify Financial Analysis. Finance and accounting widely used Excel because of its simplicity and has a multitude of financial functions, according to PCC.edu. You can always gather and enter all the data, formulate ratios wherever they add value so you can generate reports and dashboard summaries.
4. Efficient Importing and Manipulating Data. Typically, other financial professionals input data manually into their Excel spreadsheets, unaware of importing information logically to improve their efficiency. Importing procedure involves extracting data from another source of program and populating it in your Excel workbook. This extracted data may be saved in an external database and accessible through a data connection. By doing this, you save time and avoid associated errors of manual inputs in your financial models. You can do this process repetitively as you needed.
5. Test your Financial Model. It is essential to test and check for errors upon completion before letting your model put to use. You can do this by entering mock data that will give an expected result, and see if your model is reliable. It may seem tedious, but it is a must to double-check your inputs and calculations to ensure you did not miss any typos and other mistakes.
6. Safeguard Integrity. Some handy features of Excel will help you keep tabs on your model and prevent others from entering erroneous data or accidentally breaking your financial model. To ensure this, try to consider using tools such as data validation and conditional formatting to safeguard the integrity of the data inputted in your model.
Making a reliable financial model will allow you to craft a narrative from numbers that will transform your company’s financial data into reasonable outputs. These simple best practices help you create an accurate and error-free financial model. You may take a look at the variety of financial model templates prepared by eFinancialModels to help you develop a financial model for your project.
