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FINANCIAL MODELLING - TIPS, TRICKS & TRAPS
The importance of robust financial models continues to grow as organisations increasingly utilise these
tools in their financial decision making process. Poor modelling practices have the potential to increase
financial and reputational risk for an organisation, the State and other stakeholders. Recently, Western
Australian Treasury Corporation (WATC) presented on the topic of Financial Modelling at the 2017 CFO
Forum facilitated by the Department of Treasury, an overview of the key themes presented can be found
below.
What Does a Robust Financial Model Look Like?
Model Structure &
Transparency
Should have logically labelled tabs.
Clearly defined Style Guide or Legend for cell formatting.
Clearly identify model inputs.
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Clearly identify timing and dates and incorporate sub-headings where
appropriate. Rows in Calculations sheet should be labelled and units should
be specified.
Formulas Need to be dynamic and simple to allow the model to be flexible, easy to
audit and able to handle different scenarios.
Consistent across each row (no empty cells) to reduce the chance of
entry error.
No hardcoded values in formula.
Utilise binary flags to simplify formulas and keep the model dynamic.
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Interest Rates Confirm appropriate interest rate is being applied (benchmark commercial
or government borrowing rate) and correct term (Monthly, Quarterly, Semi-
annual or Annual).
WATC has an Interest Cost Projection (ICP) system which is used to assist
clients improve debt management and project costing estimation by
providing robust forecasts of future interest costs. It is also useful for
budgeting, project evaluation, managing and reporting of future debt levels
and associated interest costs, and to support informed decision making
when considering debt finance options.
Discount Rates Needs to be appropriate for the cash flows being discounted (Real/Nominal,
Pre/Post Tax, align with the risk profile of the project).
Consider if you are calculating Net Present Value (NPV) or Net Present
Cost (NPC).
Consider Strategic Asset Management Framework (SAMF), Financial
Administration Bookcase (FAB), Weighted Average Cost of Capital
(WACC), Regulated WACC (for regulated businesses).
If using WACC don’t include interest payments (double counting).
Complex Project? Seek assistance from a professional consultant.
Remember the Fisher Equation when converting Real discount rates in
Nominal discount rates.
Build in Checks Build formulas to carry out Logic Testing and create Graphical
Representations as a visual check of outliers or anomalies.
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Post Model Build – Check, and Check Again!
Models which are built with a “Significant Purpose” or are to be re-used, should go through a Quality
Assurance (QA) process. This involves an independent 3rd party (internal or external to your organisation)
with the sufficient skill, time and knowledge inspecting the entire model, documenting the process undertaken
and completing signoff.
How Should My Organisation Embed Sound Financial Modelling Practices?
Organisations should create standard organisational templates which standardise colours and formatting to
promote model consistency across the organisation. In addition, staff involved in financial modelling should
receive training to ensure they have the requisite skills. We recommend training be consistent (internal or
use the same external provider) to ensure that a consistent approach to modelling is embraced and adopted
by your organisation.
WATC Financial Modelling Services
WATC has experience in assisting clients in building unique and/or complex financial models, forecasting
future interest costs, providing advice in relation to discount rates and conducting quality assurance checks.
WATC provides independent and objective advice that is tailored to a client’s needs and enables agencies
to manage their financial modelling challenges with confidence.
If you would like to discuss your own agency’s requirements regarding financial modelling please contact
David Letts on (08) 9235 9178 or email [email protected].
David Letts Head of Advisory Services
December 2017
DISCLAIMER Any opinions, judgments, conclusions, forecasts, predictions or estimations contained in this advice are made in reliance on information provided to Western Australian Treasury Corporation which Western Australian Treasury Corporation believes to be reliable. Western Australian Treasury Corporation, however, cannot guarantee the accuracy of that information. Thus, any recommendations are made in good faith but are provided only to assist you with any decisions which you make. These recommendations are not intended to be a substitute for professional advice on a particular matter. Before accepting or rejecting those recommendations you must discuss your particular needs and circumstances with Western Australian Treasury Corporation.
