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Reducing the Risk of Error in Financial Models
Danielle Stein Fairhurst
House Keeping• Slides will be available on our SlideShare page, link will be
emailed to you
• Recording of the webinar will be available to download, link
will be emailed
• Take time to complete the post-webinar survey that will pop
up at the end
• You can type your questions throughout the session
• Time will be allocated in the end for the Presenter to
address your questions
About Your Speaker
Danielle Stein Fairhurst, Principal of Sydney-based consultancy Plum
Solutions, is an MBA qualified financial modeller with many years'
experience as a financial analyst. She is the author of "Using Excel for
Business Analysis: a Guide to Financial Modelling Fundamentals",
second edition, John Wiley & Sons, April 2015. With her professional
background and analytical approach, she helps her clients create
meaningful financial models in the forms of business cases, pricing
models and management reports.
She has hands-on experience in a number of industry sectors,
including telecoms, information systems, manufacturing and financial
services.
For supplementary material & updates, visit:
www.plumsolutions.com.au/book
You will find:
DOWLOADABLE RESOURCES
• Online resources & Weblinks (Chapter 1)
• Excel Versions (Chapter 5)
• Shortcuts (Windows Version) (Chap 5)
• Shortcuts (Mac Version) (Chap 5)
• How to Create a Break-Even Chart (Chapter 9)
• QA Log template (Chap 10, Appendix 10.1)MODELS
• Model Assessment Checklist (Chap 3)
• Salary Sacrifice Calculator (Chap 7)
• Scenario Comparison (including both Exercise and
Completed Versions) (Chap 11)
Types of Model Error
1. Formula errors are the easiest to
make, but the easiest to fix. Also the
most career-damaging!
2. Incorrect assumptions or inputs
3. Logic error can be very difficult to
identify
Ten Strategies for Reducing Error1. Use the enter key
2. Check your work
3. Check it again (sense-check)
4. Have someone else check it!
5. Validate assumptions
6. Document methodology
7. Stress-Testing
8. Sensitivities & Scenario analysis
9. Take note of Excel Errors
10.Build Error Checks
Strategies for Reducing Error
1. Use the enter key
During the model build process,
get into the habit of using the enter
key rather than clicking somewhere
else.
See “Using Excel for Business Analysis”, Chap4, p75
Strategies for Reducing Error
2. Check your work
After hitting the enter key, look at
the formula. Does the value look
correct?
Strategies for Reducing Error
3. Check it again
Fill the block of data, and go back
and check it again. Use the F2
key, and a calculator to sense-
check make sure the values are
correct.
Strategies for Reducing Error
4. Have someone else check your
work!
When you’ve finished your financial
model, and checked, have a
colleague check it before it gets
published.
Strategies for Reducing Error
5. Document and validate
assumptions
Financial models are garbage in and
garbage out. Clearly lay out and
document assumptions for any
decision makers using the model
output.
Strategies for
Reducing Error
6. Document your
Methodology: Flow
charts of the model
methodology can
identify logic errors
See “Using Excel for Business Analysis”, Chap4, p79
Strategies for Reducing Error
7. Stress-Testing
Put some nonsensical inputs into
your model. If price is set to
zero, revenue should be zero for
example.
See “Using Excel for Business Analysis”, Chap4, p77
Other Examples of Stress-Testing
• Double headcount. Do staff costs
double?
• Change growth rate to zero. Do
forecasts remain flat?
• Chart metrics over time. Does cost to
serve each customer or price per unit
remain constant for example? Explain
any anomalies.
See “Using Excel for Business Analysis”, Chap4, p77
Strategies for Reducing Error:
8. Scenarios & Sensitivity Analysis
Strategies for Reducing Error
9.Take Note of Excel Errors
######The railroad tracks; not really an error - just make the
column wider
#DIV/O! You’re trying to divide by zero
#N/A No value available
#NAME? There’s a name in the formula Excel doesn’t recognise
#REF! Your formula refers to a cell that no longer exists
#VALUE! The formula uses a wrong type of operand or argument
Circular
Reference
This means you are trying to link a formula to itself
somehow. Circular references often cause models to stop
calculating
How much profitthe company
earns will impact their cash and
need for funding
Funding requiredis how much debt the company has,
which impact their interest
Interest payments are an
input to profit
Circular References in Interest Calculations
See “Using Excel for
Business Analysis”,
Chap4, p90
Strategies for Reducing Error
9. Error Checks
• A good financial modeller always looks
for opportunities to include error checks.
• Checks will identify errors in inputs
when using the model, not errors
created during the model build.
• Error checks should not replace good
modelling practiceSee “Using Excel for Business Analysis”, Chap4, p87
Ten Strategies for Reducing Error1. Use the enter key
2. Check your work
3. Check it again (sense-check)
4. Have someone else check it!
5. Validate assumptions
6. Document methodology
7. Stress-Testing
8. Sensitivities & Scenario analysis
9. Take note of Excel Errors
10.Build Error Checks
• Any questions?
• Thank you very much for attending!