Key steps to be remembered while building a financial model

There are some crucial points that must be remembered while building a financial model. We can divide them into 3 categories – the points to be remembered before, during and after building the model

Key points to be kept in mind before beginning with the building of the model

1. Planning the central objective behind the model keeping in mind the parties involved for whom the model is being built
2. Defining the required output, and accordingly, the needed inputs
3. Finally, defining the relationship between the inputs and the outputs?

Key points to be kept in mind while building the model

1. Go for building the structure first with inputs, outputs and calculation sheet
2. Post preparing the template, proceed with filling up the information about the historical financial statements
3. Build the reasonable assumptions based on the historicals
4. Prepare the financial statements giving due attention to the special adjustments and specific calculations
5. Balance the balance sheet and the model & ensure there are no negative cash situations
6. Set up an error checking mechanism to ensure there are no logical, Excel based or concept based errors in it
7. Lastly, check for the consistencies and correct them if needed

Key points to be kept in mind after building of the model

1. Ensuring that the model is giving logical results and not some improbable or imaginary values. If they are then there should be some proper rationale behid it
2. There are various scenarios in the model that model which tests the model for the stress situations
3. Necessary documentation is provided for the model. When we say necessary documentation we need to have various comments in the model which point out sources of data that we have used, which also maintains a log of various changes made in the model in the form of the versions