As our business community become more litigious, it is imperative that tools used by directors and senior management reflect best practice. Excel is the default product used to prepare most funding applications, feasibilities and cash flow forecasts. Given the reliance on such outputs, shouldn’t you ensure your models reflect best practice?
Financial models vary by client, purpose and sophistication. Nonetheless, there is often consistency in the areas in which models are deficient. Following are some examples of flaws, errors or omissions we commonly identify.
This Way, That Way But Not Three Way…
Three way financial forecasts are becoming industry standard for funding applications, capital raisings and acquisitions. The interrelationship of the Profit and Loss Statement, Balance Sheet and forecast Cash Flow provide powerful tools for end users including:
High Profit / Cash Poor businesses can be appropriately managed;
Sub optimal Working Capital positions can be identified;
Funding requirements inclusive of corresponding covenants can be tracked to ensure ongoing compliance with same.
Hold, Fold or Double Down…
Excel models are commonly used to evaluate new business units or product lines, geographical expansions or significant investment in plant & equipment. In most cases, the decisions made today will have long lasting consequences. Accordingly, a robust understanding of time value of money is required. Net Present Values are often incorrectly determined. Sensitivity analysis is often omitted from the modelling undertaken. Modelling is an imprecise art and failure to appropriately contemplate varying scenarios can result in erroneous decision making.
Thanks for Nothing…
In many respects, the value in excel models lies in the knowledge transfer from creator to end user. Models should provide dynamic inputs which enable even the most basic end user to alter results and run scenarios. Verbose commands and poor model layout should be avoided. Transparency is the key here.
Further, provision should be made (where possible) for models to become reusable. Forecasts should have provision for annual roll forwards so that benefits extending from the model can recur. Date fields should be dynamic and user instructions should be clear.
If you require models to improve your decision making, mitigate risk and add value, contact your accountant at WMS and upgrade to the gold standard.
DISCLAIMER: This article is intended to provide a general summary only and should not be relied on as a substitute for professional advice.