What is finance without the concept of time?

You know that distress call that comes in once in a while from a distant family member or friend asking for a boost because it’s mid-month? I’m sure many can relate. It is always followed by a long text providing the reasons why you should help them. In most cases these reasons, end up guilt-tripping …

You know that distress call that comes in once in a while from a distant family member or friend asking for a boost because it’s mid-month? I’m sure many can relate. It is always followed by a long text providing the reasons why you should help them. In most cases these reasons, end up guilt-tripping you into sending them MPESA which is then followed by a Thank You note from them and a promise to repay by end month. Well, this promise is never kept and you end up doing constant follow-ups only to be repaid the original amount after a few months. At this point you are just happy that they have repaid you not noticing that from an economic stand point, you have been short-changed since the repaid amount is worth less because of inflation. This is also known as the concept of time value of money. It holds that a dollar today is worth more than a dollar tomorrow. From this one can deduce that time is a very important metric in any financial transaction. It lays the foundation for any form of asset valuation and interest on loans.

When coming up with a financial model, a financial analyst should take into consideration the operations of a business or a project over the modelling period. The timing aspect of a financial model is tracked using the time sheet in the model. The time sheet forms a foundation of any financial model as it is used to map out all the transactions and balances from the beginning of the model period to the end. In a FAST Compliant Financial Model, a time sheet contains calculations with respect to dates, flags and any other time-related computations.

Why is it important to have a time sheet in a financial model?

  • A time sheet provides the basis of the timelines for the financial model. For instance, the time sheet would indicate which columns detail historical values and which ones indicate forecasted values within a financial model
  • A time sheet also helps in answering the question “when?”. A time sheet can be used to map out when a given financial transaction will happen within the financial model timelines
  • It improves flexibility within the financial model. Models that do not incorporate a time sheet in their structure are rigid especially when it comes to making changes that relate to time. For instance, when one wants to change when the valuation for a business will be done, the valuation will need be recomputed in a different cell (relating to the new period) as opposed to just changing the valuation period date

What is contained in a time sheet?

A typical time sheet in a FAST compliant Financial Model will contain the following sections:

  • Time Ruler – This section maps out all the financial model timelines from the beginning of the financial model period to the end
  • Flags – A flag is an ON and OFF switch in a financial model. A flag is normally in binary form whereby a YES will be indicated as 1 and a No as a 0. It is mostly used to indicate the occurrence of an event. For instance, a pre-forecast period flag would show 1’s in the historical period and 0’s in the forecast period

We have received requests from various financial analysts on the need to develop a course that maps out the steps for creating a time sheet. We have put together a short course on the same that can be accessed using this link.  This is the first of several resources we plan to launch on our learning platform. We hope you enjoy the course.

Written by David Ndungu