Have you ever developed a financial model for a client or your organization and later found out that the spreadsheet had errors? What did you do? Did you go to your supervisor or the client and tell them …? Person 1: “Oh, by the way, do you know the model we built for Project Y …
Have you ever developed a financial model for a client or your organization and later found out that the spreadsheet had errors? What did you do? Did you go to your supervisor or the client and tell them …?
Person 1: “Oh, by the way, do you know the model we built for Project Y had some minor mistakes, but it’s nothing to worry about” or
Person 2: “I would like to bring to your attention that I found some mistakes in the model we built for Project Y. I have assessed the potential financial impact of the mistake and would like to bring you up to speed and brainstorm some possible remedies at the earliest possible opportunity” or
Person 3: Are you the type that ignored it and hoped that nobody would ever find out? In this scenario, I’m right on the money that you dreaded hearing these words from your supervisor, “please come to my office and close the door or from the client, “Something’s not adding up. We need to talk.”
Whoever you are, these costly mistakes can be minimized by getting someone else to review and audit your model.
This article will answer some Frequently Asked Questions on financial model review and why it is important for anyone making financial and non-financial decisions to ensure their financial model has been reviewed before adoption. This article is NOT about financial model audit.
What is a financial model?
A financial model is a forward-looking abstract representation of real-world financial situations for use in decision making. Financial models can be built for businesses, projects, and portfolio of assets, among other uses. A financial model is built in spreadsheet software such as Excel.
Why should you review your financial model before adoption?
According to Ruth McKeever, around 95% of spreadsheets contain actual or potential errors. Isn’t this enough reason to review your model?
What are some common mistakes found in financial models?
Common mistakes may be categorized as below:
How can a modeller minimize mistakes in financial models?
What is the difference between financial model review and financial model audit?
Financial model review is a process that focuses on certain aspects of the model (such as formula inconsistency, external links, hardcoding in calculations) as per agreed terms with the model owner while a financial model audit is a cell-by-cell review of the financial model and encompasses conducting logical, integrity, model build, and commercial checks. A model audit often takes longer than a model review because it is a more detailed exercise.
What are some similarities between financial model review and financial model audit?
How can a modeller conduct a financial model review?
A modeller can do a quick financial model review by:
Who needs financial model review services?
In conclusion, it is advisable to review your financial models to avoid making costly financial and non-financial mistakes. Remember, as Stephen Gugu, Principal at InVhestia Africa, says, “there is no Excel money. Any mistake in a financial model leads to a loss in real money.”
InVhestia Africa has built capabilities around financial model review over the years. We would be delighted to help you increase the confidence level in your financial model before making any financial or non-financial decisions. Please check our website for more information on the financial model review product.
Written by Keziah Njeri, Associate Principal, InVhestia Africa Limited.