Financial Modeling Best Practices

Every input should appear in exactly one place. Link all usages back to a central assumptions section. Never hardcode values directly in formulas.

Establish and maintain consistent sign conventions. Cash outflows as negatives, inflows as positives. Or use absolute values with clear labels.

Define whether periods are calendar years, fiscal years, or calendar quarters. Label clearly. Ensure consistent mid-year vs end-of-year discounting.

Use consistent units throughout (millions, thousands, actual). Label all sections with unit convention. Never mix units in calculations.

If model requires circular references (e.g., interest expense → debt → cash), use iterative calculation or break with reasonable estimates.

Include 1-way and 2-way sensitivity tables on key drivers. WACC × Terminal Growth is mandatory for DCF. Show bear/base/bull scenarios.

Build balance sheet balancing checks, cash flow reconciliation, and sanity checks on outputs. Make errors visible and unmissable.

Ensure terminal year represents sustainable "steady state" operations. Capex ≈ D&A, working capital stable, no one-time items.

Keep dated versions of all model iterations. Document changes between versions. Never overwrite previous versions without archiving.

Document the source and rationale for every key assumption. Reference management guidance, industry benchmarks, or historical analysis.

Track all material changes to the model with date, author, and rationale. Essential for audit trail and institutional memory.

All models should be reviewed by at least one other team member. Document reviewer and sign-off. Critical models need senior review.

Key assumptions that significantly impact outputs (WACC, terminal growth) should require senior approval before finalization.

Historical financials should reconcile to audited statements. Document any differences or adjustments made.

Cite specific sources for market data, comparables, and external assumptions. Include access date for time-sensitive data.

Blue text = hardcoded inputs. Black = formulas. Green = links to other sheets. Yellow highlight = check/warning. Maintain consistently.

Every row, column, and section should have clear labels. Include units in labels (e.g., "Revenue ($M)"). Avoid abbreviations without legends.

Information should flow left-to-right, top-to-bottom. Historical on left, projections on right. Inputs at top, outputs at bottom.

First sheet should summarize key outputs, assumptions, and sensitivities. Decision-makers often only see this page.

Set print areas, page breaks, and headers/footers. Models should print cleanly to PDF without manual adjustments.

Charts should have clear titles, labeled axes, and legends. Use consistent color schemes. Avoid 3D effects and unnecessary decoration.

Include table of contents with hyperlinks. Name sheets clearly. Use consistent structure across sheets.

Assets = Liabilities + Equity in every period. This is non-negotiable. Any imbalance indicates a formula error.

Cash from operations + investing + financing should equal change in cash. Check every period.

Calculate implied metrics (multiples, growth rates, margins) and compare to reasonableness benchmarks. Flag outliers.

Historical financials should tie exactly to source documents. Document any adjustments (e.g., one-time items, reclassifications).

Test model with extreme inputs. Does it break? Do outputs make directional sense? Identify and fix edge cases.

Spot-check that formulas are consistent across rows and columns. Look for hardcoded values that should be formulas.

DCF should be compared to comparable analysis. LBO returns should be checked against DCF. Multiple methods validate each other.