I am just completing the final edits of my new book, Financial Modeling in Excel for Dummies and one of the finishing touches is to make sure we have the spelling right! Here in Australia we use British spelling, so I’ve always called it “modelling” – including my last book, Using Excel for Business Analysis, a Guide to Financial Modelling Fundamentals. We also call it colour, not color, it’s a tick box, not a checkbox and don’t get me started on the date formats… it’s been a long few months! Published in the US, the For Dummies series is such a distinctive well-known brand and their style is quite strict so I’ve agreed to become a “modeler” - just for a time :-)
This got me thinking about the fact that although they might not call themselves financial modellers, (or even modelers) I often find that Excel users working in Finance build financial models without realising it. A financial model is simply a structure (usually in Excel) that contains inputs and outputs, and is flexible and dynamic. Of course not every spreadsheet is destined to become a financial model, but if you’re using Excel to any extent whereby you are linking cells together to display dynamic solutions to real-world financial problems, chances are you’re already well on your way to building a financial model. Whether you want to call it a model or not, the most important thing is that you are building the model (or whatever it’s called) in a robust way, following the principles of good modelling practice.
So how does a simple spreadsheet end up a fully-fledged financial model? Take a look at the typical lifecycle of a Financial Model.