LOOKUP functions, especially VLOOKUPs are very commonly used in financial modelling – sometimes a little too commonly used! Knowing when and how to use them – and use them well is a critical skill for any financial modeller. Let’s explore some of the problems with LOOKUP functions and how to make their more robust.
Whether you are a consultant building a model for a client, or an internal modeller, you or the person who has commissioned the model build will – understandably – want to know how long it will take. The answer is never straight-forward, as like many other tasks it really depends on how long you have got (and there’s never enough time!) and how much detail you need to go into. The more time you’ve got, the better the model will be! Some models could take months and months of dedicated work, or you could throw together a very high level model in a day or two.
In a high level model, the assumptions would probably only estimates, as you won’t have had time to validate them with stakeholders, and the calculations will be pretty rough. You also might not have much in the way of fancy colours, formatting, drop-down boxes or tick boxes etc, but the numbers should still be reasonably accurate.
Building a Model Under Pressure
It’s a critical point to remember that even when under immense time pressure, the modeller should never compromise on good working practices. Even in a high level model, best practice should still be followed, correct labeling and documentation of assumptions should be maintained. See Best Practice in Financial Modelling for some guidelines on good practice. If these points have been adhered to, there should be surprisingly little difference in the base numerical outcome between a high-level model that takes a few days, and a detailed model which could take months. If pressed for time, cosmetic features such as those shown below can be omitted.
Time permitting, the detailed model may show:
- Detailed assumptions documentation, validated by key project stakeholders
- Scenarios and sensitivity analysis, using drop-down boxes, tick boxes or data tables
- Table of contents or navigation tools
- Colours and formatting, conditional formatting, insertion of company logos
- Output summary and detailed analysis of output
Time should be spent on “quick wins” – use your judgement to spend your time on calculations that are material to the model. Don’t waste time on validating minor assumptions which are not material to the outcome of the model.
This article is an extract from the book “Using Excel for Business Analysis” by Danielle Stein Fairhurst
Whilst not the most sexy topic for a blog article, this is probably the thing that I’m asked most about by clients. Because many modellers are self-taught, a lot of them don’t necessarily adhere to best practice. Or perhaps they do – but don’t realise why they are doing it! I thought it might be helpful to lay out my views on the topic, and as always, I’d welcome any reader input…
Thanks to all of the subscribers who contributed to our ‘Which Excel version are you using?’ poll – results are in, and we have some very interesting feedback!
Seeing as we’re now heading into 2011 I’m interested to know which version of Excel most users are on. It’s been a while since any research was done on the topic, so I decided to set up a Linked In Poll to canvass our subscribers on the subject. I think we’ll be surprised to see how many users are still on 2003!
Take the Poll
Those who’ve been following me for a while will know that I’m a big fan of using online resources as much as possible.
How much income tax will you be paying in the new financial year? The tax brackets are changing again, which of course, means that from 1st July 2010 we all pay less income tax! Download our handy new Excel-based tax calculator and find out roughly how much you will save.
Starting a new job and want to know how much of that whopping great new salary you’ll lose in tax? Find out!
What a great question. A potential delegate for my upcoming course in Kuala Lumpur asked this very question and I liked it so much I decided to answer it in detail. Scenario analysis, sensitivity analysis and what-if analysis are a very important part of financial modelling but are really only slight variations of the same thing.
When you decide your company’s financial models are not as good as they should be, is the first thing you do; send your staff on an Advanced Excel course? Whilst this is helpful, there’s an awful lot more to Financial Modelling though than being good at Excel!
Do you need an Excel Jockey, a Finance Wizard, or a Financial Modeller?