Financial Modeling Guidelines

A free, comprehensive best practices guide to advance your financial modeling skills

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Written by Tim Vipond

Reviewed by Duncan McKeen

CFI’s free Financial Modeling Guidelines is a thorough and complete resource covering model design, model building blocks, and common tips, tricks, and best practices for designing and building robust, world-class financial models.

Many of the models we encounter today are poorly designed, difficult to maintain, and hard to follow. Given their central role in the financial decision-making process, it’s critical these models are built to the highest possible standards. Implementing some detailed financial modeling guidelines is a logical step toward improving the financial tools we use every day.

These guidelines will resonate with individuals building their own models, as well as corporations and other organizations. Larger institutions may welcome more consistency and standardization in the models they use across their teams, mitigating the risk of human error. While not every suggestion in the guidelines will be appropriate for every user or organization, they can serve as catalysts to stimulate important discussions.

Key Highlights

Many models are poorly designed, difficult to follow, and hard to maintain. The Financial Modeling Guidelines help practitioners to design world-class financial models properly.
Many practitioners begin building models by thinking about the inputs before the model outputs. We prefer to think about the outputs first, then back-solve for the necessary inputs.
The guidelines also cover topics like periodicity, circularity, and proper formatting.

Download the Financial Modeling Guidelines

What’s Included in the Financial Modeling Guidelines?

Get your free download for a deeper dive and how-to guides on the topics listed below, plus much more:

Financial model designs and level of detail

One of the first topics covered in the guide is the importance of thoughtful model design. Time invested upfront in the model design process will save considerable effort on the model build and will lead to a better financial model. An example of a well-designed model dashboard is shown below:

Guide to Financial Modeling - Example of a Dashboard

Image: CFI’s Financial Modeling Courses

We also discuss designing in a modular fashion. Using a modular process enables us to create a library of building blocks for future use in other financial models. Dividing the model into these small modules or blocks makes it easier to interpret, print, and present once completed.

Example of a Financial Model - Modular Process

Image: CFI’s Financial Modeling Courses

We begin the model design process with the model dashboard or outputs, and then solve back through the supporting schedules to the required inputs as illustrated below. By only including the components that support the dashboard, we ensure the level of detail throughout the model is appropriate to its end objective. This is incredibly important, as many models miss the mark in terms of the appropriate level of detail. Financial models are commonly either too simplistic or overly complex.

Example of Financial Model Design Process

Once it’s clear what the model needs to do, we need to imagine how it will be presented. Essentially, we start the process by designing what we refer to as the dashboard of the model. The dashboard is a page or set of pages that shows the audience important model variables. These can include important outputs, but sometimes also critical inputs. Envisioning the final dashboard helps us back-solve the elements that will be included in it.

Periodicity

Periodicity refers to the frequency of the time intervals in the model. Many professionals wonder what model is best: monthly, quarterly, or annual. They may also struggle with the best design. For instance, many models display quarterly information across four columns, with an annual total in the fifth column. Although this is quite common, the downloadable Financial Modeling Guidelines suggest a much better approach to building quarterly models.

Corkscrew schedules

Within model schedules, there are a few common structures that work really well and should be used as standard practice. One of the most common structures is a corkscrew, which is especially useful for tracking accounts that change over time. Corkscrews are used extensively in debt and equity schedules.

Circularity

Circularity is a very controversial topic in the modeling community. Many practitioners build models using the most common circular loops, while others don’t include circularity at all. Download the guide for our view on it as well as some tips regarding model circularity.

Model formatting

Formatting is critically important for a number of reasons. One of the primary ways we can instill confidence in a model is by using a well-structured, clean, and professional format. For example, we can define the ways Excel displays positives, negatives, zeroes, and text. Understanding how to control each individual type of entry in Excel can give you solid control over your formatting.

Everything you’ll learn in the Financial Modeling Guidelines

Your free download includes comprehensive coverage of all of the above, as well as:

Proper level of detail and model design
Layout and printing
Column and row consistency
Navigational columns and custom views
Consistent labeling
Transparency
Positioning precedents
Waterfall schedules
Font colors
Marking units
Naming cells
Macros
Protection