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Plan your model

Before you start out, spend some time thinking about what the model will be used for.  This will often involve a number of people – I will refer to your 'client' a number of times. This may be a paying client if you are an independent consultant, it may be an internal client, such as your boss, a project manager or the finance director.  It might even be you, in which case, don't let anyone catch you talking to yourself.

Business Drivers

First of all, what is driving the need for a financial model?  Some of the common reasons for building a model are:

• Transactions (eg acquisitions, divestments, stock market listings)
• Investments – new plant, machinery, facilities or financial investments
• Corporate finance – to assist in deciding the best capital/corporate structure of a company
• Project Financing – if borrowing money, banks will usually want to see a model which shows the borrower will be able to meet the repayments, and stay within the covenants set by the bank
• Venture capital raising – similar to the above, but with a module to calculate returns to the various parties at various exit times
• Costing – to assist in establishing and allocating costs (eg Activity Based Costing)
• What-if scenarios – to forecast the potential outcomes of available courses of action

There are plenty more reasons why a model might be useful, but in all cases, you will need to establish what output your model is expected to provide, and what inputs will drive the model and what assumptions will be needed.

A word of warning; it is not uncommon for the financial modeller to end up understanding the business or transaction better than nearly everyone else involved, because you will need to have thought through, in detail, every aspect of what you are modelling.

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