Building a robust and reliable financial model requires a systematic approach. A well-designed checklist can help corporate finance teams ensure their models are accurate, transparent, and aligned with best practices. Here is a checklist covering the essential steps for effective financial modeling.
1. Model Planning & Scoping
Before you even start building, it’s crucial to define the model’s purpose and scope. You need to identify key stakeholders and intended users, whether they are technical or not. Establish the forecast period (monthly, quarterly, or annually) and what specific outputs are required, such as EBITDA, cash position, or IRR. Also, decide on the base currency and unit scale (e.g., thousands or millions) to maintain consistency throughout the model.
2. Assumptions & Inputs
All your assumptions should be clearly separated from your calculations. A dedicated Inputs/Drivers sheet is a best practice. This is where you’ll define operational drivers like revenue growth (volume × price) and COGS as a percentage of revenue. Other critical assumptions include depreciation methods, tax rates, working capital assumptions (DSO, DPO, DIO), financing structures, and CAPEX schedules. It’s also vital to include historical financials (3-5 years) if available.
3. Model Structure & Logic
A well-structured model is a modular one. It should have distinct sections for assumptions, calculations (supporting schedules), core financial statements (IS, BS, CF), and outputs & dashboards. Build separate schedules for depreciation, working capital, debt, and equity movements to maintain clarity. Remember to use consistent time-based columns and ensure the cash flow statement is built indirectly from net income, working capital, and non-cash items.
4. Formatting, Style & Best Practices
Consistency in formatting is key to readability. Use a clear color-coding system: inputs are blue, calculations are black, links are green, and outputs are bold black. Avoid merging cells and minimize the use of volatile functions like OFFSET or INDIRECT. Keep formulas short and readable by breaking them into smaller steps, and clearly label all sections, rows, and inputs.
5. Linking & Integrity of the 3 Statements
The three financial statements (Income Statement, Balance Sheet, and Cash Flow Statement) must be integrated. Ensure Net Income flows from the IS to the Balance Sheet (retained earnings) and the Cash Flow statement. Depreciation, amortization, and CAPEX should flow to both the CF and BS. Working capital changes must flow from the BS to the CF. Crucially, confirm that the balance sheet balances every single period to avoid fundamental errors.
6. Scenarios & Sensitivities
A good model should be dynamic. Create toggles or dropdowns for different scenarios like Base, Upside, and Downside cases. This allows you to dynamically change key assumptions like revenue growth, cost inflation, CAPEX levels, and interest rates. Consider adding scenario managers or data tables to perform sensitivity analysis on key valuation drivers.
7. Error Checks & Validation
Building in error checks is essential for a reliable model. Create a dedicated “Checks” section to verify that the balance sheet equals zero (Assets – Liabilities – Equity = 0) and that your cash flow reconciles (Opening + Net Change = Closing). Use error flags like IFERROR for visual cues, and regularly audit your formulas using the trace precedents/dependents feature.
8. Documentation & Handover
Finally, a model is only as good as its documentation. Provide a summary tab or dashboard with key performance indicators (KPIs) and charts for easy viewing. Include a model guide or “readme” file that explains key inputs, assumptions, and user instructions. Maintain consistent version control (e.g., v1.0, v1.1) and protect inputs and outputs to prevent accidental changes. Before handing off the model, ensure the layout is clean, and all unnecessary hardcoding and external links have been removed.
Make sure to download our Financial Modelling Checklist to elevate your modelling capability.