Financial Modelling Advice - Keep It Simple

Why overly complex Excel financial models are a problem. Advice on how to keep Excel financial models simple. 

For all the financial modelling rules, guidelines, best practices and advice out there - and there are hundreds, covering all areas from workbook structure, worksheet structure, calculations, formatting, functions, flow of data etc – one which is rarely thought of or mentioned is simply ‘Keep it Simple’.

The Golden Rule!

I learnt this from my previous employer, PwC, where it was in fact the Golden Rule. And I would agree. Yet a good majority of financial modellers, and particularly consultants, will ignore it or cast it aside. Why? I believe because many fall into the band of ‘insecure overachievers’ – smart people with a point to prove, but who don’t know when to stop in their attempts to prove it. The classic consultant! And perhaps you know one at your work?

Many will see an all singing, all dancing Excel model that frankly can do everything and anything as the ultimate solution. Functionality that’ll dazzle the client is seen as a product that delights by going over and beyond expectations. Fitting everything, particularly calculations, into fewer cells and fewer rows is considered efficient. And well, VBA, if I can pack a load of this in then nobody is going to question the brilliance of my model, or more importantly…my Excel modelling ability.

But what if this all becomes so complicated that the user has no idea how the calculations turn their inputs into their outputs? If there is a problem and no one can fix the model because it’s so confusing? If size and complexity get out of hand and the model becomes slow and sluggish? If a company’s security settings prohibit macros and the user struggles to open the file because there is some nice-to-have VBA in it? The dazzle of this model starts to fade.

But what does ‘Keep it Simple’ really mean?

You could say simplicity is in the eye of the beholder. The majority of the population are unlikely to think of any financial model as being ‘simple’, and with good reason – they are heavy on logic, often very numerical, some involve accounting principles. Many are coded with hundreds if not thousands of unique formula, involving functions and calculations that appear a completely different language to someone unfamiliar with Excel.

On the other hand, a model review specialist trained in auditing large financial models may be able to read long strings of formula like a book. Or based on the nature of the spreadsheet and the calculations sitting around a particular cell, anticipate the calculations within that cell before they’ve even looked at it.

I would say simple depends on the end user’s ability and avoiding going above and beyond what is necessary to adequately fulfil the task at hand.

So how can we keep it simple?

So when we think about keeping a model simple we should first be thinking about the end user, their ability, their needs, and ultimately what level of complexity is suitable for them…what does ‘keeping it simple’ me

an for them? If we create a financial model for them that is so ‘advanced’ and complex and they run into trouble with it, or just don’t understand it, then it quickly becomes useless to them.

Balance the functionality and associated complexity with the user’s ability and resources.

Secondly, we should always be thinking - can I make what I’m doing more helpfully transparent? This might involve breaking one long calculation down into several smaller ones across several cells, including thorough, descriptive labelling around the model, or attaching comprehensive and varied documentation such as instructions, model maps and specification documents.

Consistently take a step back and think about whether another person could pick this model up and run with it.

Lastly, ask yourself whether what you are doing is more about helping the end user or helping feed your own ego. Am I including some functionality that is really necessary, or am I trying to show off? And in my view this is where many consultants or financial modellers slip up – they try too hard to impress and prove their worth – a trait of the insecure overachiever.

Always question your motivation for what you are doing and for who’s benefit it is. It should always be the end user’s.