Fundamentals of Forecasting – Basic Modeling Hygiene – III

November 5, 2016
financial modelling analysis

By Reshma Krishnan

We are continuing to understand the Fundamentals of Forecasting. Please click here for Part 1 and Part 2.

Many aspiring candidates ask us what is so special about the FMVC program at Imarticus Learning. After all, shouldn’t an MBA suffice? The problem with MBA’s, regardless of which school you go to, is that they don’t teach you role specific issues. For instance, they don’t have specific modeling modules. They will have a forecasting module but they won’t teach you how to model or how to forecast step by step. In the Financial Modelling and Valuation Course (FMVC), India’s leading Forecasting and Financial Modeling program, we teach you the minutae and we go into specifics. One such specific is modeling and forecasting hygiene.

Hard Coding- the model users bane.

This is the first thing I teach in modeling class. Hard Coding is essentially a stand alone number in a cell, which has no back up. It says nothing about the number. You must never hard code a forecasted number because the forecast is always done on the back of an assumption, which has to be modeled in. Hard coded numbers are usually past data, actual data that has been verified and been the result of auditing. A forecasted number should always be a linked number from an assumption.

Colour Coding

Staying with hard coded numbers, it always helps to colour code. In fact, in my class, I mark an assignment zero if it is not colour coded. Red hardcoded number tells me that the forecaster had no option but to hard code. All actuals should be in a different colour to forecasts and all delta numbers, that is the variable you are using to arrive at a forecast needs to also be in a different number.

Give the delta its own cell

Let’s say you want to increase the sale of pencils in 2017 by 10% from 2016. You have two ways to do it.

=(2016 revenue cell) x 10% +(2016 revenue cell) = 2017 revenue.

Or

You create a special cell for 10%

= ((2016 revenue cell) x (10% cell) )+(2016 revenue cell) = 2017 revenue.

Here I am assuming that revenue is growing by 10% . This helps me change the delta as I see fit which then changes my model. The delta is the rational for my model. If you hide it within a formula, I have to constantly look at formulas to find my assumptions.

Learn more about Forecasting by joining our course, FMVC,Financial Modeling and Valuation Course, India’s leading program in Financial Modeling and Valuation and focused on improving your chances on having a career in Investment Banking or Equity Research.


 

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