Creating an Excel file for modeling financial data, whether it's a budget, a business plan or a sales forecast, is a crucial step in business management. A well-designed file can not only improve decision-making, but also avoid costly errors. To achieve this goal, it is essential to follow rigorous, recognized standards such as those of the Spreadsheet Standards Review Board.
In this article, we'll explore best practices for creating an efficient, robust and easy-to-use Excel file.
Standardization: A consistent format for better readability
The first step in creating a successful financial modeling Excel file is to respect the rules of standardization. This means that each spreadsheet must follow a consistent structure. For example, define clear naming conventions for your tabs, columns and cells. Use uniform formatting: titles should be bold, hypotheses italicized, and results bolded and colored for easy distinction.
Standardization not only makes the file easier to read and understand, it also reduces the risk of errors when editing or updating the model. Consider using pre-defined cell styles to maintain this consistency throughout your file.
Example: If you're creating a business plan, all income calculations should be on the same sheet, using similar columns for each type of income. The formulas used should follow a consistent logic from one sheet to the next.
Separation of Assumptions and Results: Clarify your data
One of the key principles of the Spreadsheet Modelling Standard is the separation of assumptions and results. This involves placing assumptions (input data) and results (calculated data) on separate spreadsheets. This makes the file clearer and helps the user to quickly understand which data can be modified and which cells should not be touched.
This separation also facilitates scenario simulations. By simply modifying assumptions on a dedicated sheet, you can see the immediate impact on results without the risk of mistakenly modifying formulas.
Example: In a sales forecast, all assumptions concerning sales volumes, unit prices or growth rates should be grouped together on a single sheet, while the calculated financial results (sales, margins, etc.) appear on another sheet.
In the same spirit, if your Excel workbook is linked to other external sources (other workbooks, other sources...), be sure to use a dedicated sheet identified as an external source. The other sheets will then refer to ranges or cells in this sheet. This will ensure that any data used in a particular place comes from a source external to the workbook.
Hyperlink navigation : Make your model easy to use
Good modeling also means smooth, intuitive navigation through the Excel file. Rather than relying solely on tabs to navigate between sheets, we recommend the use of internal hyperlinks. This allows users to move quickly from one section of the model to another without wasting time searching for the right tab.
Hyperlinks can be integrated into a table of contents on the first sheet of the template, or directly into the cells to direct the user to key areas of the file. This navigation system enhances the user experience, especially in complex models with numerous sheets.
Example: In an annual budget, a table of contents with hyperlinks could direct the user to specific sections such as fixed costs, variable costs, or cash flow forecasts.
Protection and security: Preserve the integrity of your model
Data security in a financial model is crucial. Best practice recommends locking all cells that are not intended to be modified, to avoid accidental errors. Indeed, a simple unintentional change in a formula can lead to completely erroneous results.
This practice is all the more imperative as the template may be used by several people with widely varying levels of Excel expertise.
Excel offers the possibility of protecting sheets and cells, by only allowing the modification of assumption cells. You can also implement alerts to notify users when they modify critical areas of the file.
Example: If you're working on a budget, lock all automatically-calculated cells, leaving only those where the user must enter data (such as cost or revenue assumptions) editable.
Documentation and Help: Make your template understandable to everyone
Finally, a good Excel model must include clear documentation. Every modeling file should have a documentation sheet explaining the main outputs, the assumptions made, and instructions for using the model. This documentation is particularly important if others need to use or maintain the model in the future.
Also include explanatory notes next to complex formulas or important assumptions so that users understand where the figures come from and how they are calculated.
Example: In a business plan, the documentation sheet could explain how revenues are calculated from growth and conversion rate assumptions, with references to the sources of the assumptions used.
Using Color: Visual Coding to Clarify Content Types
Color is an essential tool in the creation of Excel financial modeling files, as it helps to quickly distinguish the different types of content within the model. The Spreadsheet Modelling Standard recommends the use of specific color coding to identify cells according to their content, helping to improve readability and minimize errors.
Cell coding: Constants, Formulas and Mixed Formulas
Here's how you can use colors to code different types of content in your Excel file:
- Constants (Fixed Values): Cells containing fixed values, i.e. data entered directly without a formula, should be colored blue. This color indicates to users that these cells contain values that are not calculated, but entered manually. For example, if you enter a value of 100 directly into a cell, it should be blue.
- Pure formulas: Cells containing only formulas, with no embedded fixed values, should be black. This indicates that the contents of the cell are automatically calculated from other cells. For example, a simple formula like =J20*J45 would be in black.
- Mixed formulas : When a formula contains both calculations and fixed values (constants), these cells should be in green. This color indicates that the cell has a fixed component built into the formula. For example, if the formula is =J20+100, where 100 is a constant added to a calculation, this cell would be colored green.
Uniformity and Consistency in Color Usage
To maximize the effectiveness of this coding, it is essential to apply it consistently throughout the Excel file. Each type of content (constant, pure formula, mixed formula) should always be represented by the same color on all sheets of the template. This consistency helps prevent errors and makes the file more intuitive to use.
Example: In a sales forecasting model, all sales volume assumptions (constants) should be in blue, revenue calculations (pure formulas) in black, and formulas that combine fixed rates and variable calculations (mixed formulas) in green. This allows users to immediately understand the type of content in each cell and act accordingly.
Contrast and accessibility
In addition to color coding, it's important to ensure that the colors chosen offer good contrast, especially for users with visual impairments. Use colors that are easily distinguishable, and avoid combinations that are difficult to distinguish. Remember to test your file with accessibility tools to ensure that it is usable by all.
Conclusion
By following these best practices, you can create financial modeling Excel files that are not only reliable but also easy to understand and use, especially if the model is used and modified by several people. Whether you're preparing a budget, a business plan or a sales forecast, these principles will help you achieve professional results.
To help you get started, we provide Excel templates that already comply with the Spreadsheet Modelling Standard. Download them now from our website to save time and guarantee the quality of your financial analyses.