Financial Planning and Analysis (FP&A) professionals play a crucial role in driving the financial success of businesses and clients. As someone working in FP&A, you would be responsible for processes like analyzing financial data, developing forecasts, and providing valuable insights to aid decision-making. Excel is a powerful tool that we can rely on for financial modeling and analysis. In this article, we will explore some essential tips and techniques to help you master financial modeling in Excel.

Structuring Your Excel Model

A well-structured Excel file is the foundation for a practical financial model. Let’s look at some tips that can help you improve the structure of your financial models.

Use Flow Charts to Structure Models

Whenever I start working on a new model, before I even open Excel, I spend some time thinking about the model’s overall structure on a piece of paper. I would draw a diagram showing how data flows and how logic is separated within the model. One of the most helpful things I introduced to my workflow!

Separate Inputs and Calculations

When setting up the structure of your models, make sure to separate source data inputs from the worksheets where model logic and calculations happen. This will significantly enhance your model’s clarity and ease of use, making it easier for external stakeholders to read through your file.

Additionally, suppose your model has a significant amount of input assumptions that users can adjust to test out different scenarios. In that case, separating all critical assumptions in a single worksheet may make sense. Having the adjustable inputs separate and documenting their function in detail will help other users of your model quickly test out different scenarios.

Separate Different Stand-alone Scenarios

If you are working with predefined scenarios of assumptions, creating separate worksheets for different scenarios might make sense. This will enable easy comparison and analysis. For example, you can have a base case worksheet and additional worksheets for best-case and worst-case scenarios. This approach allows for quick adjustments and a comprehensive evaluation of potential outcomes.

Another thing I’ve done when users want to be able to compare multiple analyses is creating two dynamic scenario worksheets. These had dropdown menus where users could load a scenario in the two tabs. Additionally, there were worksheets with various summaries and visualizations comparing the two scenario worksheets. This allowed my client to select any two scenarios and get a complete comparative analysis between the two. As we had to load up assumptions for 50+ scenarios, this approach made more sense than having 50+ different worksheets for each scenario.

Data Validation and Error Handling

Now this is something I am guilty of often overlooking. It’s easy to dive deep into building fancy model logic and the summaries & visualizations that will support the decision-making processes of the business. Something quite dull in comparison is having proper data validation and error handling built into the model. However, these are crucial to ensure the accuracy and reliability of your financial models. Let’s look at a few techniques to implement.

Implement Data Validation Rules

One of the easiest things to do is to apply Excel’s integrated data validation rules to control input values and prevent errors. For example, you can set up data validation to only allow positive numbers or limit certain inputs within a specific range. This helps maintain consistency and guards against potential mistakes when users adjust input assumptions.

Limiting assumption inputs to acceptable values is a great way to introduce robust error handling quickly. Of course, in more specific situations, you would need to implement additional rules and checks to ensure that incorrect inputs won’t break down the model logic.

Perform Sensitivity Analysis

This one can be time-consuming, but it’s worth it. Sensitivity analysis allows you to assess the impact of changing input variables on our financial model’s output. We adjust key assumptions and evaluate how sensitive the model logic is to extreme changes in those. This is a great way to identify significant issues with the overall model logic. If a 5% increase in revenue growth does not increase profit margins, this may indicate that our calculations’ logic is flawed.

Use Conditional Formatting

Conditional formatting can be a powerful tool for highlighting errors or inconsistencies in your model. I never got into the habit of using conditional formatting, but I’ve seen some colleagues do incredible data validation and error handling with conditional formatting alone. This functionality helps us draw attention to cells that contain errors, allowing for quick identification and correction.

Implement Error-Checking Functions

I often rely on simple error-handling techniques, such as IFERROR, ISNA, and IF statements, which have proven the easiest way to address potential errors. However, I must admit that I prioritize building the logic first and then go back into the model later to wrap everything in IFERROR statements. We incorporated a convenient feature into an add-in. It enables you to select multiple cells and seamlessly wrap them in an IFERROR statement. It provides the flexibility to specify the desired value to be returned in case of an error.

Automating Repetitive Tasks with Macros

Excel macros can significantly increase your productivity by automating repetitive tasks. Here are a few ways to leverage macros to streamline your financial analysis.

Record Macros

If you are starting with Excel automation, Excel has an in-built macro recorder. It allows you to record and save a series of actions as a macro. For example, if you frequently perform the same calculations or formatting steps, you can record a macro to automate those tasks and save valuable time. Recording macros works for simple use cases, but it has its limitations. If you want to build more advanced automations, you must learn how to write your own macros.

Customize and Enhance Macros

Excel’s VBA (Visual Basic for Applications) language editor allows you to customize and enhance recorded macros and create new ones from scratch. You can add conditional statements, loops, variables, etc., and make more sophisticated macros that adapt to different scenarios.

Share Macros with Colleagues

Once you create an automation (macro), you can share it with colleagues to promote efficiency and consistency across the team. Macros can be stored in a central location or embedded within Excel templates, allowing others to utilize and benefit from your automation efforts.

Embracing Excel Add-Ins

Excel add-ins offer additional functionality and expand the capabilities of Excel. Consider exploring the following add-ins to enhance your financial modeling and modeling skills.

Solver Add-In

The Solver add-in comes with Excel and helps you run what-if analysis on certain variables with specified constraints. It is particularly useful for problems that involve maximizing profits, minimizing costs, or optimizing resource allocation. The Solver add-in is a great tool that I highly recommend you check out! Here’s a video tutorial on solving problems with the Solver add-in.

Power Query Add-In

Power Query is another excellent add-in from Microsoft. It helps you analyze your data while simplifying the connection to various data sources. It allows you to efficiently clean and reshape data and automate repetitive data-related tasks.

Conclusion

Excel is an invaluable tool for FP&A professionals, empowering them to perform advanced financial analysis and modeling. Following the tips and techniques outlined in this article can enhance your Excel skills and improve your financial modeling. Remember to structure your models effectively, validate and handle errors diligently, leverage advanced functions, visualize data where appropriate, automate repetitive tasks with macros, and explore useful Excel add-ins. With these skills in your repertoire, you will be well-equipped to drive financial success and provide valuable insights to your organization.