Training · IB-2 · Lesson 08 of 12
Financial modeling
The rule
A model turns a story about the future into a schedule you can test. Build it so a stranger can follow it without asking you anything.
What a model is for
A financial model turns assumptions into outputs a decision-maker can use: a valuation, a financing need, a return. A good model is accurate, transparent and quick to change. A colleague should be able to audit it in minutes and trace any output back to its inputs.
Structure and conventions
Separate inputs, calculations and outputs. Put assumptions in one place, colour-coded: blue for hard-coded inputs, black for formulas, green for links to other sheets. Keep time running left to right with consistent columns across every sheet.
- ·No hard-coded numbers inside formulas.
- ·One formula per row, copied across.
- ·Check rows (balance sheet balances, cash ties) that turn red when broken.
Building the forecast
Drive revenue from its real components — volume and price, users and revenue per user, stores and sales per store. Costs follow as percentages of revenue or as fixed amounts that step up. Capex and working capital tie to revenue growth. Each driver should be explainable in one sentence.
- Units sold, year 1
- 1.0m
- Unit growth
- 8%
- Price per unit
- $50
- Price growth
- 3%
- Revenue year 2
- 1.08m × $51.50 = $55.6m
Speed and accuracy
Use keyboard shortcuts, not the mouse. Learn to trace precedents and dependents. Build in small steps and check each one. Circular references from interest on average debt are common; use a switch to break them if the model becomes unstable.
Presenting outputs
Outputs should answer the question asked: a summary page with key metrics, scenarios and sensitivity tables. Label units, round sensibly and state the main assumptions on the page, so the output can be read without opening the calculation sheets.
Hold onto this
- ·Assumptions live on one tab, hard-coded nowhere else.
- ·Drivers beat hard-coded growth: price × volume beats a single revenue line.
- ·Every output needs a sanity check against a comparable or a prior year.
Progress saved on this device
Education, not financial advice. Figures may be simplified for illustration.