Financial Modelling Advice - Keep It Simple
Why overly complex Excel financial models are a problem, and advice on how to keep them 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, and flow of data – one which is rarely thought of or mentioned is simply ‘Keep it Simple’.
The Golden Rule
Simplicity is the single most important, and most overlooked, principle in financial modelling.
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 can do everything and anything as the ultimate solution. Functionality that will 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 VBA: if I can pack a load of that in, 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.
What Does ‘Keep It Simple’ Really Mean?
Simplicity is relative – it depends on the end user's ability and what is necessary to fulfil the task at hand.
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, and some involve accounting principles. Many are coded with hundreds, if not thousands, of unique formulas, 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 formulas like a book, or anticipate the calculations within a cell before they’ve even looked at it, based on the nature of the spreadsheet and the calculations around it.
Simple depends on the end user’s ability and avoiding going above and beyond what is necessary to adequately fulfil the task at hand.
How to Keep It Simple
Think first about the end user, then about transparency, and finally about your own motivation.
When thinking about keeping a model simple, start with the end user: their ability, their needs, and the level of complexity that is suitable for them. If you create a financial model that is so ‘advanced’ and complex that they run into trouble with it, or simply 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, always ask yourself: 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 and descriptive labelling around the model, or attaching comprehensive 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 feeding your own ego. Am I including functionality that is really necessary, or am I trying to show off? And in my view, this is where many consultants and 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 whose benefit it is. It should always be the end user’s.
Learn More
If you’re looking to develop your financial modelling skills – building models that are structured, reliable, and clear – our Excel Modeller course covers best practices and techniques used within Big 4 modelling teams. It is designed for finance professionals, analysts, and consultants who want to build models that stand up to scrutiny and serve their users well.
