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Spreadsheet errors are avoidable

Posted by Stephen Daniels

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Why is it that in 2014 we are still talking about spreadsheet errors as if they were inevitable?

This week's high profile spreadheet story was the FT’s savaging of Thomas PikettyThese errors have raised questions around Piketty’s (until now) widely praised conclusions, regarding the rising wealth inequality in the US and Europe.

The story has received commentary from a few sources, including:

Felienne Hermans' blogFelienne Hermans is an assistant professor at Delft University of Technology and her attitude is “only a fool blames their tool”. Whilst spreadsheets are very close to her heart – she has a wider view about programming and software engineering methods. 

City A.M. - How simple rules can help avoid Piketty-style spreadsheet mistakes

In my opinion the spreadsheet blunders that are mentioned in the news are as a result of a lack of respect for the tool of choice (the spreadsheet).

To look at this a slightly differently, it is like an average person like me, who has no building skills, looking at a house and thinking “I could build that”, simply because I have the right materials.

If you don’t have an understanding (or even awareness) of the basic principles and standards for building a house, then it will not work. You might not realise there is a mistake, but that house will always be fundamentally flawed and dangerous.

But as so many spreadsheet errors have shown, a poorly built model doesn’t always fall apart in the same way a poorly built house may. The mistakes can remain hidden until someone with an understanding of the standards takes a look, then the mistakes appear glaringly obvious.

Themodelauditor blog points readers towards the ICAEW’s twenty principles for good spreadsheet practice. This is due to be launched formally launched on the 17th June in London.

Principle number 2 in this document, is “Adopt a standard for your organisation and stick to it”. We’ve been talking about this for some time and we’re delighted that a body such as the ICAEW is clarifying its advice on this.

At F1F9 we use the FAST Standard. This helps us to ensure that any errors that do exist (and they will) are more easily spotted.

Until standards are embraced within spreadsheet use,  mistakes will continue to occur and the hard work that has been put into developing hypotheses and conclusions will be undermined by simple errors that could have been avoided.

Almost a year ago we highlighted what happens when spreadsheets go wrong, with our dirty dozen ebook – take a look and tell us if you think that Piketty should be added to make this a baker’s dozen.

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Financial Modelling Handbook - The first five months

Posted by Stephen Daniels

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We have now published more than 20 modelling guides by 12 different contributors. Over the past 5 months these have been viewed over 10,000 times on slideshare and downloaded more than 3,000 times. It's a good start, but it's just a start. 

We aim to publish a handbook guide once a week - to receive our regular handbook notifications, please sign up below.

Below is an infographic we created to showcase the achievements of the last 5 months.

Click on the image to download the pdf.

FMH_Infographic2

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Financial modelling: start with the end in mind

Posted by Stephen Daniels

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When building financial models, it is helpful to conceptualise the results that the financial model needs to produce and to work your way backwards from there. The following provides brief pointers on why this technique is useful and how it works. 

According to the world-renowned leadership adviser, Dr Stephen R. Covey, an effective person always approaches a task or project by starting with the end in mind.

He says that having a crystal clear picture of what we want to achieve before we take the first steps will make it easier for us to determine what we need to do in order to reach that goal. In his international best-seller The 7 Habits of Highly Effective People, Dr Covey adopts the analogy of a building, pointing out that construction is only possible once the blueprints have been drawn up.

The habit of beginning a process of construction with a clear understanding of the end product can be highly beneficial when building financial models. When we can conceptualise how the model should function and appear, we can work our way backwards to see what steps are needed to achieve that result.

Here are some guidelines on how this approach can be applied to financial modelling and why it is beneficial:

Make sure that the steps are clearly defined. When we begin with the expected output, each task that precedes it must be broken down into steps and arranged logically. These clearly defined steps tell us how far we are from the required result and, therefore, the time required to achieve that result.

Avoid unused calculations. Calculations which do not add to the required output should be avoided completely. This approach is very helpful in models where we need to replicate. Start with the financial statements and then work backwards to find the inputs required to calculate the line items in the financial statements.

Don't start with the inputs – as tempting as this is. This is important as we won’t know what data is needed unless we start with our outputs and figure out how to calculate each line item.

As with any new habit, adjusting your approach to building a financial model can take time. Starting with the end in mind may be difficult at first, but by persevering with this method and using it each time you need to build a model, you will soon find that it is an efficient and logical approach. 

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