Good financial modelling is like good business writing.

We write to be clearly understood. Not to make ourselves look clever.

Excel files are called workbooks. And the way we organise books or long reports is a helpful analogy for how we structure models.

  • Worksheets are like chapters.
  • Calculation blocks are like paragraphs.
  • Formulas are like sentences.

Well structured chapters

When writing long documents, we break them up into chapters with sections and clear headings and subheadings. It makes finding material easier. I recommend doing the same in your Excel file. Have chapters for each "topic" rather than a single "Calculation sheet". Having a single calculation sheet is like having one chapter in a lengthy document. It's a horrible idea. The exception would be a small model where a single calc sheet might be appropriate, just like a short document doesn't need chapters.

Split the sheet up with headings and sub-headings to make finding the right place in the chapter easier. We'll come to how to do this effectively.

In long documents, we include executive summaries with the most critical information in a format that makes it easy to digest. We should do the same in models with clear summary reports.

Well structured paragraphs

It helps to structure our business writing so that we present one idea per paragraph. And ideally, that idea should be at the start. That way, you're not forcing your reader to wade through your reasoning to get to the main idea. Give them the main idea first. We apply this to models by using calculation blocks and having only one calculation per block.

Well written sentences

When we write in business, we write to be clearly understood. We should apply the same thinking in financial models. Our goal is to build models that are easy for other people to understand and use. We don't build models to make ourselves look clever.

Simplicity is the key to writing with clarity. In documents, this means short, declarative sentences. In financial models, this means short formulas.

When I use the word "and" to connect two clauses, the sentence usually reads better split in two. Similarly, in models, when I find the formula is getting too long, it's generally better to split it up into several steps.

In the sections that follow, we will look at how to apply this in practice.


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