Because incorrect timing assumptions are the cause of many a financial modelling error.
Here are some examples of how getting the timing wrong can cause errors:
- What is the timing of capital expenditure or finance drawdowns?
Getting this wrong can lead to incorrect interest calculations or IRRs.
- What is the timing of debt service payments?
Getting this wrong can cause circular references, incorrect interest calculations, incorrect cover ratios, unintentional overdrafts within a period or incorrect dividend payments.
- What is the timing of interest on cash balances?
Getting this wrong can cause inaccurate results or circular references.
- What is the timing of inflation?
Getting this wrong can overstate or understate costs and revenues. See last month’s blog for further details.
- What is the timing of tax payments?
Getting this wrong can cause incorrect tax payments or circular references.
- What is the timing of cashflows for calculating NPVs and IRRs?
Getting this wrong can cause incorrect results.
- What is the timing of dividends?
Getting this wrong can cause incorrect IRRs.
- What is the timing of fees?
Getting this wrong can cause incorrect fee calculations or circular references.
This is not an exhaustive list; there are plenty more areas where timing errors can easily be introduced.
Always be clear about the timing. For example, at what point in a period does something happen and what are the implications of this? And always think about what you know and when you know it.
In real life these timing subtleties are easier to understand, but these distinctions are often not so clear in financial models. Clarity of timing is crucial for accurate (and non-circular) modelling.