Blog Article:

How Accurate is your Financial Model?

How Accurate is your Financial Model?

Maybe you are confident that it is correct and you are happy, for example, to “debt size” an exact number correct to two decimal places and present that as an accurate answer.

But remember that any financial model contains two distinct strands: assumptions and calculations.

Some of the model’s assumptions will be correct (those that come directly from contracts, for example). However, many will simply be a guess. Can you really predict such assumptions as tax rates, working capital assumptions, inflation and interest rates for the next 30 years?

As for the calculations in a model, did you ever achieve 100% in a maths exam? Maybe you did, but it is telling that on all of my financial modelling courses, the participants will end up with different answers on almost every exercise. The error checking process is a key part of my courses, but in real life creating accurate models is harder: modellers work under great pressure, often late at night and there is no second model to check against.

There are plenty of Excel traps to fall into too which many are simply not aware of. And how many modellers are accurate enough with their definitions or have the necessary feel for timing? One of the areas I’m thinking about here is indexation: so often this is included incorrectly, resulting in inaccuracies.

Always keep a cool logical head, employ error checking techniques, question the results models throw up and run sensible sensitivities, including stress cases. And just because a model has been through an auditor, don’t assume that that makes it correct either.

As for accuracy, don’t forget statistician George Box’s statement:

“All models are wrong, but some are useful”

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