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About this lesson

Introduction and the semantics of what constitutes "best" in "best practice". We consider a good model has four key attributes: Consistency, Robustness, Flexibility, and Transparency.

Exercise files

There are no related exercise files for this lesson.

Quick reference

Introduction

An overview on the best practices used when preparing a financial model.

When to use

To refer to when building a financial model.

Instructions

Financial Modeling Basics:

  • This course sets the scene for building a financial model.
  • It provides necessary concepts, functions and features to build a financial model.
  • It is not just theoretical.  There will be examples throughout.

Financial Modeling:

  • Where possible, keep it simple:
    • Comprehension, named cells, arrays, “megaformulae”
  • All data entry should only occur once and be clearly defined.
  • No hard coded data in formulae.
  • Input conventions should be consistent.
  • Model should “read” from left-to-right, front-to-back.
  • Treatment of repeatable sections.

CRaFT Methodology

  • Models should adhere to the following four key qualities:
    • Consistency
    • Robustness
    • Flexibility
    • Transparency
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  • 00:04 Hello, and welcome to the financial modeling basics training course, and
  • 00:08 I'm your host Liam Bastick.
  • 00:09 I've been working with financial models now for over 30 years.
  • 00:12 Throughout this course I'm going to try to pass on a lot of the tricks and
  • 00:15 tips I've learned over the time.
  • 00:17 That's another way of saying, I'm going to highlight the errors I've made and
  • 00:21 how I've corrected them, and present them in this course.
  • 00:24 This particular course deals with the preparation,
  • 00:27 all the stuff you need before you actually build the financial model, the givens,
  • 00:32 the things that you need to set the scene.
  • 00:34 I'm gonna provide necessary concepts, functions, and
  • 00:37 features in order to build that financial model.
  • 00:40 We'll be building the financial model in the next course,
  • 00:42 financial modeling techniques.
  • 00:44 This preparation course is just as important.
  • 00:46 So I do urge you,
  • 00:48 even if you a quite an advanced modeller, not to fast forward through.
  • 00:51 It's not just theoretical, we're not gonna go just death by PowerPoint here.
  • 00:54 We're gonna have lots of examples throughout.
  • 00:57 We'll try and have a laugh as we go.
  • 00:58 I do have a terrible sense of humor as you'll work out as we go through.
  • 01:02 So to set the scene with financial modeling, the idea is to keep it simple,
  • 01:07 stupid.
  • 01:07 The principle of KISS, K-I-S-S.
  • 01:10 Comprehension, named cells, arrays, megaformulae.
  • 01:14 We'll try and keep all of this to an absolute minimum.
  • 01:17 The aim is to make it easy for the model developer, and,
  • 01:20 more importantly, the user alike.
  • 01:24 Too often, model builders make life easy for themselves and
  • 01:27 the model user, well, they just have to fend for themselves.
  • 01:30 And that's not fair.
  • 01:31 It's delivering a service, a product.
  • 01:33 They should be able to understand.
  • 01:36 Keep it simple.
  • 01:38 If you don't understand what named cells, arrays, megaformulae are,
  • 01:40 we'll talk about these concepts as we go through, but
  • 01:43 on the whole, we use them sparingly, if at all.
  • 01:47 Other things we'll pass on, any data entry should only occur once and
  • 01:50 be clearly defined.
  • 01:52 Yes, you're looking to actually just type inputs in once.
  • 01:54 You shouldn't put them in twice, otherwise every time you change your number,
  • 01:57 you'll have to do it to more than one place.
  • 01:59 That's crazy!
  • 02:01 No hard coded data in formulae.
  • 02:02 If you don't know what hard coded data is, great.
  • 02:05 I'll try not to teach you bad habits.
  • 02:07 All that in the later session.
  • 02:09 I'm talking about inputs, it was all about how you make them stand out
  • 02:12 from the sheet, whether you separate them out somewhere else, and
  • 02:15 why you should separate them out.
  • 02:17 We also look at the idea that the model should read like a book,
  • 02:20 from left-to-right and
  • 02:20 down the page, so people can follow it, because it's just more intuitive that way.
  • 02:25 And repeatable sections are fine too.
  • 02:27 And repeatable sections are fine too.
  • 02:29 And repeatable.
  • 02:30 Sorry.
  • 02:31 The jokes have slipped in already.
  • 02:33 Repeatable sections are fine too because when you copy something down,
  • 02:37 if you've made a mistake in referencing all logic,
  • 02:40 it's often highlighted when you copy something down.
  • 02:43 So don't be afraid to use things over and over again.
  • 02:49 To help us with the idea of modeling best practice, one of the things that you'll
  • 02:52 come up with is there's no such thing really as best practice.
  • 02:55 It's a balancing act the whole time.
  • 02:57 There's various texts and treatises out there that talk about the idea of
  • 03:01 best practice, and the main thing that they all have in common is if you try and
  • 03:05 read any of these books, you'll find they're a great cure for insomnia.
  • 03:10 No, I've been the author for at least three of these texts and
  • 03:12 I like to say, it's simpler to bring it down to a methodology we call CRaFT,
  • 03:17 with a little a.
  • 03:18 What am I talking about?
  • 03:21 Four words.
  • 03:23 Models should adhere to four key qualities,
  • 03:26 consistency, robustness, flexibility and transparency.
  • 03:31 And over the next four sessions, I'm going to talk about each of these qualities in
  • 03:35 turn and what I mean about them.
  • 03:38 So, if you're sitting comfortably, let's begin.

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CRaFT - Consistency
06m:43s
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