Modeling (in Excel)

I am going to spend the better part of today building some models in Excel. Much as I love Google Docs, for any serious model I still go back to Excel without regrets. It is fast and versatile and I know it extremely well.

I see a fair number of business budgets and financial models built in Excel. Many suffer from the same set of problems:

Artificial precision: often there is an attempt to capture every line item down to office supplies – but those generally won’t make or break a business (unless you are in the office supplies business that is).

Key assumptions not easily visible: the cells which contain the key assumptions (e.g. about drivers of revenue growth) should be clearly highlighted and/or gathered up in one place.

Circular references: sometimes you can’t avoid having to do a “goal seek” but many models contain gratuitous circular references. For instance, if you want to target a particular post investment option pool size, you can do that with a simple formula. No circular reference required.
Lack of sensitivities: no attempt to analyze how a small change in one of the key assumptions will impact outcomes.

Deterministic: this is my biggest pet peeve. It’s OK for something like a cap table for a specific round of financing. But for any kind of projection you really want to look at a distribution of outcomes.

Now off to actually putting my models together!

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I see a fair number of business budgets and financial models built in Excel. Many suffer from the same set of problems:

Artificial precision: often there is an attempt to capture every line item down to office supplies – but those generally won’t make or break a business (unless you are in the office supplies business that is).

Key assumptions not easily visible: the cells which contain the key assumptions (e.g. about drivers of revenue growth) should be clearly highlighted and/or gathered up in one place.

Circular references: sometimes you can’t avoid having to do a “goal seek” but many models contain gratuitous circular references. For instance, if you want to target a particular post investment option pool size, you can do that with a simple formula. No circular reference required.
Lack of sensitivities: no attempt to analyze how a small change in one of the key assumptions will impact outcomes.

Deterministic: this is my biggest pet peeve. It’s OK for something like a cap table for a specific round of financing. But for any kind of projection you really want to look at a distribution of outcomes.

Now off to actually putting my models together!