Financial modeling

Financial modeling

A model is an argument about how the business works, expressed in arithmetic. Its value is the argument, not the output precision.

Structure

Three separated layers, always:

1. Inputs — every assumption, in one place, each with a source and a date. An assumption buried inside a formula is invisible and therefore never challenged.
2. Calculations — no hard-coded numbers. Ever. A constant inside a formula is an untraceable assumption.
3. Outputs — the statements and the summary a decision-maker actually reads.

One row, one calculation, carried consistently across periods. Models become unauditable through inconsistent rows more than through complexity.

Build revenue from drivers

Never grow a top-line by a percentage. Build it: volume × price, or accounts × retention × expansion. Driver-based models can be argued with, and being argued with is the point — a growth rate cannot be wrong, only optimistic.

Cost structure separated into fixed, variable, and step-fixed. The step-fixed items are where plans break, because they move in jumps nobody modeled.

Sensitivities are the deliverable

A single-scenario model tells you nothing about risk. For every model, produce:

• Which two or three assumptions actually move the answer. Usually far fewer than expected.
• Breakeven on each — how wrong can this be before the decision reverses?
• Downside case — not a haircut on the base case, but a coherent story where things go badly.

If a plan only works in the base case, that is the finding.

Reviewing someone else's model

The description of a model is not evidence about the model. Check these, in this order, because