Incorporating error checks into a financial model helps to bulletproof, safeguard and enhances the integrity and value of a financial model to users. All error checks across a financial model should be summarised and aggregated onto one Error Check worksheet, where each check in the financial model is listed on this worksheet and hyperlinks back to the source EBIT worksheet.
Enjoy greater Data Integrity with your Financial Model
Error checks can help to check the accuracy of external data sources when imported into the financial model. They help to alleviate the constant need to continually check that all cells, rows and columns are flowing into a financial model. For example, importing the consolidated financials of a company, it could be easy to overlook one business unit’s financials and this could lead additional time trawling through the financial model and working out why your financial model is out of balance.
What a great Reconciliation Tool for your Financial Model
Error checks can act as a cross-check tool, such as verifying the accuracy of each business unit’s EBIT calculation reconciling completely to the overall company’s EBIT number on the financial statements.
It is often prudent to recalculate some elementary financial metrics such as EBITDA for each business unit, to guarantee the source input financial statements are reliable and accurate.
A value-adding Finalisation Tool for any Financial Model
An error check serves as a final cross-check of financials and operational data before they are presented to executive management, peers or clients via executive reports, or are exported to other external models or databases (refer to Export Worksheets blog).
This will save the users of the financial model, having to continuously spot-check at length the entire financial model, after each new reporting period or whenever the source financials change before presenting to management or clients.
One less error you will make, if you start now!
Error checks are a very effective and simple way to improve the accuracy and credibility of a financial model. Spending additional time in the short-term will greatly reduce the time in the final stages of completing the financial model, which would otherwise be spent balancing numbers, verifying all financial numbers are flowing fully through the financial model, and validating the source financial data.
Hi Simon,
This is a cracking article, I find people talk about these checks but don’t use them much so its good to see someone recognising they are important and using them!
My approach is to split them up into “Integrity” checks and “Commercial” signals. This highlights the difference between checks that always have to be passed (such as a balance sheet or a sources and uses check) and aspects such as Cash < 0 which is not a mistake but commercial issues a user may want to examine. I will post a more comprehensive entry on this in due course.
Nick
@Nick
That’s a nice distinction. I’ll be using that one from now on!
Hi Chris,
No problem I am glad it was useful. As I said I will post an article as there are some good screenshots that will paint a more complete picture.
Nick
It is essential for the financial modeller to know the checks in the model.
I think it will be useful if a modeller make “Commercial Checklist” beforehand.