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About this lesson

The check that checks for everything else sensitivity and error checks don't.

Exercise files

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Alert Check
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Quick reference

Alert Checks

Alert checks explained using the CRaFT methodology.

When to use

Many modelers add checks as an afterthought. Basically, it is too late to create them then. While building a model, a developer knows what situation might break a formula. That is when a check should be created. When the issue is foremost in your mind, create the check there and then.

Instructions

Overview

  • Alert checks: everything else! This flags points of interest to users and / or developers issues that may need to be reviewed
    • e.g. revenues are negative
    • debt covenants have been breached

Example

  • A company has a responsibility to ensure that it is trading while solvent – simply put, its assets exceed its liabilities. This example will put an alert check in to ensure the company is solvent.
  • The formula =IF(SUM(E14:E15)=0,(E6<0)*1,0) will ensure that the Prima Facie and the Balance Checks are OK, and if so, will check to ensure that the Total Equity is greater than 0 – meaning the company is solvent. In this example the total equity is negative and therefore the insolvency check is producing a 1 to highlight the company is insolvent.

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  • 00:04 The final type of check is the Alert Check.
  • 00:08 So as a reminder the checks are things you can put in to a model, looking for
  • 00:12 zero if everything is working fine, and a one if there is some issue.
  • 00:16 We already at error checks.
  • 00:19 Something's wrong with the model.
  • 00:21 Doesn't matter about materiality, something needs fixing.
  • 00:24 Our sheet doesn't balance.
  • 00:25 Cash and cash flow statement doesn't equal cash on balance sheet.
  • 00:28 Whatever.
  • 00:30 Sensitivity check is warning warning, you're not in the base case.
  • 00:34 So what's an alert check?
  • 00:37 Alerts checks are just everything else.
  • 00:38 It's your dump zone.
  • 00:39 It's the flagging of points of interesting to users that look, it's not a mistake.
  • 00:44 Your in the base case, but you might be interested to know this.
  • 00:47 Your revenues are negative.
  • 00:49 Debt covenants have been breached.
  • 00:51 You're in solvent.
  • 00:53 Things that you're reporting accurately even though
  • 00:56 you might not want to hear them.
  • 00:58 It's like, you may want to know that this is an issue.
  • 01:01 It gives end users confidence if they see these checks going off,
  • 01:04 especially in a model where typically I can have 800,
  • 01:08 900 checks in a model anything's okay, that gives end users just more comfort.
  • 01:13 Let me give you an example of a alert check with going back
  • 01:16 to the example we used to the other checks earlier.
  • 01:21 Let me return to the error check example I used before for
  • 01:25 my final example on checks, this time for an alert check.
  • 01:30 Here the balance sheet balances, there's no error, there's no balance issue.
  • 01:35 But I want to check for insolvency.
  • 01:38 For those of you that aren't familiar, insolvency is the term used when net
  • 01:42 assets or total equity, well, with a balance, obviously, are negative.
  • 01:47 When that happens,
  • 01:48 it means you owe more than you have and technically you could be bankrupt.
  • 01:54 You're not supposed to be in that position.
  • 01:56 So, there's nothing wrong with the model.
  • 01:58 It may be in the base case, but it's something that you need to be alerted to.
  • 02:02 It's a prime candidate for an alert check.
  • 02:04 So let me make it balance.
  • 02:06 But let's say that I'm actually insolvent.
  • 02:09 Let my liabilities exceed my assets.
  • 02:12 So I'm -30.
  • 02:13 I let my retained profits be -80 as a consequence.
  • 02:19 So no error, it balances, but I'm stuffed.
  • 02:24 What I want to do is actually create a check that says okay in this instance
  • 02:30 I actually want to see that I have got a problem.
  • 02:34 So I'm gonna use an if statement again and I'm gonna say that if the sum
  • 02:42 of these two values is 0, that means it's all working fine.
  • 02:49 I can then check to see if my next assets is strictly less than 0.
  • 02:59 It it's greater than zero, it'll be naught, if it's less than zero,
  • 03:03 it will be one, if it's equal to zero, it'll be naught, cuz technically,
  • 03:06 you still locate a trade there, cuz you've got enough assets to commit to your
  • 03:10 liabilities, otherwise, it's zero, we're not going to calculate it.
  • 03:15 You see, I've now created an alert check.
  • 03:19 Look, everything's fine, there's no privacy error, the balance sheet balances,
  • 03:24 but you might want to know your insolvent directors.
  • 03:28 Get ready to give up your houses, or whatever it might be.
  • 03:31 And this is a key thing to have here.
  • 03:33 What you would do is you put all of these different types of checks
  • 03:36 on different sheets and you would summarize them all.
  • 03:39 We only showed you in the overall example earlier an error checks form, but
  • 03:43 you could have it for the others.
  • 03:44 Sometimes they get put together, sometimes they get put on different sheets but
  • 03:48 they're things worth knowing, very useful checks but put them in at the beginning.
  • 03:53 Okay.
  • 03:54 So we've got to the stage now where we've got to check, sort it out,
  • 03:59 how you can put it together.
  • 04:00 Maybe we can even consider how it's all going to be displayed next.
  • 04:04 And that's what we'll consider next time.

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