Importance of Checks

Quick reference

• 00:04 Last bit of blurb then before we plow into Excel.
• 00:07 I want to go back to the importance of checks as we've covered in the basics
• 00:11 course, so this is more of a recap.
• 00:16 >> The whole idea of a good financial model is, we don't have some big,
• 00:19 convoluted, tangled-up mess of the modeling that gets us from A to B.
• 00:23 It should be a streamlined, efficient way with no errors in it.
• 00:27 We talked about the key points.
• 00:29 We've talked about the financial statement, and
• 00:31 we've talked about constructing the basic model first.
• 00:34 We talked about the order, getting it right by eating an elephant analogy,
• 00:38 it's part by part, only ever one mistake away.
• 00:41 And we know that for the last we're going to talk about here,
• 00:43 the importance of checks.
• 00:47 As we've said before, there should be various explicit checks in a model.
• 00:51 Check the balance sheet balances,
• 00:52 check the cash in the cash error statement against the cash on the balance sheet.
• 00:56 Check you're not insolvent, we need to identify errors of omission,
• 01:00 double counting, incorrect accounting entries.
• 01:03 We need to put it all together.
• 01:06 We have three types of classification you might recall.
• 01:09 Error checks, fundamental flaws in model logic, the bar sheet doesn't balance.
• 01:14 You're littered with prima facie evidence like #REF!, #NULL!, #DIV/0!.
• 01:19 Sensitivity checks to warn you if you're not using the base case numbers.
• 01:24 And alert checks, which is everything else that's not covered by the first two.
• 01:28 It may be you've breached your debt service coverage ratio,
• 01:31 it may be that you were insolvent.
• 01:34 It might be that there's more cost then are revenues to the period,
• 01:37 whatever it might be.
• 01:39 So we'll have dedicated sheets for each, errors, sensitivities, and alerts.
• 01:43 Now, in the exercise we're going to do, we're only going to have one overall error
• 01:47 check sheet, but you may have three in a real model.
• 01:50 You'll have one for the error checks, one for the sensitivity checks, and
• 01:53 one for the alert checks.
• 01:54 You'll have in flags, you'll put conditional formatting in, and so on.
• 01:59 A summary sheet might look something like this screen shot.
• 02:02 You'll actually have these particular checks in here that show whether
• 02:06 the data is complete,
• 02:07 if it's an invalid start date, duplicate codes, whatever it might be.
• 02:11 And each of these other checks may be a hyperlink so that if you actually clicked
• 02:15 them, it takes you to the part of the model that's relevant.
• 02:18 What will happen is you'll then sum them all up.
• 02:21 Essentially, all these checks give a value of either zero or
• 02:24 one, zero if everything's fine, one if there's an error.
• 02:27 And then, the Summary of Errors at the bottom will sum the above, so
• 02:31 hopefully it will be zero.
• 02:32 If it's one or greater, it just gives a value of one so that all checks either
• 02:37 report a value of zero, everything is fine, or one, there's an error.
• 02:41 And how do we put it in?
• 02:43 Well, we have our checks worksheet system.
• 02:45 We start off with building the model and
• 02:47 having our checks in there as we go to check everything's fine.
• 02:50 This then flows into your dedicated worksheet, I just discussed.
• 02:54 And that will flow through the model to the cover sheet and other sheets as we go,
• 02:58 saying everything is fine.
• 02:59 And that feeds through to the rest of the model, so no matter where we are,
• 03:02 we have a link at the top of the page that says error checks okay or otherwise.
• 03:07 I think we've done rambling with PowerPoint,
• 03:10 I think it's time to bite the bullet and actually get going.
• 03:13 So, in the next session, what we're going to do is we're gonna have a brief,
• 03:16 brief recap about the idea of financial modeling.
• 03:19 And what we're going to do then is introduce the actual modeling exercise
• 03:23 that we're going to build on for the rest of this course.

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