Principles of Financial Modelling

CHAPTER 7Creating Transparency: Formula Structure, Flow and Format

INTRODUCTION

This chapter covers some key ways to enhance the transparency of a model. This represents an important aspect of best practices, since it is one of the major approaches to reducing the complexity of a model. The main themes relate to:

• Putting oneself in the place of an auditor, since doing so helps one to understand the causes of complexity, and hence to determine characteristics of better (less complex) models.
• Drawing clear attention to the location of inputs, calculations and outputs.
• Ensuring that audit paths are clear, and are as short as possible. (Achieving this is also linked to the discussion of workbook structure in Chapter 6.)
• The appropriate use of formatting, comments and other documentation.

APPROACHES TO IDENTIFYING THE DRIVERS OF COMPLEXITY

Taking the Place of a Model Auditor

Perhaps the best way to gain an understanding of what is required to maximise transparency is to do one (ideally both) of the following:

• Review large models that have been built by someone else. When doing so, one is almost invariably struck by their complexity, and the difficulty in understanding their detailed mechanics. It seems that there is unlimited creativity when it comes to building complicated models! Especially by reviewing several models from different contexts, one can start to establish common themes which add complexity unnecessarily. Indeed, many of the themes in this chapter were determined ...