If you are lucky, you will get to build your own model from scratch, but most often you will be handed someone else’s model to validate, modify, and make your own. One of the toughest tasks for any financial modeller is trying to use, understand, audit, or validate an existing model. While it may seem like a simple enough task where the hard work is already done, the real challenge will be to understand how the model was designed.
Excel is such a flexible tool, and there are so many different ways to achieve the same end, that trying to understand the way a model has been built is like trying to get inside another modeller’s mind! Give three different modellers a problem, and you’ll undoubtedly have three different model designs, as each modeller will approach the model design in a different way and almost certainly using different formulas.
Obviously the best place to start when trying to understand a model is to talk to the original designer, if that is at all possible. There is no one who understands the model better than the modeller who designed it in the first place. However, the original modeller is often unavailable, and we therefore need to allow the model to speak for itself.
If financial modelling best practice has been used, understanding a financial model in Excel should be a fairly straightforward task. However, many inherited models have not been built by professional modellers, but rather cobbled together by ...