Now and then this comes up for me. I'll have a client with one set of logic and they want to take it out of one financial model and put it into another financial model template. When doing this, there are some things to consider.
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Merging two financial model templates can be a complex task that requires careful attention to detail to ensure accuracy, consistency, and usability. Slower is better and faster in the long run. Here are some best practices to follow:
- Understanding Both Models: Before you can merge two models, you need to understand them individually. This means understanding the structure, key assumptions, output metrics, and inputs of each model. You should know how the data flows through the model, which parts are static, which are variable, and how the model reacts to different scenarios. This is easier if you yourself built both models, but if a client is giving me models from other people and asking for merging, things become more difficult and it will take more time to implement all the changes.
- Planning the New Model: Plan what the merged model will look like before starting the merge. Identify the key outputs you need, which parts of each model you will use, and how you will integrate them. Sketching a flow diagram may be helpful.
- Consistency: Make sure that all formulas, references, naming conventions, and assumptions are consistent across the merged model. This includes cell formatting, color coding, and comment usage.
- Back Up Data: Always make a copy of both models before starting the merge. It's easy to make a mistake that could ruin a model, so always have a backup. You can do this by simply changing the name of each file, that way you have the original as a hard copy download that is separate.
- Use of Version Control: Keep track of the changes you make during the process of merging. Version control helps to monitor and control the changes to the financial model, which is particularly helpful when working with large and complex models.
- Check and Double-check: After the merge, test the new model thoroughly. Change inputs to see if the outputs change as expected. This can help identify any errors that occurred during the merge.
- Documentation: Document your work, including any changes you made and any problems you encountered. This is particularly important if the model will be used by others.
- Step-by-step Process: Merge the models in stages, checking each stage as you go. It can be easy to get lost in a complex financial model, and working in stages can make it easier to identify where any problems are.
- Simplicity and Clarity: Whenever possible, aim for simplicity and clarity. This will make the model easier to use, check, and update.
- External Audit: Consider having the merged model reviewed by an external party. An external review can help identify any errors and suggest improvements.
Remember that the process of merging financial models can take time, and it's important to not rush the process to ensure the accuracy of the final model.
Article found in Accounting and Finance.
