Avoiding errors in financial modelling with Excel spreadsheets is of paramount importance if the end result is to be usable and reliable. By using a consistent approach and applying best practice guidelines, it should be possible to build models with a high degree of accuracy and robustness.
The most important rule when it comes to designing spreadsheets is never to assume that a project will not require more data to be added to it in the future. Failure to take this into account at the design stage is a common cause of failure and leads to spreadsheets which, while effective in the short term, have only a limited lifespan because they lack the scope for expansion.
Although it may seem highly inefficient to spend more time planning a spreadsheet than implementing it, the long-term gains of this approach will always pay dividends. In a properly planned spreadsheet, all the key information and related headings need be entered only once and will then automatically flow through to whichever parts of the file require it. This not only reduces implementation time but also vastly reduces the possibility for human error as multiple data entries are not required.
Similarly, formulas should be designed so that they can be applied in blocks rather than being linked from individual cells. Breaking longer formulas into smaller chunks will make them easier to read and check should any problems occur. If others will also be working with the spreadsheet, add notes to cells clearly explaining the purpose and function of each formula.
Using modular spreadsheet blocks allows individual components to be added at any point in the future. It also means that, should errors or omissions be discovered, changing one part of the file will not adversely affect others.
While a well-formatted, great-looking spreadsheet can be a thing of beauty, it is worthless unless the information it contains is both accurate and efficiently organised. Best practice suggests that keeping the look of the spreadsheet as simple as possible and the use of formatting to a minimum will not only reduce the file size but will also avoid wasting time on elements that add nothing to the overall effectiveness of the spreadsheet.
Common errors can easily be avoided by using best practice guidelines. Though it may be tempting to clear cells using the space bar, this can lead to an invisible character residing inside a cell which in turn can prevent a formula from functioning correctly. Always clear cells using the delete button to prevent this from happening.
Another common error occurs when a number format is applied to a series of specific cells but is instead applied to the entire column. This leads to Excel having to reference thousands of cells that may or may not contain any relevant data.
Although this technique can be useful as it means that any new data will be automatically included in the spreadsheet, it can also lead to errors in any inconsistent information is contained within those cells. Using a more limited cell range may take more planning and require constant updates if additional data is required, but Excel will run far faster as a result.
There are several ways of helping Excel perform its recalculations more quickly. If, for example, you use mathematical constants in some of your formulas, calculate the values yourself and enter them. This will negate the need for Excel to determine the values during the next recalculation cycle.
Best practice also involves building spreadsheets with future maintenance requirements in mind. Organising vertically, with the smallest possible number of columns but as many rows as needed will make it easier to follow the flow of a calculation, should any future checks or adjustments be required.