Excel best practices while preparing financial models | List of important MS-Excel shortcuts

 

As a Financial Analyst, your key goal, while building a financial model, is to improve its transparency and audibility.

Below are some of the Excel best practices while preparing financial models and list of important MS-Excel shortcuts

1. Color Coding: There are no hard and fast rules in assigning color codes to various inputs, however the below mentioned guidelines are mostly followed across the industry.

Types of cell	Excel formula	Color
Hardcoded Numbers	=1234	Blue
Formulae / Calculation	=H3*H2	Black
Links to other sheets	=Sheet2!D9	Green
Different formula	=H8/2	Red

 

2. Sign convention: There are two approaches

a. All income should be positive and all expense should be negative (Preferred)

b. All income and expenses should be positive while the formula will include negative sign

Line Item	Option 1	Option 2
Revenue	300	300
COGS	200	(200)
Gross profit	100	100

 

3. Write simple formulae: A good financial model is the one which does not contain complicated formulae, and not the other way around! A complicated formula should be broken down into multiple cells.  

a. Always remember to keep the formula constant in the entire row for all the years

b. Most formulae in a financial model will refer to i) a value which corresponds to a period (for example, 2019) and ii) a metric (sales)

Example: =$M$9/N$3

4. Avoid constants in the formula: Do not include hard coded numbers i.e. constants into a cell reference. You'll likely forget there is an assumption inside a formula

Example: N45 * 0.23

5. Never hide row or columns, instead the best practice is to use group function (Shortcut key: Alt + D + G + G), Ungroup function (Shortcut key: Alt + D + G + U)

When we group them then that particular row or column is not shown while viewing or printing the model and it also helps us while updating the model

6. Never use merge cells function instead we can use “Centre across selection” under “format cells -alignment”. As when we merge cells there are a lot of restrictions like we cannot drag formulas or we cannot insert sort and filter function which is one of the important function in financial models.

7. Macros for the most widely used functions while building a financial model. Make sure you set the desired macros before and while preparing the model

a. Currency ($, INR etc.)

b. Decimal points (no decimal, one decimal etc.)

c. Multiples (P/E of 8.9x, P/B of 1.20x)

d. Color coding (input cells, calculation cells, linked to a different sheet, warning cells etc.)

e. Separator rows and columns

 

8. Always try to connect cells if possible: For example, current year’s opening balance should be connected to the closing balance of previous year

 

9. Never use long names for worksheet instead use shortest sign possible like using “IS” for Income statement, BS for balance sheet, CF for cash flow, COGS, Revs for revenue, etc. 

 

10. Last but not the least, Excel Shortcuts: While its extremely important to be fast and efficient at the same time while preparing models and hence excel shortcut comes into picture. Some important functions are given below

Shortcut Key	Function
F2	Edit cell
F4	Repeat last action
Ctrl + Z	Undo last action
F9	Recalculate workbook
Alt + W + F + F	Freeze panes function applies to the selected cell
SELECTION
Ctrl + Arrow key	Jump to edge of content
Ctrl + spacebar	Select column
Shift + spacebar	Select row
Alt + I + R	Insert row
Alt + I + C	Insert column
Alt + E + D	Delete row / column
F5	Go to
Shift + F11	Insert worksheet
Ctrl + Page up / page down	Move to next / previous worksheet tab
Alt + E + L + M	Delete worksheet
Alt + O + H + R	Rename worksheet
FORMATTING
Ctrl + B	Bold
Ctrl + I	Italics
Ctrl + U	Underline
Ctrl + D	Copy formula down to fill section
Ctrl + R	Copy formula right to fill section
Alt + E + S	Paste special
Ctrl + L	Open formatting dialogue
Ctrl + shift + 7	Outline cell
Ctrl + shift + -	Remove cell border
Alt + O + C + A	Autoformat column width
Alt + O + R + A	Autoformat row height
Alt + D + E	Text to column
Alt + D + F + F	Filter data
Alt + D + S	Sort data
Alt + O + D	Conditional formatting
Ctrl + Shift + $	Apply currency format to the selected cells
CELL NAVIGATION
Ctrl + Arrow keys	Shows the end of range
Shift + Arrow keys	Select a specific range
Shift + Ctrl + Arrow keys	Highlight the entire range of data
Home	Move to beginning of line
Ctrl + Home	Move to cell “A1”
Shift + Enter	Move to cell above
Tab	Move to cell to the right
Shift + Tab	Move to cell to the left
Backspace	Delete cell and start writing
Ctrl + ~	Show formulas/Values

 

If you are not aware than this post is a part of the Financial Modeling Series. To check the previous post on the Basics of Financial Modeling, Click here. Also, the list will keep updating so kindly drop your email id in the comment section below to be notified as and when the new addition is made to the series.

Below is the snapshot of the three financial statements:

Three Financial statements (Financial Modeling Process)

1. Income statement:

Revenue

- Cost of goods sold (also known as direct cost)

= Gross Profit

- Operating expense (also known as indirect or office expense)

= Net operating income (EBIT)

- Non-operating expense and interest expense

= Pre-tax income (EBT)

- Income tax

= Net income (PAT)

* One important term EBITDA i.e. nothing but we add back non-cash expenses to EBIT. EBITDA is used to understand the actual cash profitability of the business.

 

2. Balance sheet: Total assets + (total liabilities + equity)

    * Total assets= Non-current assets + current asset

    * Total liabilities + equity = Non-current liabilities + current liabilities + equity

 

3. Cash flow statement: Cash flow from operating activities + cash flow from investing activities + cash flow from financing activities = Net change in cash i.e. Cash balance, we find on balance sheet)

 

This was all about Excel best practices one should keep note of while preparing financial models and snapshot of three financial statements. Keep checking out our latest post for the next part of the financial modeling series which will be out any soon.

Thanks for reading

The Finance Magic

 

Financial Modeling series:

1. What is financial modeling - It’s scope, uses, types, and how to build a financial model? | Explained

2. Excel best practices while preparing financial models | List of important MS-Excel shortcuts {This Post} 

3. Things to understand before buildingthe financial model {NEW} 

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