Once you’ve built a financial model, reviewing the equations and assumptions in detail and abstraction is essential to ensure accuracy. Since numbers and figures saturate financial models, it’s easy to make mistakes.

From calculation errors to wrong assumptions, a financial model can quickly become inaccurate. Below, we outline the process of reviewing a financial model.

Why Should You Review a Financial Model?

Financial models are built to inform decisions, so accuracy is essential for reliable execution. You can identify errors and refine assumptions by thoroughly reviewing a financial model to ensure the model accurately reflects the situation. Doing this can also help you identify any additional data needed to make a decision.

Moreover, financial models are complex and often require multiple levels of review. The modeler should be able to explain the equations, assumptions, and other variables in a financial model. A review process can help identify potential risks and opportunities before decision-making.

What Should You Look For When Reviewing a Financial Model?

A thorough review of your financial model can help you identify any inaccuracies. Look for the following when reviewing your financial model:

• Calculation Errors: Check for typos and incorrect input values.
• Incorrect Assumptions: Make sure the assumptions are based on accurate data and reflect the latest financial situation.
• Financial Statement Linkages: Identify any potential inconsistencies in the relationships between different financial statements.
• Data Quality: Ensure the data used in the model is accurate and up-to-date.
• Inaccurate Outputs: Check the figures and projections to ensure they accurately reflect the data used in the model.

While reviewing, consider the purpose of the financial model and how it will be used. It can help you verify that the equations and assumptions accurately reflect the desired outcome.

For instance, if you’re creating a financial model for budgeting and forecasting, it should focus on the following:

• Understanding how revenues, expenses, and investments impact the financials
• Estimating future performance based on current trends and historical data
• Analyzing risks and opportunities that can influence the outcome

A single error in any cell of your Excel financial model can throw off your whole calculation. For example, an extra zero or omission of a decimal point, or a wrong formula reference can mess up everything from your assumptions to risk profiles.

Who Should Review a Financial Model?

Financial models should be reviewed in two stages: the first is the modeler’s review, and the second is by a third party.

Modeler’s Review

The modeler is the person or team responsible for creating the financial model and should be knowledgeable about the business and its operations. The modeler’s review should check that all inputs, formulas, and assumptions are reasonable and accurate. 

The modeler should also validate the accuracy of the results, paying particular attention to any variances or forecasts that appear to be out of line with expected results.

Third-Party Review

A third-party review is often beneficial and can provide an independent view of the model. It doesn’t necessarily have to be an external auditor but should be someone who is familiar with the industry and financial modeling.

They should review any overlooked or poorly thought-out assumptions and double-check the mathematical accuracy of the formulas and calculations. They should also ensure that any risks or uncertainties have been adequately accounted for in the model and that any potential sources of bias have been identified.

Finally, they should verify that the output is accurate and consistent with other models in use. It is important to remember that financial models are not static and should be regularly reviewed and updated to ensure that they remain relevant and accurate.

How Often Should You Review a Financial Model?

The frequency of review should depend on the complexity of the model and how often it is used. Generally, financial models should be reviewed at least once a year to ensure that they are up-to-date and accurate. 

More complex models, or those which are used on a daily basis, should be reviewed more regularly, such as quarterly or semi-annually.

For example, operational models should be reviewed at the end of each quarter, while valuation models should be updated before making any major decisions. It should include a comparison of the model’s outputs with actual results to ensure that the model accurately forecasts the business’s performance.

Steps in Reviewing a Financial Model

The process for reviewing a financial model can be broken down into three steps:

Review the Inputs and Assumptions

It includes checking data sources, understanding the nature and scope of information that is input into the model, validating all formulas used, and ensuring the accuracy of any numbers or assumptions. The modeler should also check that all the assumptions underlying the calculations are reasonable and consistent with industry practices.

Review the Outputs

The next step involves reviewing the outputs generated by the model. The modeler should examine the sensitivity of the results to changes in inputs and understand whether any key relationships are being captured. Additionally, the modeler should look for any inconsistencies or strange patterns that may indicate an error in the calculations.

Validate the Model

In this step, the modeler should validate the model against real-world data and compare it with other models. For example, the modeler should compare the results of the model with a set of benchmarks that reflect industry or market standards.

It Starts With a Perfect Financial Model

There’s no denying that reviewing financial models is an absolute necessity. But even a dozen reviews won’t do you any good if the financial model isn’t well-made, to begin with.

That’s why you should leave financial modeling for your startup to Numberly. Since we factor in your company’s individual needs and goals, you can be sure that the model we produce will cover every angle of your business.

Based on dynamic assumptions, our financial models are fit for startups who’re in need of a sound basis for their financial decision-making process. Schedule a 30-minute call with your representative to learn more about our bespoke financial models.