2.1 Overview of Structures within Traditional Financial Models

It is clear that – when considering all types of financial models that could exist – there is a huge set of possibilities and variations: Some models will be much larger than others, some will have only a few variables whilst others will have many. Similarly, some may capture much more detail than others, or forecasts over a longer time-period, and so on. The amount of data that is available for analysis (or can be used to populate model input values) may also vary significantly. Many models may also contain some types of bespoke calculations that are highly specific to a particular situation.

Nevertheless, overall, many models consist largely of relatively common types of calculations and structures, which are then linked together. Some of these can be created by using standard arithmetic within Excel, whereas others require more advanced aspects of Excel (such as using Excel functions, its data manipulation functionality, or VBA macros). These structures are therefore highlighted at the relevant places within the CertFM Program.

At this point – using arithmetic only – the following standard calculations and structures can be highlighted:

  • Growth forecasting.
  • Ratio-driven forecasting.
  • Logic reversals.
  • Sensitivity analysis techniques in time-based models.
  • Corkscrew structures (including implied or reverse corkscrews).
The above topics form the basis of this Chapter.

Recommended Exercises in This Chapter

The examples in this Chapter are all simple to build in Excel, and you should be able to do so very quickly by using the techniques covered so far in the materials. Therefore, it is recommended that you build them as you can from scratch (especially if you wish to reinforce the core Excel skills of creating and copying formulas, and doing so quickly and efficiently).

Note also that the formulas in the images of the models in this Chapter are shown without the $ symbol. (That is, the formulas are shown as if each formula were individually created (rather than being created by copying another existing formula after fixing the appropriate column or row). This is done to simplify the visual presentation at this point. However, you are likely to find it more convenient to use the $ symbol at the appropriate points when creating the models, especially if you use copy/paste operations.

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