Financial modeling is an essential tool for businesses, helping them make informed decisions related to investments, forecasting and budgeting. Custom financial models enable businesses to analyze financial data and make informed decisions in a meaningful way. Excel is the most commonly used software for building these models due to its convenience and structure.

Creating custom financial models in Excel offers many advantages; it is flexible and user friendly, both of which are important when it comes to building robust, accurate financial models. It is also cost-effective and can be used to efficiently allocate resources and plan for future expenditures.

In this blog post, we will outline some helpful tips for building custom financial models in Excel.

Framework for Building Financial Models

Financial modeling can be a complex process, but it doesn’t have to be. Having a strong framework for building models can help streamline the process and make it easier to create reliable and accurate models. Here are some tips for setting up a framework for building financial models in Excel.

Organize Data

Before you begin building a financial model, it’s important to make sure you have the data you need in an organized format. This means gathering all the relevant data and ensuring it’s in an organized structure. It also means ensuring that the information is consistent with other data sources and that any gaps are addressed.

Create a Detailed Design Specification

A design specification is a document that outlines the scope of a financial model. It should include the desired inputs, outputs, assumptions, calculations, and any other components of the model. Having a well-defined design specification will help ensure that the model is accurate and complete.

Develop a Formula Reference

Using a well-defined formula reference can help make financial modeling more efficient and accurate. This should include a list of all the formulas used in the model, as well as any assumptions or notes related to the formulas. This will make it easier to update the model in the future and ensure accuracy.

Selecting the Appropriate Data Type

When it comes to financial modeling in Excel, selecting the appropriate data type for model components is essential for accuracy and efficiency. The data type should be considered in terms of its ability to provide users with the ability to take full advantage of Excel's capabilities. Additionally, the data type should allow for the easy formatting and documenting of the model for an improved user experience.

Ability to Use Full Range of Excel Capabilities

The data type selected should be able to allow users to take full advantage of Excel's various capabilities. This includes things such as the ability to employ conditional formatting, analyze data with functions like VLOOKUP and INDEX/MATCH, and accurately represent data with charts and tables. When selecting the appropriate data type, these capabilities should be taken into consideration in order to maximize the capabilities of Excel during model development.

Formatting and Documenting Model Components

Formatting and documenting model components is essential in a financial model, as it not only serves to make the model more visually appealing to users, but also improves the user's overall experience interacting with the model. Hence, when selecting the appropriate data type, it is important to ensure that it allows for easy formatting and documentation of the various components of the model such as inputs, drivers, assumptions, and outputs. In terms of formatting, it should be easy to adjust column sizes, cell colors, font types, and more. In terms of documentation, Excel's comment and hyperlink functions should be utilized in order to provide users with easy access to additional information regarding the model's inputs and outputs. This can also be supplemented with an external documentation file for longer or more detailed notes which are not appropriate for a comment.

Structuring Output Reports

When it comes to custom financial modeling, the structure and layout of output reports are just as important as the data that goes into them. Reports must be both informative and professional, with data presented in a clear, concise manner. With this in mind, there are a few tips and tricks that can help ensure that your output reports meet these criteria.

Presenting Professional Reports

The first step to producing an effective output report is to ensure that it is presented in a professional manner. Some techniques which can be employed to achieve this include:

  • Including a dedicated title page, introducing the report and giving it a name.
  • Utilizing a consistent font and styling throughout the report.
  • Ensuring the organization and layout of the tables, charts and infographic provided with the report are straightforward and logical.
  • Including page reference numbers on each page to help readers find relevant sections quickly.

Summarizing Financial Data

When presenting financial data in an output report, it is important to ensure that the data is both structured and summarized in a way that is easy to understand. Tables and charts should both be used to provide a comprehensive summary of the data provided by the model, highlighting key trends and insights. Including a short written summary of the data presented can also help the reader to interpret and make decisions based on the information presented in the report.

Utilizing Visuals

Presenting business or financial data doesn't have to be as overwhelming as it initially seems. You can help convey complex financial data more efficiently and effectively by utilizing visuals within your custom financial models. Excel offers a robust amount of options available to create visuals that may help simplify your data.

Using Graphs and Charts to Show Model Results

When building a custom financial model in Excel, it's important to focus on creating visuals that accurately depict changes in the data. Incorporating visualizations can aid in more rapidly translating complex data into a comprehensible format, whether that be developing tables, plots, maps, charts, scatterplots, heat maps, et cetera. Graphs and charts are powerful tools that can quickly show dynamic changes and correlations between data sets.

Explaining Complex Financial Data

As the use of visuals become increasingly widespread, interactive strategies such as the drilling down of reports and dashboards are being used to explain complex financial models. This provides readers the opportunity to delve deeper into specific data sets, featuring details in just a few clicks. Detailed visuals can also effectively highlight outliers, making it easier for reviewers to identify abnormalities within the data.

In addition, dashboards allow decision makers to review historical trends and flag data points that require further analysis. Having the ability to quickly visualize and interact with the data gives an in-depth understanding of the financial model, making it even easier to assess decision outcomes.

Testing and Refining the Model

Testing and refining your financial model is crucial for ensuring results are accurate and reliable. Models built with Excel that are employed for long-term use should be tested for accuracy and for potential errors. It is also important to refine your model for long-term use, making user decisions easier, using scenarios, or streamlining the analysis process. Below we outline some tips for testing and refining your custom financial model in Excel.

Ensuring Accuracy of Results

The accuracy of your results relies heavily on how you built your model. To check your results, it is important to check formulas and links used in your model. To do this:

  • Re-run all calculations by pressing F9.
  • Check for inconsistencies by using the trace precedents tool.
  • Check for circular reference errors.
  • Verify links to ensure you are using the correct cells.
  • Check for #REF! or #DIV/0! errors.
  • Validate data entered into your model.

After verifying the accuracy of calculations and the results it is important to check the logic of your model. This can be done by carefully going through each scenario and making sure your outputs are consistent and make logical sense. It is a good practice to design a few test cases with known answers, this will help to check the accuracy of your model.

Refining Model for Long-Term Use

Besides ensuring accuracy of results, if you plan on using your model for long-term use, it is important to tailor the design of your model to suit user needs. Some important points to keep in mind when refining your model for long-term use include:

  • Simplicity – Minimizing complexity and providing the level of detail that is necessary for decision-making and analysis.
  • Flexibility – Making your model dynamic and able to quickly adjust to changing user requirements.
  • Scenarios – Building scenarios and sensitivity analysis which allow users to understand the impact of certain variables on the outputs.
  • Formatting – Simplifying the display of results, easy to read and understand the outputs.
  • Documentation – Documenting assumptions, formula logic and design.


Creating custom financial models in Excel can be a complex process. It requires a full understanding of the various components that make up a financial model, along with a dedication to meticulous recordkeeping and the use of best practices.

By taking the time to learn the processes involved, breaking down each part of the finance model into manageable components and ensuring accuracy through rigorous testing, you can build a reliable and robust financial model that meets your needs.

Below are the core strategies for building a financial model and the best practices that can help you ensure success:

Summarizing Core Strategies for Building Financial Models

  • Understand the components of a financial model
  • Break down the model into parts
  • Create the model in Excel
  • Test and adjust the model as needed

Best Practices for Ensuring Successful Financial Models

  • Make sure the data is accurate and relevant
  • Develop a plan to ensure accuracy of the input data
  • Perform frequent testing and review of the model
  • Include clear documentation and a step-by-step guide

Whether you are a seasoned financial analyst or someone just starting out, building a financial model can be a daunting but rewarding task. Consider these strategies and best practices when building your own financial model in Excel and you'll be sure to see success.

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