Review of financial models

I don't know how many people here have to review huge financial models quite frequently (rather than create them). For my last transaction I was reviewing a lot of financial models on very short timelines - my usual "system" is to go line by line through the financial statement and trace precedents and see how the various items have been built. I also have a few macros (from the internet) to compare changes made between versions etc etc.
However, I would be interested in knowing what other "reviewers" do in terms of devising a system or process to review models esp. on tight timelines.
Thanks in advance.

 

Mind linking to some of the macros you found?

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I just googled. Not sure where I picked them up from (been some time), but if I found them I am sure you can as well. 1. Compare two worksheets and list all the differences (good to compare two versions) 2. A trial software which does the same thing, but for a workbook as well - 3. A macro which can list all precedents in a selection (the usual Trace Precedents does it only for one cell)

I guess not too many people on this board review models. Or maybe I put the topic in the wrong area of the forum!

 

Maybe some of the other PE guys will comment. I don't use any special software to review models, I just look through the model as an overview to see how its set up (sometimes something will pop up) and then work back from the results (usually returns/cashflows) back to the assumptions. Similar to your approach I suppose.

I'm in REPE so our models are a bit different and most models we do deal with the same thing, an investment scenario, so experience helps as strange results will catch your eye given familiar deal parameters.

If its internal, the way our team works is whomever made the last set of changes would put a few bullet points in the email circulating the latest version.

 

Big fan of F11, anything looks a bit off, go into more detail. Very quick way of seeing odd assumptions.

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Best Response

Experience helps you develop the "MD/Partner eye" (picking up issues at first glance), one of the most spooky abilities I've experienced.

Some hints from my own (unfortunately largely forgotten) experience:

1) Abstraction: Before starting print PL/BS/CF (and very basic sheets, depending on model, i.e. uses/sources, sensitivity etc). Less is more. Have an undisturbed good look at them, high-level, down and across.

  • Any odd developments? margins, CAGRs, YoY, actuals vs projections. Highlight them. Later, after your deep dive comeback to them... can you explain them now?
  • Usual sanity checks: can you explain growth, margin compressions/Expansions, why cash/assets or whaterver grows? how can they pay debt? KPIs, multiples, IRR in line? etc etc etc,.

2) Find the logic and go with the flow: Then go step by step. Find the logic behind the model and particularly how assumptions flow into side calculations and then financials. Spend more time on the major drivers (operational/economical/financial), cost of capital and discounting and cascades on lbos. Once a good grip of these everything should flow smoothly into basic sheets (PL/BS/CF/Financing).

3) Going back to the surface: Check output sheets and analysis (e.g. Accretion/decretion, value a different prices, sensitivities, etc.). If circularities on, disconnect/divert them and see if playing around still make sense. Personally, the less macros the better, as I have seen quite "sophisticated" macros that were just not necessary, a nightmare to manage/check and at the end plainly delivering wrong outputs.

4) The tedious work: Finally, I hope you don't have to check calculations. If so, make sure formulas are correctly copied, make random checks, in doubt rebuild operations on the side (perhaps simplified and check if results are consistent), check links and dedicate more time to the complex calculations (where for most analysts gets rocky).

Hopefully a disciplined model system (following conventions and model hygiene) will make things easier and save you time.

5) Some final wisdom Give feedback to your juniors, they'll appreciate it and you'll benefit from more robust models. Remember: "Junk in, junk out"... the model is only as good as the assumptions. and finally: simplicity is beauty

Good luck

 

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