Another one of the components in building a good model is historical analysis and forecast ratios....

Another one of the components in building a good model is historical analysis and forecast ratios. Should this part of the model be hard coded numbers or formulas?

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Expert Solution

Having formula instead of hard-coding is always better when building a financial model by forecasting historical prices and financial ratios because of the following important reasons:

- Checks become easier - The chances of manual errors are more in case of hard-coding than that in formulas. Also, the checks and correction of any error become way easier.

- Easy to understand and interpret- When a financial model has formulas in it we can clearly analyze where the results are coming from by just looking at the formulas from the cells. Also, for an outside person, it is easy to understand the financial model and interpret the results.

- Easier to add more Data in the future - We know that we need to continuously add data to do effective forecasting. So with forecasting models with formula in it, we can always add numbers and the outputs will change automatically in the result cells and no additional calculation will be required.

However, there can be some hard-coded assumptions in the financial model which should be mentioned clearly and the hard-coded cells can be separated from the formula cells by coloring them but wherever possible we should always go with the formula and not with hard codings.

jeff jeffy answered 9 months ago

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