Financial modelling is the most sought after skill in the corporate world. As we develop financial models, there arises the need to document every model so as to facilitate review or reference by us or other end users who use them in the future
But why do we document a financial model? This will be the question raised by the model developers.
Here is my personal experience when i was using a financial model.
I found it very difficult to reuse the financial model although it was me who authored the model. I could not recall the formulas used in the model. Neither could I remember the purpose for which i developed the model. It was then that i realized the importance of documenting a model. It is also necessary that we have to pen down the documentation then and there without any laziness so that the same can be referred back in the future. This will add value to those long hours of hard work that we put in to model development.
There were different versions of the same model to which i made several updations. Hence i had to update the date of change and the nature of changes i have made to the model. As i have used different color codes for various inputs, i had to explain each color code so as to highlight those cells which contains predefined inputs and those cells which needs to be forecast.
The model should also explain the macros, if any, are used in the model and the purpose for which the macros were injected into the model. I also felt the need to document every assumptions and basis of those assumptions upon which i have built the model. The document should also state the target audience for whom the model is intended to be built. The document should also outline the purpose for which the model is built , say, for instance, project finance, credit analysis, decision making etc.
As I am distributing the model to different users, i believe that the model should be documented in such a way that the model is reusable by all the end users in an organization and should be readable by even a layman. Documentation of a financial model is necessary for the reason that it removes the redundancy of users and it will also help the organization to avoid the dependency upon a single person to edit or to maintain the financial model. It could also help the user to identify the strategy involved in model development.
The organization can easily carry out the audit on the financial model by just using the documentation provided by the developer. As there could be many end users to a single financial model, the documentation by the model developer would render the financial models to be very useful to its stakeholders to use and reuse the financial models and also make suitable changes to the financial model from time to time.