1. Spreadsheet Engineering
Principles of Development and Design

2. What is a good model? The model is objective-driven & realistic
Meets the decision-support needs of the end-user
Uses an appropriate set of inputs and outputs
The model is easy to use and understand
Clear logical flow: non-fragmented structure
Well documented and strategic use of formatting
Formulas are readable and easy to update

3. A model is good when… The model is free from quantitative errors
No erroneous formula calculations or finance logic
The model is flexible
Robust formula and layout design generate correct outputs when assumptions are changed
Easy to modify/extend layout to include more dimensions of the problem

4. Steps in Creating a Model
Understand the decision. Define and structure the problem
Objective of model
What questions must be answered?
What key outputs are needed?
What is the time horizon of the problem?
Target audience
What type of decisions do they need to make?
What level of detail is needed?
What type of interaction and controls will they need?

5. Steps in Creating a Model
Define modules and list of input and output variables for the model
Input assumptions and sources
Decision variables
External data and data structures
Key performance measures
Charts, tables, visual aids
Structural relationships/Intermediate calculations
Documentation

6. Steps in Creating a Model
Understand financial and mathematical aspects of the model
Appropriate line items for free cash flows
Matrix operations
Assumptions of key performance measures, plugs

7. Net Present Value (NPV)
NPV Rule 1: A project is worthwhile if NPV>0
Excel function: =npv(rate,value1,value2,…)
calculates

8. DuPont Ratio Analysis Framework

9. Design the Model Plan your layout! Consider how
On paper, map out the different sections of your model and their planned locations within the workbook
Consider how
Readable the model layout will be for the user
Easy it will be to modify the assumptions
Easy it will be to extend the model
Inserting/deleting new rows and/or columns
Copying similar formulas
Map out steps for more complex interactive logic

10. Data Input Layout Strategies
Isolate constants into their own cells
Do not use constants in formulas unless number has a mathematical foundation (e.g. p, 1 in percentage calculations)
Don’t allow an input value to be entered in multiple places in the model
Organize decision variables and model parameter/assumptions logically into separate physical areas or color schemes
Consider pros and cons of creating separate worksheets for inputs

11. To Reduce Formula Errors
Use relative and absolute cell addressing where appropriate
Set up common structures in different parts of the model (e.g. same row labels, order and vertical positioning)
Minimize linking formulas across worksheets
Split complex formulas into multiple intermediary formulas

12. Steps in Creating a Model
Create the model
Write any necessary VBA code
Test the model
Compare to a second calculation method to verify accuracy
Ask intuitive questions: Do numbers make sense?
Test different input assumptions including extreme values
Use Formula Auditing Toolbar
Protect the model
Excel’s Data Validation

13. Steps in Creating a Model
Document the model
Assumptions, inputs and outputs
Conditional Formatting
Cell comments
Worksheet with model description and version updates
Range names
Update model as necessary