The concept of separation is to group like with like. This enables better understanding of the
- inputs required,
- the calculations to be performed and
- the results obtained.
It also reduces the risk of omitting inputs or accidentally overwriting formulae.
When planning your financial model, you should work on a piece of paper first. Draw a quick picture like the one below and brainstorm what each section requires, BUT you must think of it backwards.
By working backwards you are more likely to cover all the issues.
When doing this, ask yourself
- what reports/ results do you want (speak to the person requesting the model/ think of the type of questions they usually ask etc),
- what calculations are required to achieve the results (so if you need monthly results, your calculations should also be monthly), and
- what inputs are required to perform the calculations.
By think through these SEPARATE section, the model will be better planned and you will already be half way to meeting the Separation concept.
Getting back to the concept of Separation, the best way to achieve it is to clearly differentiate the
- calculations and
This can be achieved by placing these areas on different sheets (or areas of the spreadsheet) and clearly identifying and labeling them.
The video clip below shows some of the things you should think of
To follow along go to 1.14, 1.15, 1.16 and 1.17