Modeling discipline
Checks and error traps
Build balance, cash and equity checks that flag errors the moment they appear.
Learning objectives
- Build balance, cash and equity reconciliation checks
- Turn checks into error flags with a tolerance and a single model status
- Diagnose what a failing check says about where the error is
Every model contains errors at some point while it is being built. Good modelers find theirs before anyone else does, because they build checks: formulas that should be zero when the model is internally consistent and that change as soon as it isn't.
The three statements give you natural identities to test: assets equal liabilities plus equity, the cash flow statement explains the change in balance-sheet cash, and equity rolls forward by net income less dividends. A Checks tab that tests all three, with one status cell at the top, is standard in banking and corporate models.
Balance = Total assets − (Liabilities + Equity) · Cash = BS cash − CF closing cash · Equity = Opening equity + Net income + Dividends paid − Closing equity
- Dividends paid
- as shown on the cash flow statement, a negative number
- Tolerance
- a small threshold (e.g. 0.05) so rounding doesn't raise false alarms
Included with a Formula Quest membership
The rest of this lesson is for members. Members get the full lesson, including its 3 graded exercises, and every other Finance Quest lesson.