A project requires 2 years of detailed monthly forecasts followed by 3 years of less detailed annual forecasts. That’s driven by the quality of the forecast information available. There is a requirement to present the calculated results on an annual basis. How should the financial modeller prepare their timelines to cover the 5 years? Some options:
1. Single timeline; monthly throughout;
2. Single timeline; annually throughout;
3. Single timeline; monthly for 2 years, annual for 3 years; or
4. Multiple timelines: monthly for 5 years; annual for 5 years
5. Any other option
What help does financial modelling guidance provide? The ICAEW’s Financial Modelling Code refers to multiple timelines: “place any secondary or tertiary timelines near each of the values to which they relate so they can be viewed together without scrolling”. It also refers to single timelines that accommodate different time periods: “Present any distinction clearly when multiple timelines are included in one axis (e.g. a change of periodicity from monthly periods to semi-annual periods), and keep formulas consistent along that axis.”
The FAST Standard points to multiple timelines as being necessary noting the importance of any primary time ruler encompassing the period of time covered by secondary time rulers: “In these cases, ensure that the primary time ruler encompasses the higher-resolution time period such that summarisation of data from both periods can be effected more easily” (FAST 1.01-04).
(i) How would you design your financial model to manage the requirement set out above; and
(ii) What additional guidance would be helpful?
In particular, I’m interested to hear from those that might advocate a single timeline that converts from monthly to annual two years in. As far as I can see, the Financial Modelling Code recognises it as a possible design solution and the FAST Standard does not explicitly rule it out.
Join the discussion on the FAST Standard Group
Author: Andrew Berkley