The art of designing financial models

Based on a review of the author's own experience, a number of principles are proposed for designing financial models. The focus is on models used in the evaluation of investment decisions, but the aim is to devise model design principles of general application. Three principles are identified as crucial: well-planned and consistent layout; separation of input, calculations and results; and designing for sensitivities. Turning to the design of generic models, two basic designs are put forward for models used for the evaluation of investment decisions, each tailored to the different sorts of flexibility required in different circumstances.