Building assumptions
A financial model can be defined as a collection of mathematical assumptions for the purpose of projecting the results, financial position, and cash flow of a business into the future, often with the aim of arriving at value for the business.
Building reliable assumptions is critical to the success and viability of your model.
The following is a quick checklist. Your assumptions should be as follows:
- Based on actual historical figures
- Realistic
- Clearly explained
- Easily verifiable
- Properly documented
- Visually distinguishable in your model (usually with a different font) from calculated cells
Let's dive deeper into the history and foundation of building assumptions.
Historical data
The foundation for building assumptions that we will use to forecast the company's results for the next 5 years is the company's historical financials. You will therefore need to obtain 3 or 5 years of the company's financial...
