Understanding the Fast Financial Modelling Standard
Understanding the Fast Financial Modelling Standard
Financial modeling is a key requiremnet of all businesses. It keeps track of a business’s financial situation, forecasts future financial performance and guides in strategic planning and making data-driven decisions. The crux of a financial model is a mathematical model comprising of many accounting equations, that is capable of representing financial data relationships under various scenarios. But as businesses grow, scenarios become more difficult to translate as mathematical models. Eventually, financial models become so complex, opaque and difficult to understand that only financial modellers are able to understand it, which is not the best practice.
Financial modelling‘s importance lies in the fact that it makes understanding finances easy. It is required by company owners to make strategic decisions and by investors to assess business performance. But as it becomes complex, they are no longer able to understand it. This terrible situation dims the effectiveness of the financial model. To solve this problem, some experts in the financial modeling field introduced a financial modeling standard called the FAST modelling standard. The motivation behind this standard was to enable all spreadsheet users to use financial model easily without any complication. FAST standard is a 72 page document with an extended list of individual modelling principles. This article briefly explains what is the FAST modelling standard and how you can implement it in your financial model.
What is FAST Standard?
The FAST Standard is a set of principles ensuring financial models are Flexible, Appropriate, Structured, and Transparent. It promotes models that are adaptable, suitably complex, easy to navigate, and clear to understand, enhancing the consistency and reliability of financial analysis.
Reasons to adopt FAST standard
The financial model becomes complex and difficult to change due to a number of factors. Below is the breakdown of some major reasons to adopt FAST standard.
- Complexity and Inaccessibility: As the business grows, its operations become diverse, and more and more variables need to be added to the financial model. If these new variables are added without proper standard procedure, the financial model becomes highly complex and un-understandable. This added complexity makes it difficult for stakeholders to use and audit the model effectively.
- Inflexibility: A financial model is made for different purposes. Some financial models are made as all-in-one financial models that are well adjusted to fulfill all purposes. On the other hand, some financial models are made to address a single issue. Obviously, special-purpose financial models are not flexible, they can not facilitate other issues. There is a need for a standard that even special purpose financial models be able to be adjusted to address purposes other than their root causes.
- Lack of Standardization: Without a standard, every business may make its financial model in its own way. This makes a model difficult to understand for the stakeholders as they may be working with different businesses and if each business may have a different model approach, there will be a lack of consistency. It can lead to inconsistencies and errors. For that reason, having a standard to make a financial model was inevitable. The need gives rise to the FAST modeling standard.
By adopting the FAST modelling standard, organizations can overcome these hurdles and create robust financial models that can grow according to business requirements without becoming complex. FAST standard enhances the accuracy and clarity of financial statements, ensuring they reflect true historical performance and facilitate better strategic decision-making.
Principles of FAST Modelling Standard
According to FAST modelling standard, a model should have these four key characteristics to be called well aligned according to the FAST standard. Adopting FAST can transform corporate finance functions by enhancing the quality of financial modeling through improved level of accuracy and data integrity. The 4 key principles of FAST standard are as follow:
Flexible
F in FAST standard stands for Flexible. It ensures that financial models are made in such a way that they can accommodate future changes easily. Businesses grow, and they face new challenges and opportunities; they need to adjust new variables in their models as per they requirements. Flexible prinicple ensures that it happens perfectly. Flexibility feature in financial models saves time and resources and they let financial professionals to make changes in financial models in a jiff.
Appropriate
A in FAST standrd stands for Appropriate. Approprite principle ensures that financial model should be well-balanced. Neither it should be super complex that make it difficult to understand. Nor, it should be oversimplified that it fails to provide critical insight. It should be appropriate. Try to make financial model as simple as possible but make sure that it addresses all critical insights requirements. Financial model should be at perfect balance to ensure that it is both practical and functional.
Structured
S stands for Strucutred in financial modelling standard, FAST. Structured principle ensures that all information is organized logically and consistently. Structured model ensures that both experienced modellers and users can navigate through model and understand it with ease. Good logical structure in an effective model means it has a clear separation of inputs, calculations, and outputs, which enhances the ease of audit and review. A structured approach also helps to find if there is any calculation or logical error.
Transparent
And finally T stands for transparent in FAST modelling standard. Transparent principle states that finanical model should be clear and understandable for everone. Financial model builder to naive end users, each one should be able to understand what the model is doing when they observe it. Transparency is achieved through straightforward formulas, well-defined assumptions and clear documentation. Transparency builds confidence in financial model working. Moreover, it makes communication with stakeholders easier. Financial model should be so transparent that even a naive person gets the idea of structure when he starts interacting with financial model.
Key Components of the FAST Standard
FAST standard comprises of several fundamental components to ensure that financial models fulifill the requirements of FAST modelling standard. Below are the key components of FAST modeling standards.
Model Structure
A proper hierarchical arrangement in the model ensures easy navigation and understanding of the financial model. Make sure that model layout throughout the workbook and within individual worksheets must be consistent. Different layers such as inputs, calculations, and outputs layers should be designed distinctively and hierarchically. Input should be isolated from calculations worksheet layers. Changing input dta should not require any other change in core model structure. Group calculation modules separately to ensure clarity in the structure. Output layer should be well organized and should be able to provide summarized and detailed information as per the requirements.
Formula Construction
Keep same formula for similar calculations to reduce errors and simplifying auditing. A very simple example for this can be to add values in Excel for one column can be
- =A1+A2+A3+A4+A5+A6+A7+A8+A9+A10
- =Sum(A1: A10)
You just need to make sure that you are using same format of formula for a calculation in the complete financial model to keep a consistent structure.
Moreover, make sure that formulas are as simple as possible. Unnecessarily complex formula where implemented is hard to check and more prone to errors. Break down complex calculations into simple and small calculation logic. Avoid adding hard-coded numbers in formulas. Formula must be robust that they are accurate across all expected values and works fine with any value entered.
Scenario Management
Assessing different scenarios in financial modeling is the key benefit of a robust financial model. Make sure, that your financial model is capable of scenario building. However, it should be done without changing the structure of the base model. Scenario analysis is done by entering different inputs and observing how these different variables effect the outcomes. A FAST aligned financial model has straightforward addition, removal and modification of scenarios without extensive model restructuring. It enables the users to explore what-iff analysis with a minimal effort.
Data Validation and Error Checks
Check each step twice when making your financial model. Ensure your modelling logic is fool proof. Make sure to implement automated error checking in the financial model. Forexample, you can set a value range for any variable if possible. Additionally, you can include type checks to ensure no one can add text in number column. Utilize error trap formula so that your financial model shows you properly that what is the error, instead of just getting broke. Moreover you maintain data consistency throughout the financial model. Evaluate on human basis each and every output given by the financial model atleast once to make sure the formulas are implemented correctly.
By following FAST modeling standard, financial models become easy tools to understand finance and make right decisions. Moreover, FAST implemented financial models ensure quality improvement, reliabilty, precision and ensure adaptability in the modeling process.
Implementing the FAST Standard
The FAST Standard simplifies the process of tracing the assumptions and calculations that underpin each financial line item in your outputs. Implementing FAST modelling standard can significantly enhance quality and reliability of your models.Interestingly, making your financial model adhere to FAST standard is super easy. Here is a structured approach to adopt FAST standard:
Assess Current Modeling Practices
Start with observing your current financial model carefully and identify any area that does not align with FAST principles. Look for issues like if there are unnecessary overcomplicated forumlas or does your financial model is documented correctly. Ensure that data is properly structured. Fix all these issues to align your model with FAST standard.
Train Key Personnel
You need to train the person responsible for creating and maintaining financial modl to be well versed in FAST starnard. Training key personnel is necessary as he will be responsible to make your financial mode
Standardize Inputs and Outputs
You need to create separate templates for inputs and outputs in your spreadsheet design that aligns with FAST modelling standards. The standardization procedure significantly enhance the structure and transparency of models.
Implement Documentation Practices
Make sure that your financial model is documented from the very beginning and any changes in the financial model must be reflected on model documentation. In the documentation, you need to mention assumptions, sources of data, and the purpose of each model component. Clear documentation helps to maintain transparency and aid in future model revision.
Revise the Models Gradually
You need to revise your current financial models to FAST standards. Do it for all financial models for your business. Best practice is to update the models incrementally rather than all at once. Once your model is ready, assess it carefully to make sure it meets the FAST modelling standards.
Frequently Asked Questions:
Why should an organization adopt the FAST Standard?
Adopting the FAST Standard helps ensure that financial models are easy to use, audit, and maintain. It enhances the accuracy and efficiency of financial decision-making processes by standardizing the approach to financial modeling across the organization.
How does the FAST Standard improve financial modeling?
The FAST Standard improves financial modeling by ensuring models are built with a logical structure, clear documentation, and consistent methodologies. This makes models easier to navigate and reduces errors and the time needed for modifications.
Who benefits from implementing the FAST Standard in financial modeling?
Financial analysts, CFOs, and other stakeholders involved in financial decision-making benefit from implementing the FAST Standard. It also aids investors and external auditors who rely on clear and accurate financial models to assess company performance.
Conclusion
The FAST Financial Modeling Standard enhances the clarity, consistency, and efficiency of financial modeling across organizations. By adopting its principles of flexibility, appropriateness, structure, and transparency, businesses can create models that are easy to use and adaptable to future changes. This approach not only simplifies financial modeling but also supports better strategic planning and decision-making, ultimately leading to improved business outcomes and sustainable growth.Elevate your financial modeling with Oak Business Consultants. Specializing in the FAST Standard, we transform complex data into clear, actionable insights. Ready to enhance your strategic decision-making? Contact us today to explore how our expert services can benefit your business.