In the world of financial analysis, precision, clarity, and efficiency are paramount. Over time, several methodologies have emerged to ensure that financial models are not only accurate but also user-friendly and adaptable. One such methodology is the FAST Standard, a widely-recognized approach to financial modeling. FAST stands for Flexible, Appropriate, Structured, and Transparent. Here, we'll delve into what the FAST methodology is all about and why consulting agencies, like ours, swear by it.
1. Flexible
A good financial model should easily accommodate changes. As businesses evolve, models should be nimble enough to account for different scenarios, such as changing market conditions, regulatory environments, or shifts in strategic direction.
Scenario Analysis: FAST promotes building models that can handle various scenarios. This enables decision-makers to assess potential outcomes and plan accordingly.
Modular Design: Each component or module (e.g., revenue, cost, tax calculations) is built separately but integrates seamlessly. This way, if a single element needs adjustment, the entire model doesn’t need a revamp.
2. Appropriate
The level of detail in a model should match its intended use. An over-complicated model may be just as ineffective as an overly simplistic one.
Purpose-driven: Every aspect of the model should serve a purpose. Unnecessary complexities should be avoided.
Tailored Models: A model designed for strategic decision-making might be vastly different from one meant for day-to-day operational decisions. Recognizing the purpose and audience is vital.
3. Structured
A structured model is both intuitive and navigable. It ensures that users can follow the logic of the model easily, making it more reliable and robust.
Consistent Formulas: Using consistent formulas across similar data reduces errors and makes the model more understandable.
Clear Flow: FAST recommends a clear flow of information, usually from left to right and top to bottom, much like reading a book. This ensures that users can easily follow the model's logic.
Separation of Inputs, Calculations, and Outputs: Inputs (assumptions), calculations (processing), and outputs (results) should be distinctly separated. This enhances clarity and reduces the likelihood of errors.
4. Transparent
Transparency ensures that the assumptions, calculations, and outputs in the model are clearly visible and comprehensible.
Documentation: Key assumptions, sources of data, and rationale for specific choices should be well-documented within the model.
Avoid Hardcoding: Instead of embedding fixed numbers within formulas, FAST encourages using clear input cells. This way, it’s evident when a figure is an assumption rather than a calculation result.
Simple Formulas: Instead of complex, multi-step formulas, the methodology promotes breaking them down into simpler, more understandable steps.
The FAST approach to financial modeling provides a robust framework that emphasizes clarity, flexibility, and user-friendliness. For consulting agencies, adopting this methodology not only boosts the reliability of our models but also enhances our clients' trust in our work. By adhering to the FAST standards, we ensure that our financial models serve as reliable decision-making tools for businesses, ensuring sustainable growth and forward momentum.
