5 Tips for a Better Cash Flow Model

25/08/2016 | Tobias Bitterli, Product Owner & Founder greenmatch
Tags: cashflow

How can you ensure the quality of your financial models? Without a doubt you know the problem: For almost every transaction, the existing cash flow model has to be adjusted to individual requirements. In the best case, the responsible financial experts are available and can adjust the model. It is, however, also quite possible that they are not available straight away or that they have left the company, making adjustments much more complex. Add to this that missing quality checks can mean that mistakes easily remain undetected and are carried along into subsequent projects. Furthermore, a comparison of various investment objects becomes difficult due to the continuous adjustments to the financial model.

A certain amount of uncertainty remains: Are the returns you calculated two years ago still comparable to the current results? Do the adjustments have unintentional side effects or has a formula error crept in somewhere? Often, such mistakes are subtle and are discovered too late or not at all. In the worst case, model mistakes lead to wrong investment decisions with substantial financial consequences.

How can the quality of your financial models be increased?

1. Assessment via automated tests
A reliable discounted cash flow model (DCF) requires tests that run automatically and ensure that calculations are correct even after changes have been made to the financial model. In this way, mistakes can be avoided and the success of an investment guaranteed.

2. Multiple eyes principle
In order to avoid mistakes in implementation, changes must be checked and confirmed by several people.

3. Ensuring continuity of development
The continuity of further development of a discounted cash flow model can be improved with standardized processes, complete documentation and an agile development team.

4. Confirmation by independent parties
In order to confirm the reliability of DCF software, one’s own certainty about the correctness of the calculations is not enough. It is at this point that assessments by external experts, who lend credence to the software with their reviews and reports, come into play.

5. Validation by community
A large, active community that successfully works with a financial model app on a daily basis is a good indicator when it comes to the reliability of an application.

How we at green[::]match ensure quality

We want to ensure that cash flow models remain comparable despite constantly changing regulatory and market-related demands and that certainty about the correctness of calculations prevails even after adjustments are made.

For this reason, we have geared our development process entirely towards these goals:

  • All changes in the source code undergo a multistage quality check. Before changes are incorporated into the existing code base, they are checked and accepted by several people.
  • Thousands of automated tests verify each individual calculation. These tests are activated by any change in the source code and thus guarantee that the existing logic continues to function flawlessly.
  • In addition, integration tests based on hundreds of reference projects make sure that the interaction of the individual components functions perfectly.

In order to verify the correctness of the green[::]match software by independent parties, green[::]match has appointed Ernst & Young AG to review the software based on three projects. Read the review memorandum here >> (login required).

Furthermore, we can count on a community of hundreds of users, who together have already evaluated over 1'000 projects with a performance of more than 10 GW. Due to the suggestions and the extensive know-how of this community, we are able to make green[::]match even better with our weekly releases.

Conclusion:

The creation of cash flow models is a complex process and bears some risks. Manual mistakes can have substantial financial consequences:

  • Time-consuming adjustments
  • Wrong investment decisions
  • High development and audit costs

Efficient measures to guarantee top quality standards are required. Outsourcing to a professional provider such as green[::]match can reduce these costs and ensure the highest measure of quality.


Author

Tobias Bitterli
Product Owner and Co-Founder of green[::]match


About green[::]match

green[::]match is the leading web-based investment application for renewable energies. The highly flexible application models the complete financial project lifecycle of your wind, photovoltaic, hydro and biomass projects and optimizes your workflow. Its collaborative and integrative approach allows projects to be analyzed and executed more efficiently, comprehensibly and reliably. Our solutions empower project developers, investors and banks in making reliable decisions and in increasing the success of their transactions. green[::]match is an innovative model to limited traditional spreadsheet applications.

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