Financial Modeling Color Formatting

Article byRatnesh Sharma
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Color Formatting in Financial Models

Color Formatting in the financial model refers to the display of format or information that assists the reader or user in identifying specific pairs of information & in correlating things quickly. The most critical parameters for color formatting are consistency, efficiency & clarity. Lack of any of these may not serve the purpose of providing the financial model.

Financial Modeling Color Formatting

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Correct and proper color formatting in financial models helps to make it more user-friendly and easier to interpret. They give the model more clarity if the colors are used in a balanced and strategic manner. The main aim of the process is to make it visually appealing and easy to identify and use.

Financial Modeling Color Formatting Explained

The process of color formatting in financial models is the technique that analysts use to enhance the use and clarity of presentation of financial models and spreadsheets. The colors make the model easy to interpret and use. The numerical data can be identified as related to historical, current or future forecast based on these colors.

Using colors to highlight any specific data type makes the entire document visually appealing and easy to use. The colors also segregate different categories of data that should catch the reader’s attention.

Color formatting is done to the cells & data within each financial model. The most commonly used color formatting is as follow:

  1. Blue: For hardcoded (i.e. typed) inputs. It can be some historical information or something which you assume or the key driver (such as rate of interestRate Of InterestAn interest rate formula is used to calculate loan repayment amounts as well as interest earned on fixed deposits, mutual funds, and other investments. It is also used to calculate credit card interest.read more, rate of tax, output, etc.) used in the model.
  2. Black: For calculation & cell referencesCell ReferencesCell reference in excel is referring the other cells to a cell to use its values or properties. For instance, if we have data in cell A2 and want to use that in cell A1, use =A2 in cell A1, and this will copy the A2 value in A1.read more within the same sheet (i.e. all formulae are in black font)
  3. Green: For references made to other sheets. However, one may keep the color format here as black & may avoid this color.
  4. Red: For external linksExternal LinksExternal links are also known as external references in Excel. When we use a formula in Excel and refer to a new workbook, it is the external link to the formula. In other words, an external link is when we give a link or apply a formula from another workbook.read more outside the working file.

Thus, color the cell & contents within each cell helps the readers. This also helps in linking the flow of different pieces of data within different sheets & files.

Example

Below is an example that shows how the models are prepared using various colors and how the reader or user of the model will understand what kinds of data the colors are trying to portray.

You can download this Financial Modeling Color Formatting Excel Template here – Financial Modeling Color Formatting Excel Template

Let’s take a classic template for understanding:
Financial Modeling Color Formatting Template 0.1

Projected Financials:

Template 0.2
Financial Modeling Color Formatting Template 0.3
Template 0.4
Financial Modeling Color Formatting Template 0.5

Explanation:

  • We have used the color codes as defined in the topic.
  • The flow is maintained for assumption, calculations & summary.

Shading Color Formatting

Shading color is another type of formatting using colors that help in distinguishing between different parts of the excel, mainly the heading and subheadings from the calculation details. This provides a quick way to identify the main totals and subtotals easily. Let us go through the method of shading.

Importance

Given below are the importance of using colors for the purpose of formatting data in the cells.

  • Color formatting helps easy identification of cells.
  • It differentiate the cells based in direct input and calculation, which helps in identifying where the user may make any changes.
  • A standard is set for readers for the identification of information.
  • It gets the reader involved in the working of the model.
  • The working file becomes more attractive & appealing.
  • A consistent flow can be maintained for enhancing the understandability of the model.
  • The user can easily identify which cells have formula in them and which cells only display the result.
  • It creates a visual hierarchy, which makes it easy to navigate within the sheet. The headers, titles, headings and subheads should be colored differently for easy identification.
  • Since the assumptions and real data are colored seperately, it helps users understand the effect of different types of data in the final output.
  • Since the colors are also visible in a printed format, it becomes useful even in a hard-copy form.

Thus, the above uses make the entire process of color formatting in the models very crucial. However, there should be a proper balance in the format, without any overuse of colors.

Recommended Articles

This has been a guide to what is Financial Modeling Color Formatting. We explain the process with example, the process of shading and its importance. You may find more about finance from the following articles –