Color Formatting in Financial Models
Color Formatting in the financial model refers to the display of format or display of information that assist the reader or user in identifying certain pairs of information & in correlating the things easily. The most important parameters for color formatting are consistency, efficiency & clarity. Lack of any of these may not serve the purpose of providing the financial model.
Color formatting is done to the cells & data within each financial model. The most commonly used color formatting is as follow:
- 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., rate of tax, output, etc.) used in the model.
- 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. within the same sheet (i.e. all formulae are in black font)
- Green: For references made to other sheets. However, one may keep the color format here as black & may avoid this color.
- 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. 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.
Financial Modeling Color Formatting Template
Let’s take a classic template for understanding:
- We have used the color codes as defined in the topic.
- The flow is maintained for assumption, calculations & summary.
Shading Color Formatting
- Shading color formatting means to apply a similar texture to each heading, or each sub-heading, or each featured line item. Choose one color format for each of these & make sure you maintain the same format for each working sheet within the file.
- Heading means name of the company & name of the working sheet. For Example, the Name of the company is “ABC Inc” & the name of the working sheet is “Balance SheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.” or “Profitability Statement” or “Discounted Cash FlowDiscounted Cash FlowDiscounted cash flow analysis is a method of analyzing the present value of a company, investment, or cash flow by adjusting future cash flows to the time value of money. This analysis assesses the present fair value of assets, projects, or companies by taking into account many factors such as inflation, risk, and cost of capital, as well as analyzing the company's future performance.”. Heading can be just bold & different font types with underline & a little higher font size. One may prefer to keep a certain color in the background.
- Sub-heading means the reference cell for the columns, i.e. particulars, years, etc. The subheading should ideally be light grey with the black font for the cell. One may prefer a light blue color with black font.
- The featured line item means the important area or important line item in the file. It can be a total of assets or total of liabilities or profits or final answer, etc. One may keep any color with bold font.
Importance of Financial Modeling Color Formatting
- Color formatting helps easy identification of cells.
- A standard is set for readers for the identification of information.
- It gets the reader involved in the working of the model.
- The woking file becomes more attractive & appealing.
- A consistent flow can be maintained for enhancing the understandability of the model.
This has been a guide to Financial Modeling Color Formatting. Here we discuss the best color schemes for financial modeling along with its importance and downloadable excel template. You may find more about finance from the following articles –