We often hear from “I can’t build a financial forecast as I am not an accountant…”.  Well, to build a financial model, the level of accounting and Excel knowledge you need depends on several factors, but for most business operators and founders, a basic working knowledge of accounting and Excel is enough to get started and build a pretty robust forecast. The importance lies in understanding the purpose of the model, its users, and having a clear grasp of the business’s drivers. Financial modelling is a skill that develops over time, and the technical requirements often become easier as you gain more experience.

Let’s start by understanding the role of accounting in financial modelling.

Accounting provides the framework for financial statements—the income statement, balance sheet, and cash flow statement. These are the core components of any financial model. If you can read and understand these documents, you already have the foundation to build a model. The goal is not to become an accountant, but to have enough knowledge to represent the financial health of the business accurately.

As a minimum, you need to know how to categorise transactions into revenues, expenses, assets, liabilities, and equity. This means understanding how income and expenses affect profit, and how balance sheet items like cash and inventory move in relation to each other. More advanced accounting concepts—like deferred revenue, depreciation, or tax provisions—are important but can be learned as you grow more comfortable with modelling.

That said, you don’t need to master accounting. A deep understanding of accounting standards or the minutiae of tax regulations isn’t necessary unless your model is intended for technical accounting purposes, such as preparing a tax return or auditing a business.  For most financial models, your aim is to forecast future performance, track business metrics, or present a potential investment opportunity.  In these cases, understanding the key drivers of revenue, expenses, and cash flow is more important than knowing the technicalities of accounting.

The real focus should be on understanding the purpose and audience of the model.

The needs of a startup founder preparing a pitch for investors are different from those of a CFO creating a detailed budget. If you’re building a financial model to show profitability and growth potential, you’ll need to focus on revenue drivers, cost structure, and key performance indicators (KPIs) like customer acquisition costs or margins. On the other hand, if your model is for internal management, you’ll need to go deeper into operational details, cash flow, and working capital. What matters most is tailoring the model to its use, not necessarily having a deep understanding of every accounting principle.

When it comes to Excel, most people assume you need advanced skills to create a financial model. That’s not entirely true. You need to know how to use Excel efficiently, but you don’t need to be an Excel expert to start building models. Basic Excel skills like formulas, formatting, and referencing cells are enough for the majority of the work. Financial models rely heavily on simple but accurate formulas, good organisation, and logical structure. Mastery of complex Excel functions, like array formulas or macros, can enhance a model but is not a prerequisite. You can build strong, reliable models with fundamental Excel functions like SUM, IF, and VLOOKUP which give you the flexibility and ability to scale a model up.

What’s we think i more important than Excel mastery is the layout and structure of your model.

A good model is easy to follow, has clear assumptions, and allows for quick updates. You need to focus on presenting your data clearly, ensuring consistency, and making the model flexible. Using simple features like conditional formatting or data validation can help ensure your inputs are error-free. The real challenge is attention to detail, not Excel complexity.

As you gain more experience with financial modelling, your Excel skills will naturally improve. Over time, you’ll discover shortcuts, functions, and techniques that make your modelling faster and more efficient. You might eventually start using pivot tables, index-match formulas, or even basic macros, but this will come with practice. Early on, there’s no need to overwhelm yourself by thinking you need to know every Excel trick to build a solid financial model.

The common misconception is that you need to be either an accounting expert or an Excel wizard to succeed in financial modeling. But in reality, the more important skills are understanding the financial drivers of your business and the context of your model. The best financial models are not necessarily the most complex, but the ones that clearly communicate key financial information to the intended audience.

You don’t need an accounting degree to build a model that forecasts revenue, estimates costs, and projects cash flow. You need a practical understanding of how a business generates income and what expenses it incurs. As for Excel, it’s not about being able to build sophisticated formulas. Instead, it’s about making sure your model is clear, flexible, and easy to update.

Of course, the deeper your accounting and Excel knowledge, the more advanced your models can become. But these skills grow over time with experience. A basic working knowledge of accounting and Excel is sufficient for most business operators. The key is to start building models and learn as you go. Every model you create will improve your skills, whether it’s in organizing the financial information, understanding the financial impact of certain business decisions, or becoming more efficient in Excel.

In short, don’t get bogged down by the need for technical expertise. Focus on the purpose of your model, understand your audience, and keep refining your skills. You don’t need to be a financial expert to create valuable, functional financial models. What’s more important is your ability to translate business operations into numbers that can be forecasted and analysed. The technical skills will follow naturally as you gain more hands-on experience.

Corkscrew calculation is important in financial modelling because it tracks the opening balance, additions, deductions, and closing balance over time. This method is commonly used in debt and equity schedules to ensure accuracy in financial forecasts and to maintain clarity over the movement of balances between periods. The calculation ensures that balances roll forward correctly, which is essential for reliable financial projections. It allows for accurate tracking of changes in accounts, helping to forecast future cash flows and repayment schedules.

Corkscrew calculations help by providing a structured way to handle complex changes in debt or equity over time. They ensure that each period’s opening balance carries forward correctly from the previous period’s closing balance. This process allows for accurate interest calculations, as interest is typically calculated based on the opening balance or an average balance. By ensuring that inflows like new debt and outflows like repayments are properly recorded, the model provides a clear picture of the financial health of the company over time.

However, there are several things to watch out for. Incorrect opening balances will distort all future projections. Miscalculating interest, especially if it’s not based on the correct balance, can lead to errors in financial statements. Repayments or dividends that are not properly accounted for will inflate or understate closing balances, which can throw off subsequent calculations. Timing issues can also cause problems if inflows or outflows are recorded in the wrong period, leading to inaccurate forecasting.

In Excel, you can structure a corkscrew calculation using a simple layout with columns for the time period, opening balance, additions, subtractions, and closing balance. The first step is to input the opening balance for the first period. In each subsequent period, the opening balance will be equal to the previous period’s closing balance. Additions represent any new debt or equity, while subtractions account for repayments, dividends, or other outflows. Interest is calculated on the opening balance, using a formula like “=Opening Balance * Interest Rate”. The closing balance is the sum of the opening balance, additions, subtractions, and interest, ensuring a smooth roll-forward into the next period.

For example, if the opening debt balance in Year 1 is £0 but the company takes on a loan of £150,000 to be repaid over the next four years, then the Year 1 closing balance is the full loan which then reduces the subsequent years by £37,500 until the closing balance is zero.  Please note this assumes a straight line payment profile and does not take into account any interest which you would include (if applicable) elsewhere in the model. 

This structure ensures that all balances, payments, and interest are accurately projected, allowing for clear financial planning and decision-making.

If you are a seasoned modeller then you have been here, deadline approaching and you check the Balance Sheet and all balances, all is fine.  You make some edits for the next 10 mins, return to the Balance Sheet and all is out of whack with frustrations building.  A balance sheet imbalance in a financial model is a clear sign something has gone wrong. The balance sheet must balance: assets must equal liabilities and equity. When it doesn’t, it’s a major red flag that calls the integrity of the entire model into question.

Balance sheet imbalances come in different forms. Some are small and fixed across time periods, while others increase or decrease over time. From our experience, each type of imbalance points to a specific kind of error.

This post covers common causes of balance sheet imbalances and gives tips to fix them. Ensuring the balance sheet ties is critical to having a trustworthy model.

Common Causes of Balance Sheet Imbalances

1. Mis-linked or Unlinked Cells – Financial models rely on cell references across various sheets. If a cell on your balance sheet isn’t linked correctly, it can cause an imbalance.  For example, if total assets are pulling from an incorrect sheet or wrong value, the balance won’t tie.
2. Incorrect Retained Earnings Calculation – This could happen if net income isn’t being added to retained earnings correctly or if there’s a mistake in how dividends are subtracted.  Retained earnings accumulate net income year after year. If your income statement doesn’t flow correctly into your retained earnings section, the balance sheet won’t balance.
3. Equity Adjustments or Opening Balance Errors – Manual changes to equity or opening balances often cause imbalances. If you’ve adjusted equity accounts or entered opening balances incorrectly, it can throw off the entire balance sheet.
4. Debt or Interest Miscalculations – Debt and interest calculations impact both the liabilities (debt) and income statement (interest expense). If these aren’t calculated correctly, the mismatch can create balance issues.
5. Circular References – Circular references, where cells depend on each other, can cause calculation errors that lead to balance sheet imbalances. These are common in models where interest on debt is calculated based on the ending balance.
6. Depreciation and Amortisation Mistakes – Depreciation (for tangible assets) and amortisation (for intangible assets) reduce asset values. If the formulas or references for these aren’t correct, the balance sheet may fail to tie over time.

How to Identify Fixed vs. Variable Imbalances

When a balance sheet doesn’t balance, you’ll often notice two main types of errors: fixed imbalances and variable imbalances.

• Fixed Imbalances (Same Difference Each Period)
• Symptoms: The balance sheet shows a constant difference between assets and liabilities + equity across all periods.
• What It Means: A fixed imbalance usually means there’s a one-time miscalculation or missing line item in the model. A common cause is an unlinked value or incorrect starting balance that repeats across time periods.
• Example: Suppose you forgot to link net income to retained earnings. This would cause a fixed difference that repeats across every period in your model.

Variable Imbalances (Growing or Shrinking Over Time)

• Symptoms: The imbalance changes over time, either growing or shrinking from one period to the next.
• What It Means: Variable imbalances usually mean there’s an issue in how certain items (like debt, depreciation, or working capital) are calculated over time. It’s a sign that the error is compounding.
• Example: If you miscalculate interest payments, the imbalance might increase over time, as the incorrect debt balance rolls forward with each period.

Steps to Fix a Balance Sheet Imbalance

• Check Opening Balances – Start by confirming that your opening balances are correct. If your starting numbers are off, everything that follows will also be off.
• Verify Retained Earnings and Net Income – Ensure dividends are deducted properly.  Check if the income statement is flowing correctly into retained earnings. Look for any formulas that are missing or incorrectly pulling from the income statement
  
• Review Equity Entries – If you’ve made manual adjustments to equity, check that they’re reflected properly. Also, ensure any external equity transactions (e.g., capital raises, buybacks) are modeled correctly.
  
• Recheck Debt and Interest Calculations – Confirm that debt schedules are accurate and that interest expenses are calculated based on the right ending debt balance. Errors in debt schedules often cause growing imbalances.
• Review Depreciation and Amortization – Verify that depreciation and amortization flow correctly from the fixed asset schedule into the balance sheet. Ensure that formulas are consistent across all time periods
  
• Trace Changes in Working Capital – Working capital changes (inventory, accounts receivable, accounts payable) affect both the balance sheet and cash flow statement. Check if working capital movements are modeled consistently
  
• Check for Circular References – If your model has circular references, turn off iterative calculations temporarily and try to trace the issue manually. Circular references can create unpredictable changes and imbalances over time.
  
• Use Diagnostic Tools – Many financial modelling tools and Excel add-ins offer diagnostic checks for balance sheet errors. Use these to automatically scan for inconsistencies.

Tips to Avoid Future Imbalances

• Use Error-Checking Functions: Leverage Excel’s built-in functions like SUM, IFERROR, and ISBLANK to highlight potential issues in real-time.
• Regularly Check the Balance Sheet: Don’t wait until the end to check the balance sheet. Periodically verify that it balances as you build out your model
• Build a Control Account: Use a “plug” account that automatically captures any discrepancies between total assets and total liabilities + equity. This won’t fix the issue, but it helps you identify when and where the problem started.
• Double-Check Links and Formulas: Pay extra attention to linking cells across the balance sheet, income statement, and cash flow statement. Ensure formulas are consistent and pulling from the right source.
• Keep the Model Simple: Avoid overcomplicating the model. More complex models introduce more chances for error. Stick to simple, clear calculations whenever possible.

A balanced balance sheet is a fundamental check for the accuracy and integrity of your financial model. An imbalance, whether fixed or variable, is a clear indication that something is wrong. By following the steps above, you can identify and fix the issue, restoring confidence in your model. Regularly checking for imbalances as you build your model will prevent major errors down the line.