Financial models are the most important decision-making tools in finance…so why are they often such a mess?

Financial models are the foundational tool used to drive critical business decisions. Every single major financial transaction is based on the back of a financial model, yet surprisingly, most financial models are flawed. They are often poorly designed, badly constructed, disorganized, and filled with errors. They are, in short, a mess.

I know this because I have reviewed hundreds of financial models in my career. But I am willing to bet that you have seen it too. Have you ever worked with an Excel spreadsheet that someone else built? Did you open the file and wonder what the heck was going on?

This happens to all of us. And it’s not your fault. This is because the model was not built optimally. Significant risk is inherent in any model when you can’t follow and understand it.

When a model is not optimal, it is ineffective and can have real-world consequences. In 2012, JP Morgan suffered a $6.2 billion trading loss due to errors in its Value-at-Risk (VaR) model. It came out after the fact that the team that built the model was not qualified to do so.

Poorly built financial models are challenging or nearly impossible to use for effective decision-making. Instead of providing clear, reliable insights, these models become sources of confusion and uncertainty, undermining their very purpose.

Common errors found in most financial models include:

• Excessive number of sheets: Multiple sheets can make a model difficult to understand, navigate, and interpret.
• Complex, long formulas: Formulas that scroll around and around increase the risk of errors because they are difficult to update and audit.
• No executive summary: Like all good presentations, a model needs a summary page to serve as a clear communication tool that tells the reader what the answer is.
• Lack of assumptions documentation: Clear assumptions help the reader understand how you got to your answer.
• Hardcoded values: Hardcoding is a big red flag because it introduces difficulty when the user needs to make updates or run scenarios.
• Inconsistent formulas: When formulas aren’t consistent across the model, errors, and miscalculations are sure to follow.
• External links: Links to external files make models unstable and unreliable.

Financial modeling, at its core, is a discipline requiring both theoretical knowledge and applied skill. Just like mastering a sport or a musical instrument, true proficiency demands regular, hands-on practice.

While we don’t often think about model discipline and model hygiene, these concepts are core to building tools that can be used for effective decision-making. When finance professionals understand the importance of properly designed and robust financial models, they add value to their teams, reduce risk, and can ultimately deliver more value for their clients.

Ian Schnoor, CFA, CFM, is the Executive Director of Financial Modeling Institute (FMI), the world’s only financial modeling accreditation organization with candidates in more than 120 countries. Candidates in the Advanced Financial Modeler (AFM) Program join the FMI Community, learn to build a best-in-class three-statement financial model of a company, and then sit a rigorous exam in order to attain the AFM accreditation. Ian is a passionate teacher who has trained thousands of students and professionals all over the world in financial modeling, valuation, and Excel.

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Originally Posted on June 16, 2025