It still surprises me when we are completing a financial model audit, how often we encounter errors where rather than adding a number it is subtracted by mistake (or vice versa).
Where you get a sign wrong, it’s especially bad news as it gives you twice the problem compared to missing it out completely.
If you add on $100, rather than subtract $100, it gives you a $200 problem!
This sounds obvious, like an easy error to avoid, but it can be surprisingly easy to do, especially if you have picked up someone else’s model.
Imagine you are entering costs into an input sheet in a model. Is it always 100% clear as to whether the input should be positive or negative?
I’ve seen plenty of models where sometimes it’s positive, and sometimes it’s negative, and the only way to know is to trace through the impact in the model. This really is asking for trouble.
The best way to avoid these kinds of errors is to ensure your model adopts a clear sign convention throughout.
The Two alternative approaches we recommend are:
1) Everything Positive – where all inputs are positive.
2) Cash in positive, cash out negative.
There are pros and cons to each, and some items will change between positive and negative during your forecasts. But the main thing to reduce the risk of error is that you have a convention and know which one you are dealing with.
If you would like to talk to us in detail for how we navigate potential errors then contact us today.