Why financial model color formatting matters
Financial model color formatting, which refers to the way the numbers in the financial model is displayed, helps keep the visual element of the financial model clean and easy to read for the user. As stated previously, the three factors of a good financial model are consistency, efficiency, and clarity. Proper formatting aids in all three of these.
Recommended formatting: text color
The first and easiest method of formatting a financial model is to use a consistent color scheme to annotate different types of cells and data. Here is a recommended color scheme that is quite commonly known amongst financial analysts and other users of financial models:
- Blue: Inputs, or any hardcoded data, such as historical values, assumptions, and drivers
- Black: Calculations and references to the same sheet
- Green: Calculations and references to other sheets (note that some models skip this step and use black for these cells)
- Red: References to separate files or external links
Coloring the text and contents of cells as such helps the user understand the different types of data working within the model, as well as the flow between the different pieces of data. For example, blue text inputs will likely not have any predecessor data, so it becomes a logical starting point to follow formula paths.
Examples of financial model color formatting in practice can be found in CFI’s financial modeling courses.
Conditional color formatting
Excel has a valuable feature known as conditional formatting. This lets the user set rules or thresholds for certain cells. If these rules are met or the thresholds are triggered, Excel will format the cells in a certain way that the user has set. This becomes useful for pointing out certain pieces of data within the model.
For example, if it is important to point out when a company incurs a loss in a certain period, the user can set conditional formatting for the net income cells in a model. The rule will be set to check whether the cell’s value is less than or equal to 0, and if it is, the cell can have a special background shading. This conditional formatting allows users to quickly spot any red flags within the model.
A great thing about conditional formatting is it bestows a large amount of creativity to the user in how they implement such formatting. However, it is important to remember not to get carried away with conditional formatting. Ideally, it should only be used to pinpoint or highlight important information, as having too many colors appearing within a spreadsheet may detract from the clarity of the overall model.
Shading color formatting
Financial model color formatting can also be used to shade certain cells, for different effects. In the screenshot below you will notice that the Long Term Debt schedule uses three different levels of color formatting:
- Heading – dark blue with white font color
- Subheading – light grey with black font
- Featured Line Item – light orange with black font
Each of these different styles helps the user of the model clearly see the information contained in it.
Learn more in CFI’s Financial Modeling Courses.
Thank you for reading this guide to financial model color formatting. CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA) designation.
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