Validation, Alignment, and Application of the Financial Model

A financial model becomes a practical decision-making tool only after three final steps: validation of calculations, alignment with stakeholders, and real-world application.
These ensure the model is not just theoretical but relevant and usable throughout the entire project lifecycle.

This article is part of our series on building effective and actionable financial models, where we’ve already covered the fundamentals, planning structure, and financial calculations. Now we focus on how to finalize and apply the model in practice.

In this final phase, we’ll focus on:

• Step 15. Coordination of input data with the project manager
• Step 16. Filling in the financial model template: structure, references, formulas
• Step 17. Testing and validation of the model: verifying the objectivity of calculations
• Step 18. Coordination of results with the project manager or the client
• Step 19. Model refinement: adaptation to actual managerial decisions
• Step 20. Ongoing model updates during project implementation

Objective: to establish the financial model as a transparent, responsive, and decision-support tool capable of guiding managerial actions at every stage of the project lifecycle.

Step 15. Alignment of Input Data with the Project Manager

Developing a financial model is not merely about producing numerical calculations. It is a structured process of aligning operational realities with stakeholder expectations.

In most cases, the project sponsor already has a preliminary vision of what outcomes the financial model should demonstrate. However, objective calculations may not always reflect those expectations. This is a normal and expected divergence. If not addressed proactively, it can lead to a rejection of the model and, ultimately, its exclusion from the decision-making process.

To avoid this, it’s critical to align all key inputs and assumptions in advance. These assumptions form the basis for formulas and relationships within the model.

How to approach alignment:

1. Complete and validate the input data sheet:

   • What sales prices and volumes are assumed?
   • What cost items are considered baseline?
   • Which parameters are time-dependent?

2. Align key assumptions and interdependencies:

   • What is the relationship between sales and marketing costs?
   • How does unit cost evolve with scale?
   • What methodology is used to forecast revenue growth?

3. Cross-check assumptions against historical data:

   • If the project has an operational history, compare forecasts with actual performance.
   • If no historicals are available, use comparable benchmarks from similar industry projects.

Why it matters:

• Helps eliminate bias: Sponsors often unconsciously steer assumptions toward desired outcomes. Pre-alignment helps establish a neutral, data-driven baseline.
• Builds credibility: When the project manager understands the basis of assumptions, they are less likely to distrust unexpected results.
• Facilitates constructive discussion: Rather than debating the model’s outputs, focus can shift to scenario planning and implementation options.

A financial model is a decision-making tool. It must be grounded in assumptions that are transparent, validated, and logically sound.

Step 16. Populating the Financial Model Template: Structure, References, and Formulas

We now move to the technical build-out of the model—its structural layout, logical flows, and formula setup.

This step is not just about correct formula entry; it is about designing a model architecture that is clear, auditable, and user-friendly.

Key actions when building the model:

1. Design the sheet/block structure:

   • Inputs: all assumptions, variables, and drivers.
   • Calculations: logical dependencies—revenue, cost of sales, taxes, investments.
   • Outputs: core financial reports (P&L, Cash Flow, Balance Sheet).
   • Additional modules: scenario analysis, sensitivity checks, charts, control points.

2. Ensure correct referencing:

   • All drivers must link back to a single source of truth.
   • Hardcoded values must be avoided—such entries break consistency and traceability.

3. Set up accurate formulas:

   • Revenue = Sales Volume × Price
   • COGS = Production Costs + Logistics + Warehousing
   • Taxes = Calculated on profit or revenue depending on tax regime

Avoid common errors:

• Don’t overcomplicate: Complex formulas hinder transparency and troubleshooting.
• Maintain modularity: Changes to key drivers should not break model logic.
• Add control checks: reconciliation totals, balance sheet tests, and logical validations.

A financial model is not just a set of calculations. It’s a working tool for decisions. Poor structure and unclear linkages diminish its value.

Step 17. Testing and Validation of the Model: Verifying the Objectivity of Calculations

Before using or presenting the financial model, its integrity must be verified. Errors in calculations can lead to flawed conclusions and poor management decisions.

1. Historical data comparison

If the project has been running for at least 3–6 months, test the model against actuals:

• Input historical values into the model (prices, sales volumes, costs, tax rates, etc.).
• Compare model outputs with actual results for the same period.
• Analyze discrepancies:
  • Are formulas incorrect?
  • Are coefficients unrealistic?
  • Are dependencies between variables misrepresented?

Significant deviation is acceptable only if the forecasted period involves structural changes (e.g., new product launch, market shift). Otherwise, material gaps must be investigated.

2. Error and logic checks

• The balance sheet must reconcile.
• CF and P&L differences must be properly reflected in working capital.
• No broken links or formula errors should exist.

3. Sensitivity testing

The model must respond adequately to changes in key drivers:

• What happens if input costs rise by 10–20%?
• How does profit respond to lower-than-expected sales volumes?
• What is the impact of FX or tax rate changes?

4. Scenario modelling

Test real-world situations:

• Supply chain delays
• Sudden demand drop
• Raw material price shock

5. Stress testing

Push inputs to extremes to identify:

• Points of financial instability
• Most sensitive performance drivers

Why this matters:

Validation is the final safeguard. If the model withstands back-testing and stress scenarios, it can be relied upon as a sound analytical tool.

Step 18. Coordination of Results with the Project Manager or Client

Once testing and validation are complete, the model must be presented to stakeholders—project leads, investors, or other decision-makers.

It is important to recognize that the model’s outputs may differ from expectations. The analyst’s role is not to conform results to preferences, but to explain the underlying logic and potential optimizations.

Effective model presentation should include:

1. Key conclusions:

   • Total investment required
   • Projected profitability, payback period, financial risks
   • Cash flow adequacy at each stage

2. Scenario analysis:

   • Base, optimistic, and pessimistic outcomes
   • Assumptions behind each scenario
   • Break-even and failure thresholds

3. Sensitivity analysis:

   • Which drivers have the most impact?
   • What if prices, volumes, or tax policies change?

4. Risk mitigation:

   • Where are the model’s vulnerabilities?
   • What hedging or mitigation strategies exist?

How to avoid conflict during alignment:

• Justify outcomes clearly
• Do not distort inputs to match expectations
• Offer alternative scenarios when disagreements arise

The financial model is a strategic tool—not a set of idealized projections. Its value lies in presenting a realistic, data-driven view of the project’s viability.

Step 19. Refinement of the Financial Model: Adapting to Managerial Decisions

Following the model’s presentation, revisions may be required. A financial model should not be static—it must respond to updated inputs, new strategies, and evolving management decisions.

Areas for refinement:

1. Adjustments to inputs and assumptions:

   • Updated market parameters (pricing, volumes, procurement)
   • Revised cost structures (production, logistics, HR, marketing)
   • Changes in macro assumptions (inflation, FX, taxes)

2. Reworking internal logic and dependencies:

   • Sales-to-marketing relationships
   • Capacity planning and workforce modelling
   • Fixed vs. variable cost structure revisions

3. Scenario and strategy updates:

   • New project configurations (e.g., phased launch, new market entry)
   • Rebalancing the base case per new investor requirements

4. Market repositioning:

   • Adjusting pricing strategy based on model results
   • Revising product mix or target audience

5. Timeline adjustments:

   • Revised launch dates, funding tranches, capacity ramp-up
   • New project milestones impacting timing

6. Strategic plan changes:

   • Amending the overall business case
   • Reworking scale-up assumptions

A financial model is more than a calculator. It is a tool that drives strategic re-evaluation. Often, the modeling process triggers a reassessment of the project’s logic, cost structure, or growth plan.

Step 20. Continuous Refinement of the Financial Model During Project Execution

The financial model does not end with approval. It must remain a dynamic, continuously updated tool throughout the project lifecycle.

Why ongoing updates are necessary:

During project implementation, actual figures may differ significantly from the originally planned values:

• Actual costs and timelines change — for example, procurement turns out to be more expensive than planned, or the launch is delayed by several months.

• Market conditions shift — product prices, exchange rates, supply terms, and tax burden.

How should the financial model be updated?

1. Regular data updates

• Planned indicators are replaced with actual values.

• Forecasts for future periods are updated based on already obtained results.

      2. Variance analysis and strategy adjustment

• If planned and actual data differ, it is important to understand the reasons: is it a forecasting error or a change in market conditions?

• A financial model should help adjust the project strategy, not just record deviations.

      3. Operational and strategic management

• If the financial model is regularly updated, it becomes a key tool for decision-making: when to scale, when to raise additional financing, when to optimize costs.
• This enables managing the project in real time rather than acting blindly.

Conclusion

We’ve outlined 20 essential steps in building a financial model — from defining objectives and collecting baseline data to testing, validation, and continuous updating.

Focus on objectives. A financial model is not an end in itself, but a tool designed to support managerial decision-making.
Keep it transparent. The clearer the structure and logic, the more confidence it inspires among decision-makers and investors.
Ensure flexibility. Projects evolve. A working model should keep pace — reflecting real-time changes and delivering relevant, actionable insights.

Want to go deeper, ask specific questions, or see how this works in real practice?
We regularly host webinars on financial modeling, where we walk through hands-on examples and analyze common pitfalls. You can find the schedule and follow us on our Telegram channel — subscribe to stay informed.

We wish you success not only in building strong models, but in driving successful projects.