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What are the different set of tests that are undertaken in a Financial Model?
There are different aspects which need to be tested while testing a financial model.
Some of them have been listed below:
1. Input Testing: Every financial model begins with inputs from the end-user. It is therefore, essential to make sure that the model does not take faulty inputs. An intelligent model has validations built-in which alert the user if unusual values are filled in. Hence, testing the model for assumptions would means purposely entering wrong values as inputs and checking whether the system alerts the user. Wrong values generally include exceptionally large or small values. They also include negative values or even zero. A well-designed model will not allow the values to be entered. A poorly designed model will take in these faulty inputs and give out faulty outputs. The user will then have to manually verify each one of their inputs to zero down the root cause of the problem.
2. Numerical Testing: The numerical testing included checking each and every calculation which is performed by the model. The financial system already has some internal checks and balances. For instance, if the model includes a balance sheet, then it is supposed to balance automatically.
3. Testing can also be done by comparing the two models. This usually happens when a newer model replaces an older version. In such cases, the results given by the newer model are compared with, the older model in order to find out the flaws.
4. Technical Testing: Lastly, financial models need to be checked for system compatibility too. Financial models can be extremely heavy spreadsheets or applications. As a result, they may require a certain amount of computing power to operate. If this power is not provided, the entire system may crash. Technical testing is, therefore, necessary to ensure that the financial model will work as intended taking into consideration the technical specifications of the user’s computers.
Hence, it would be fair to say that the testing phase of financial modelling is almost as important as the build phase. Neglecting this phase may save some time and effort in the short run. However, it is likely to cause a lot of pain in the long run.
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