The Book of Assumptions: The Unsung Hero of Financial Modelling
- Projectify Team
- Apr 13
- 4 min read
When it comes to financial modelling, spreadsheets and formulas often steal the spotlight. But behind a solid model lies a less glamorous, yet critical companion: the Book of Assumptions.
What is the Book of Assumptions in Financial Modelling?
The Book of Assumptions is a structured document that outlines the purpose and general model details as well as all the key inputs, calculations and outputs used in a financial model. It serves as a reference guide to explain the financial model and describe the underlying logic behind the numbers driving the financial forecasts.
Why You Should Build One?
A financial model is only as good as the understanding behind it. While spreadsheets, formulas, and dashboards tell the story in numbers, the Book of Assumptions tells the story behind the numbers — and that makes it a critical part of any robust financial model.
Here’s why every model should have one:
Clarity for Stakeholders at All Levels - Senior executives, board members, and external stakeholders often need to engage with financial models without diving into cell references or complex logic. A well-structured Book of Assumptions provides clarity without complexity, presenting key drivers and rationale in plain language. It removes the need to "dig into the model" and makes the logic behind the projections fully transparent.
Visibility Into the Model’s Structure - Most financial models are structured across three core areas: inputs, calculations and outputs. The Book of Assumptions explains each of these areas whilst helping users understand how data flows across these layers, enhancing transparency and helping contributors or reviewers navigate, modify, and troubleshoot the model confidently.
Defines the Model’s Purpose and Scope - A model built for internal planning may not be suitable for investor valuation or scenario stress testing. The Book of Assumptions should explicitly state the model’s intended use case, so that users understand its purpose and boundaries — reducing the risk of it being used for purposes it wasn’t designed for.
Explains the Outputs Clearly - Financial models often produce detailed forecasts, charts, and KPIs but without context, they can be misread. The Book of Assumptions explains the outputs in detail which ensures that decision-makers are interpreting the model accurately, and using the insights in the right way.
Makes Model Limitations Explicit - Every model has constraints - simplified drivers, excluded variables, or static assumptions. A Book of Assumptions highlights these limitations upfront, so users understand the model’s accuracy boundaries and make decisions with eyes wide open. This is especially important in board-level or high-stakes decision-making environments.
Improves Auditability & Accountability - When assumptions are centralized and well-documented, it’s easier for teams, auditors, or external parties to trace the source of each figure, challenge assumptions, and validate conclusions. It creates a clear audit trail, and ensures that model outputs can be defended with confidence.
Enables Consistency Across Models and Teams - In larger organizations or multi-model environments, consistency is everything. The Book of Assumptions acts as a single source of truth for shared assumptions (e.g., inflation rates, market size, cost benchmarks), ensuring that different teams or departments are not working from different baselines.
Key Components of a Book of Assumptions
A well-structured Book of Assumptions not only improves model transparency but also sets a standard for quality, consistency, and usability. The following are the four core sections that make up a comprehensive Book of Assumptions:
Purpose & General Model Details - This section sets the foundation for the financial model by clearly outlining its purpose, intended use, and technical parameters. It typically defines what the model is built to achieve and captures critical structural details including currency, timeline, units of measure, and inflation assumptions. It also typically highlights formatting conventions, error checks, and any limitations or exclusions in scope. This ensures users understand the model’s context, capabilities, and boundaries from the outset.
Model Structure - Here, the Book of Assumptions provides a high-level overview of how the model is organized and how information flows through it. It describes the core tab structure and explains how data moves from assumptions through to final results. This gives users a clear map of the model’s layout and logic, helping both technical and non-technical users navigate and update the model efficiently.
Model Outputs - This section typically summarizes what the model produces and how those results should be interpreted. It covers the key projected financial statements as well as dashboards, KPIs, charts, and ratios. It ensures users can clearly understand what they’re looking at, what it represents, and how it aligns with the model’s overall objectives. This improves confidence in the insights and ensures the outputs are used appropriately.
Inputs and Calculations - At the heart of the Book of Assumptions is a breakdown of the model’s key inputs and the logic behind its calculations. It covers core areas such as revenue, costs, staffing, capital expenditure, liabilities, and working capital. For each area, the input source and calculation methodology is documented, helping ensure transparency and traceability.
Final Thoughts
A strong financial model isn’t just about smart formulas or perfect formatting, it’s about credibility. The Book of Assumptions is your narrative the story that explains the logic behind the numbers. Build it with care, and you’ll elevate your modelling from a backroom exercise to a boardroom asset.
If you require support with drafting a book of assumptions for your financial model, contact us on hello@useprojectify.com or submit a request for assistance or quote here.
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