FMVA common mistakes
FMVA · Understand the traps and how to avoid them.
Building a three-statement model with hardcoded numbers typed directly into the income statement revenue, COGS, and interest lines instead of formulas linked to assumption cells and prior-period balances.
Under time pressure it feels faster to type a plausible figure than to trace the driver chain, and the model still 'balances' visually so nothing flags the shortcut.
What to do instead
Adopt a one-way rule: every blue-font cell is an input and every black cell is a formula. Before submitting, use Ctrl+` (Show Formulas) and scan for any numeral appearing outside the assumptions tab; convert each to a formula or move it to the input sheet.
Leaving the balance sheet out of balance by small amounts and quietly plugging the difference into 'other assets' or a rounding line rather than finding the cause.
A plug makes the check cell turn green, and candidates often do not know that the usual culprits are retained earnings roll-forward, dividends, or depreciation flowing to both the P&L and the cash flow statement.
What to do instead
Build a dedicated check row equal to total assets minus total liabilities and equity, and never allow a plug. When it is nonzero, test in this order: closing retained earnings = opening + net income - dividends; D&A on the cash flow equals D&A on the P&L; capex on the cash flow equals the change in gross PP&E.
Using a single discount rate and a single growth rate far into perpetuity without checking that terminal growth is below the discount rate and below long-run nominal GDP growth.
Candidates focus on the explicit forecast years and treat the terminal value as a plug, forgetting that it usually drives 60-80% of the valuation.
What to do instead
Impose a hard sanity check: terminal growth must be less than WACC and no higher than roughly 2-3% for a developed-market currency. Show the terminal value as a percentage of total enterprise value and flag it if it exceeds about 75%, then sensitise WACC and growth in a two-way table.
Computing unlevered free cash flow while deducting interest expense, or computing levered cash flow while discounting at WACC.
The two conventions get mixed because both 'look like' cash flow, and spreadsheet templates inherited from prior work often blend them.
What to do instead
Write the definition on the model's cover tab before building: UFCF = EBIT x (1 - tax) + D&A - capex - change in NWC, discounted at WACC; LFCF = net income + D&A - capex - mandatory debt repayment - change in NWC, discounted at cost of equity. Confirm interest appears nowhere in the UFCF build.
Forecasting working capital by growing the balance sheet line items at a revenue growth rate instead of holding days-based ratios (DSO, DIO, DPO) constant.
Growth-rate extrapolation is quicker and the resulting numbers still look smooth, so the error is invisible until the cash flow statement produces implausible swings.
What to do instead
Rebuild each working capital line as a days ratio: receivables = DSO/365 x revenue, inventory = DIO/365 x COGS, payables = DPO/365 x COGS. Tie the prior historical year's implied days to the actual reported balance before forecasting forward.
Hardcoding a CAGR or growth rate as a typed constant inside the projection row (e.g. =prior*1.08) so that changing the growth assumption cell does not update the model.
It is the shortest keystroke path, and the number produces an output that looks right on the current screen, so the broken link is never discovered.
What to do instead
Use a separate assumption row referenced absolutely ($C$12) and multiply: =prior*(1+$C$12). Afterwards run a sensitivity test: change each assumption by 10% and confirm the affected output moves; any output that does not move indicates an embedded constant.
Naming and structuring tabs as Sheet1, Sheet2, Final, Final_v3, with mixed units (thousands in one tab, millions in another) and no cover or table of contents.
Models are built iteratively and renamed only at the end, by which point the builder knows where everything is and no longer notices the confusion.
What to do instead
Set the architecture before typing numbers: cover/contents tab, assumptions, three statements, supporting schedules, outputs, with colour-coded tabs. Put a units label in cell A1 of every sheet and use a single display unit throughout, scaling inputs once at the input stage.
Presenting a slide with a full spreadsheet grid pasted in, or with a chart whose axis does not start at zero and whose title states the topic rather than the conclusion.
The analyst is close to the data and treats the table as self-explanatory, and default chart settings are accepted without adjustment.
What to do instead
Follow the action-title rule: every slide headline should be a full sentence stating the finding ('Gross margin compressed 340bp on input cost inflation'). Replace tables with a chart of no more than five data series, label the specific data points you want read, and cite the source in a footnote.
Applying a WACC using a cost of debt that ignores the tax shield, or a beta sourced from a comparable set without unlevering and relevering to the target's capital structure.
The formula chain is long and candidates memorise the WACC equation while skipping the Hamada step and the (1 - tax) adjustment on debt.
What to do instead
Build WACC as an explicit mini-schedule with each component on its own row: risk-free rate, equity risk premium, levered beta, cost of equity, pre-tax cost of debt, after-tax cost of debt, and market-value weights. Show the unlevering and relevering formulas on the sheet so the beta derivation is auditable.
Answering a strategy or recommendation prompt with a description of the analysis performed instead of a decision, trade-offs, risks, and next steps.
Candidates treat the deliverable as a report of their work rather than a recommendation, and they fear committing to one option.
What to do instead
Use a fixed four-part structure: recommendation in the first sentence, two or three supporting reasons with quantified impact, key risks with mitigants, and the specific next action with an owner and date. Delete any sentence that describes methodology rather than consequence.