The Sign Convention Debate: Why Costs Should Be Negative

Of all the debates in financial modelling, the sign convention argument generates the most heat and the least light. So let me be direct: costs should be entered as negative numbers. Always. Here’s the complete case.

The Intuition Argument

Ask anyone who isn’t a financial modeller what a cost of £500,000 looks like, and they’ll tell you it’s money going out. It reduces what you have. It’s negative.

Ask a FAST-trained modeller, and they’ll tell you it’s positive — because on the workings sheet, everything is positive, and the sign gets flipped later on the output sheet.

One of these approaches matches how every human being on the planet thinks about money. The other requires training to understand. In a profession where models are reviewed by partners, board members, investors, and regulators who are not modellers, matching human intuition is not a trivial advantage. It’s fundamental.

The Cash Flow Test

Here is a simple test. For each item below, ask: does this make cash go up or down?

If your inputs follow this convention, your cash flow statement is a SUM. Revenue plus costs plus capex plus debt service plus everything else. The SUM formula works because the signs are already correct.

If your inputs are all positive (the FAST approach), your cash flow statement requires you to manually subtract every outflow line or, worse, introduce sign-switching rows that flip positive numbers to negative before they hit the output. Every one of those operations is a chance for error.

The Error Multiplication Problem

A sign error doesn’t just get the number wrong — it gets the number wrong by double the intended amount.

If operating costs should be -£5m on the cash flow statement but someone forgets the sign switch and they appear as +£5m, the error isn’t £5m — it’s £10m. The cash flow is overstated by £10m. In a DCF valuation, that error compounds across the forecast period and gets capitalised in perpetuity. A single sign error can swing a valuation by tens of millions.

With the negative convention, there is no sign switch to forget. Costs are entered as -£5m. They flow through the model as -£5m. They appear on the cash flow statement as -£5m. There is one place the number exists, and it’s always in the correct sign. The surface area for error is zero.

The “Sea of Brackets” Objection

The most common argument against the negative convention is aesthetic: “the workings sheets look cluttered with all those brackets.”

This is true. A model where half the numbers are in brackets does look busier than one where everything is positive. I don’t deny it.

But consider what those brackets are telling you. When you scan down a column of numbers and see a mix of positive and negative values, you can immediately see the structure of the cash flow. Revenue positive, costs negative, net cash flow positive. The brackets are information, not noise. They tell you the economic story of the business at a glance.

In the “normally positive” convention, every number looks the same. Revenue 10,000, costs 8,000, capex 2,000. You cannot tell from the numbers alone whether the business makes money. You have to read every label to understand what direction each item flows. That’s not simplicity — it’s the absence of useful information.

The SUM Formula Argument

FAST advocates argue that when everything is positive, you need to use explicit addition and subtraction formulas rather than SUM, which makes the model more transparent:

= Revenue - Costs - Capex - Tax

They say this is clearer than:

= SUM(Revenue:Tax)

I disagree fundamentally. The explicit formula means that when you add a new line item — say, a government grant that increases cash — you have to modify the formula to add it. If you forget, the grant is excluded. The SUM formula automatically captures any new rows inserted within its range.

In a financial model that evolves over time (which is to say, every financial model), automatic inclusion of new line items via SUM is a safety feature, not a shortcoming. It means the model adapts to structural changes without formula modification.

The Balance Sheet Question

“But what about the balance sheet?” people ask. “Liabilities should be positive on the balance sheet.”

They’re right — on the output sheet. The presentation convention for a balance sheet is that assets are positive and liabilities are shown as positive too (with the equation Assets = Liabilities + Equity).

This is a presentation convention for outputs. It doesn’t dictate how the workings should be structured. In the workings, a debt balance is positive (it’s money you owe — it needs to be repaid, which reduces cash). But the interest payment on that debt is negative (it reduces cash). The repayment of principal is negative (it reduces cash).

The convention is straightforward: in the workings, positive means cash in, negative means cash out. On the output balance sheet, you present according to accounting convention. These are two different things, and conflating them is the source of most confusion in this debate.

What the Industry Actually Does

I’ve reviewed financial models built by all four Big 4 firms. Every one of them uses the negative convention for costs in their workings. This isn’t a small sample — it’s the firms that collectively build and audit more financial models than anyone else on the planet.

The ICAEW Financial Modelling Code doesn’t mandate a specific sign convention, but it does say: pick one, document it, and be consistent. The code was written by senior practitioners from across the industry, and the prevailing practice among its contributors is the negative convention.

FAST is the outlier, not the norm.

A Simple Rule

If you want a rule you can apply without thinking, here it is:

Enter every input in the sign that reflects its impact on cash. If it increases cash, it’s positive. If it decreases cash, it’s negative.

Revenue: positive. Costs: negative. Loan drawdown: positive. Loan repayment: negative. Capex: negative. Asset sale: positive.

Your SUM formulas will work. Your cash flow statement will balance. Your balance sheet will balance. And you’ll never have to explain to a client why their £50m cost appeared as a positive number.

Will Wardle has spent 25 years building and reviewing financial models, starting at a Big 4 accountancy firm. Every Big 4 firm he has reviewed uses costs as negative. He recommends you do the same.