Every Finance person who has ever worked on a spreadsheet (i.e. everyone) adds “Financial Modelling” as a skill on their CV. However, Financial Modelling is not simply the ability to build a spreadsheet – anyone can do that.
Financial Model Development is similar in nature to Software Development in that it has Design, Build, Test and Implementation stages. The complexity is not in the ability to write Excel formulas but in the capture and understanding of requirements and in the ability to convert those requirements into business logic that can be managed and flexed by the end-user within a robust Financial Model that facilitates decision making during a critical period in the lifetime of a business.
Model Master specialise in developing powerful Financial Modelling solutions that support CEOs, Finance Directors and Investors with their critical business decisions. We find that many organisations are quick to bring in a large consultancy at great expense to build a Financial Model. Often, a team of graduates with little or no "real" industry experience arrive who then spend a great deal of time and budget without ultimately delivering the right solution.
In Financial Modelling, more people does not mean better or faster results. In our experience, an experienced Financial Modeller will be able to design, build, test and implement the robust industry leading Financial Model your organisation needs in less time using the following approach:
Our technique is to work backwards from the required outputs. Through understanding exactly what outputs are required from the Financial Model, this defines exactly what input data is required.
Business Analysis is then required in order to gather the detailed requirements involving tasks such as: liaising with specialists within the Finance Teams; liaising with the IT Teams to establish available data sources; going through documentation supplied by external regulators.
From the requirements gathering exercise in Stage 1, the physical Model build can begin. All Models are different however as a minimum they are usually made up of the following 4 sections:
We like to get to a Version 1 as quickly as possible and not get lost in the complexity as we see most inexperienced Financial Modellers do. Version 1 is largely designed to provide the end-users with confidence through demonstrating a logical structure of static Source Data and variable Parameters flowing through into the Calculations engine and then being presented in the required reporting Outputs. In subsequent versions, working backwards from the Outputs, each item needs to then be taken in turn and a calculation created. This allows the build to be broken up into logical versions which can be shared with the Users.
Testing happens both throughout and beyond the Stage 2: Build stage.
During the normal course of building we perform our own personal testing of calculations and outputs. Breaking the build into logical versions - as described in Stage 2 – has the added advantage of facilitating logical testing by the end-users throughout the build as opposed to waiting for a large part of the build to be completed as occurs in many software projects.
The Financial Models we develop are usually critical in nature and so this approach, again, provides the end-users with confidence that the build is both on track and logically correct. As most of the testing has been completed during the build, the remaining testing activity is usually more UAT in nature and actual Model usage activities such as Stress Testing can take place.
A critical component of Financial Model development is that they are designed for handover to the end users.
This may seem obvious yet we see so many consultants build overly complex undocumented Models that only they can operate – meaning they are retained for longer periods.
Through our iterative Build and Test stages described above, the end-users have already become very familiar with the workings of their new Model. Documentation needs to now be prepared that covers both a User Guide and a Technical Guide to provide the end-users with further confidence that their new Model is something they can maintain in-house going forward.