Financial Modelling: Two Important Questions

Two important questions came up after my recent financial modelling presentation at the 2014 AFP annual conference.

The first question was on my opinion on how much time a financial modeller should spend between inputs, calculations and outputs.

Like any professional, it depends. There are many variables to be considered, such whether the financial modeller is proficient with the financial modelling tool (i.e. Excel, Access, etc.), their understanding of the organisation or business modelled, their familiarity with the sources of information for the model, and understanding the perspective of the audience of the model.

For example, any large consulting firm developing a model for a new client will have teams of professionals that focus on gathering information, developing calculations and business rules, and crafting presentation decks for the model.

If a financial modeller is relatively new to the business being modelled, the most important aspect would have to be getting the maths right. There is an asymmetrical benefit-consequence ratio in ensuring that the calculations are correct. If a financial modeller gets the calculations right, the benefit gain would be negligible as it is what is expected from financial modeller. However, if the modeller gets it wrong, the outcome could be consequential on his reputation and even his career; not to mention the project being modelled.

On the other hand, financial modellers who are more experienced and are proficient in the technical aspects of the business, including the use of models, would benefit more if they focused their attention on how to tell the story of the model (i.e. the output section). This is one way for financial modellers to stand out, being able to effectively and efficiently articulate the story of numbers.

The second question was what book on financial modelling this writer would recommend. I have read a number of books on modelling and believe there is no one “end all, be all” book. For example, creating a financial model that includes balance sheet would combine the knowledge on leverage ratios, cash/liquidity management and accounting concepts.

What helped me though is cobbling up concepts in economics, finance and business, getting a reference book on Excel, and attending seminars on various business-related topics such as valuation and financial analysis, project finance and accounting. It also helps to have someone there to bounce ideas off and mentor the financial modeller.

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