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Financial modelling is an exercise in teamwork and leadership

Rob Bayliss Rob Bayliss

It's easy to think of financial modelling as a hands-on programming job, but that overlooks many of the ingredients for success. Rob Bayliss explains why forecasting requires leadership and a carefully thought out collaborative process designed to knock out model wrinkles.

Effective financial modelling certainly needs the work of someone who knows how to use Excel, and can do things neatly, cleverly and consistently. However, this important job shouldn’t be thrown at your most-junior accountant just because they’re the best at using Excel.

Working as a team, not going alone

Like any business process, financial modelling should be tackled with the combined resources and wisdom you have as a team. As time-pressure looms, it’s all too easy to chuck it at someone bright and put blind faith in their handiwork when the model emerges, coated in sweat and blood, the next morning. Solo financial modelling creates risk, though. People make mistakes, especially under pressure.

Imagine you are having some building work done. You’d want a credible and structured team doing it. There should be an architect, a project planner, some builders, a foreman or two, a specialist electrician and a plumber, and a standards inspector at the end. You wouldn’t be filled with confidence in the building work if just one worker, however dexterous, turned up with a wheelbarrow and just set straight to work.

The right roles for the job of financial modelling

When your business needs a financial model, you want to make sure that the right roles are filled, and that there’s a productive interplay accompanying an orderly process that sees each specialist apply their expertise. Great financial modelling needs:

  • leadership and oversight from the board at the start to determine the scope and detail needed in the model, and to form the strategic view of what the model should achieve
  • ideas on design proposed by the financial modelling expert and their manager, challenged and then signed off by the leadership
  • time away from day-to-day responsibilities for the builder to do the additional labour needed
  • disciplined work in a planned order, to a timetable, with checks and balances built in
  • independent scrutiny by the manager, who offers a second pair of eyes looking for the right things, and iteration of fixes and checks as snags are dealt with
  • overall review, challenge and ownership from the board of the results – fuelled by understanding and comfort with the principles that built it up.

Financial modelling may see its most intense activity with a skilled Excel expert, but the process to get it absolutely right for the business begins and ends at the top.

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The importance of good financial modelling habits

There’s usually an 80:20 rule operating in financial modelling, where focusing on 20% of the possible content gets you 80% of the way to a sound result. In your financial modelling, you should be:

  • careful to isolate your assumptions clearly by separating them out, collecting them up in one area in your model and shading them with their own fill colour
  • obsessive about asking whether there’s a shorter, neater and better way, instead of stepping back proudly from that multiple embedded “IF”
  • conscious of logic flow in your model – left to right, top to bottom,  like a book
  • rigorous in linking up your financial statements together properly, with a check on the Balance Sheet and no cheating.

Beyond that, much of good financial modelling comes down to following best practice ideas consistently and with a dose of common sense. In other words:

Do

Don’t

Keep it simple

Give too much detail or none at all

Make a plan right from the start

Neglect to get your model reviewed by someone else as you go

Use colour and formats cleverly and sparingly

Hard-wire assumptions into formulas

Use short formulas that can be filled from left to right

Change formulas to be different to their neighbours

Be aware of logic flow, like a book

Let your model become circular

Be conscious of model size and calculation load

Use macros or VBA code to do things that Excel could do

Create a summary dashboard for the most important results

Add ten more graphs to your model for the sake of it

For a bit of bedtime reading around good financial modelling practices, the Institute of Chartered Accountants in England and Wales (ICAEW) has published a great guide that you could start with.

To talk more about your financial modelling challenges, contact Rob Bayliss.

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