Yesterday, at the Model Off awards ceremony at Microsoft headquarters in London – talking about why ‘Financial Modelling’ always refers to a ‘single-person activity’ when in reality mostly it is not – speaking with David Lyford-Smith of the ICAEW.
Single-person activity
These are examples of ‘single-user’ modelling.
Example 1: My first financial model with Excel v2 (yes 30 years ago!) was in a coffee-table-book publishing company. There were about 50 existing and new publications. The cost structures were identical for all the products, the model rolled up to one group level. The output was a P&L forecast and a Cash Flow forecast for the year ahead. On the input side there was … just me. All the changes in operating variables came to me (by various random means!), I plugged them in. On the output side also … just me. I communicated the result at the various meetings. It was a one-man show.
Example 2: Similarly, my friend Mandy makes physical models in an architectural practice. She gets the drawing and plans from the architectural teams, and she builds a physical model of the building/development with Airfix-like bricks, trees, people, roads. The output is the physical layout that you can see. The inputs all come to her … just her. All modifications go through … just her.
Both are single-person activities.
Multiple-person activity
Today, modelling in the real world is more like this.
Example 3: This is the actual case of an Annual Budgeting Model of an engineering consultancy employing 2,500 people in the UK. The inputs came from many directions, and from many departments and many people, and they were only available at different/later stages of the budgeting process. The structure of the model itself is expected to change during the process, because the group hierarchy is expected to change in the two months between the creation of the model and the final results for the board meeting. Some key structural aspects of the budgets will depend on the result of numbers coming through the model in the budgeting exercise.
This is clearly not a single-person activity. It is a process. The inputs to the budgets come from 90 (yes, ninety) budget holders. This covers nearly 400 operating units. The source data included in the templates come from the GL when the latest month is finalized, the charge-out rates and utilization of the professional engineers come from the sales system, via the sales analytics. Overhead apportionment relies on data from the facilities department, and the other people keeping tabs on the other drivers. These inputs aren’t ready when the process begins, unlike Mandy’s drawings.
This is a process that involves many people. It has several tight critical paths. It can’t be done by one person using traditional spreadsheet techniques (such as external links to consolidate), however hard-working and immune to nervous breakdown! It has to be robust. The model must not ‘fall down’ under the weight of sheer complexity.
And what’s more? It can only be done by spreadsheets because we don’t have the luxury of a year to develop an enterprise system, or £1 million to spend on it.
As the punchline in the Silk Cut TV ad went (was it in the 80s?) … (in a comic Zulu accent) ‘TWO WEEKS IS AAAAALLLLL YOU GOT’!
Oh and … it has to be simple, and it will have to be re-usable every year.
Impossible?
The key is … Data-Driven
The key to the solution is to make the model ‘data-driven’ in both its assembly and the collection of data. And the shaping of the analytics at the end.
I have explained this in the WTF to OMG!
The Point
99% of the time, when people talk about Financial Modelling it’s about a ‘single-person’ type of model I describe in Examples 1 and 2. But in a medium to large organisation it is never a single person problem.
And given the fact that only spreadsheet technology has the availability and the flexibility to tackle such challenges, when we talk about Financial Modelling with Excel, why aren’t we talking about Financial Modelling ‘as found in the real world’?
(By avoiding the subject we’re inadvertently allowing the Alt-Excel industry to spread the fake news ‘Excel can’t do this or that’. When actually it can, and quite easily – if we’re smart)
Roadshow
This is best demonstrated with a working example. You can get in touch for an In-House session. (or, an online session if you’re thousands of miles away)
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