01st Feb 2010 - What is Financial Modelling?
What is Financial Modelling and why is it so important?
Financial modelling (also called excel modelling or business analytics) is a structured approach to decision analysis in order to understand the drivers (inputs) and outcomes (outputs).
Why is Financial Modelling useful?
As individuals and businesses, many decisions we face regarding money are much too complicated today to do accurately on the back on an envelope. There are too many inputs and most importantly, many of these are uncertain, in other words there is a range from minimum to maximum on each of these inputs. This means there is a lot of uncertainty or risk. Understanding this risk is critical for business success. Otherwise you end up offering loans to people that can’t service them and potentially causing global financial melt down. In short, financial modelling brings clarity to business decisions so that you can make the best decision available.
Sounds great in theory... But does it happen in practice?
In markets that are exposed to high levels of complexity or high levels of risk or both, successful companies are making financial modelling a core and differentiating skill. Greater identification and understanding of the risk drivers enables focused work in the most value adding areas. Also, and perhaps more importantly, those organizations that aren’t leveraging the power of business analytics will never price the risk as accurately and will therefore make worse decisions on average that those businesses that have taken the time to understand the risks.
How do successful organizations use modellers?
Successful organizations recognize financial modellers for what they are. They are analytic and commercially minded staff that know the ins and outs of a business decision better than anyone else. They’ve read every documents, they’ve understood them so well they can model it, and they know how all the aspects of a deal relate to offer value. Increasingly modellers are recognized as being among the most commercially minded and judicious resources an organization may have. Consequently they are coming out of the back office and taking a central role in day to day operation and business strategy. Should I consider a career in Financial Modelling? Financial modelling can be an excellent place to start a career. You learn the nuts and the bolts of a business and so understand the key drivers of success better than anyone else. You’ll also get great exposure to all the other departments and so be able to make an informed choice about where you are most interested in working.
What is a good modeller?
Modellers are an interesting mix of being highly analytical, numerate and detail focused but also excellent communicators as 50% of their job is talking to subject matter experts (lawyers, accountants, engineers) and working out how to model that aspect of a deal.
What is good modelling?
Good financial modelling in Excel has a number of components:
- Ability to represent a real life problem in excel at an appropriate level of accuracy
- Ability to build and structure an excel model so that it is robust and flexible
- Ability to use their model to determine and communication value and risk drivers
- Ability to format and structure a model so that it is a useful communication tool
Can I get some experience of financial modelling in Excel?
Over the last 20 years, a best practice approach to modelling has been developed to help modellers get the most out of excel for the minimum effort. The guidelines are fairly simple, but the application of them can be a bit more complicated.
If you want to learn more about best practice modelling check out www.indexmatch.co.uk who are run by modellers for modellers. We know that a SHOCKING 80% of candidates fail modelling tests.
IndexMatch offer excellent training that will help you be in teh 20% that succeed