Using Excel for Business Analysis. Fairhurst Danielle Stein

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СКАЧАТЬ of the fantastic things about financial modelling is that it is applicable across so many different industries. Good financial modelling skills will always stand you in good stead, no matter which industry or country you are working in! Financial modelling consultants or generalists will probably work in many different industries during their careers and be able to build models for different products and services. They will probably not be experts in the intricacies of each industry, however, and that’s why it’s important for a financial modelling generalist to consult carefully with the subject matter expert for the inputs, assumptions, and logic of the financial model. Don’t be afraid to ask lots and lots of questions if the details are not absolutely clear. It’s quite likely that the person who has commissioned the model hasn’t actually thought through the steps, inputs, assumptions, and even what the outputs should look like, until you ask the right question.

      Financial modelling consultants are very careful to transfer responsibility for the assumptions to the end user, which is a very sensible course of action. The person building the model is often not the one who has commissioned it or the person who is actually using it. Model builders are often not overly familiar with the product or even the organisation, and they cannot (and should not) take responsibility for the inputs. (See the section “Document Your Assumptions” in Chapter 3 for greater detail on the importance of documentation of assumptions.)

      For example, when building a pricing model, the modeller needs to understand the product and how the costs and revenue work. Experience with regulatory constraints will help the modeller to understand the basis of regulation and its components (e.g., cost building blocks, cost index, revenue cap, weighted average price cap, maximum prices, etc.). Understanding of economic concepts, such as efficient cost calculation, return on and of a regulatory asset base, operating costs and working capital, long-run versus short-run marginal costs, and average costs, are other examples of industry knowledge that is useful for the financial modeller.

      EXAMPLES OF INDUSTRY KNOWLEDGE

      ■ Regulatory constraints.

      ■ Industry standards.

      ■ Maximum price that can be charged for a certain item.

       Accounting Knowledge

      Elements such as financial statements, cash flow, and tax calculations can be an important aspect of many financial models. Professional accountants know every single accounting rule and law there is, but this does not necessarily make them good financial modellers. If a highly skilled accountant built a financial model, you would guess that the layout and structure of the financial statements will be 100 percent correct, but will they be linked properly? If you change some of the inputs, does the balance sheet still balance? Sometimes not! A good accountant, or even someone qualified who has a master’s degree in applied finance, for example, might not be familiar with all of the modelling technical tools, even if he or she is a competent Excel user. As with the other modelling skills, you don’t need a top level of accounting knowledge to build a financial model. In fact, financial models are often relatively straightforward from an accounting standpoint. You certainly do not need to be a qualified accountant to become a financial modeller, although a good understanding of accounting and knowledge of finance certainly helps.

      There are some situations where industry knowledge and accounting are required for financial modelling. For example, in manufacturing or, particularly, in the oil and gas industry, the modeller needs to know whether FIFO (first in, first out) or LIFO (last in, first out) accounting is being used, as this has a big impact on the way that inventory is being modelled. A financial modeller who has never worked in these industries may not have ever heard of FIFO and LIFO, and would probably have no idea how to model them.

      EXAMPLES OF ACCOUNTING KNOWLEDGE

      ■ How is a profit-and-loss statement structured?

      ■ How do I construct a cash-flow forecast from my model?

      ■ How do I turn capital expenditure into a depreciation expense?

       Business Knowledge

      A modeller with wide-ranging business experience is well equipped to probe for the facts and assumptions that are critical for building a financial model. This is probably the most difficult skill to teach, as it’s most easily picked up by working in a management role.

      Business acumen is particularly important when commissioning, designing, and interpreting a financial model. When creating the model, the modeller needs to consider the purpose of the model. What does the model need to tell us? Knowing the desired outcome will assist with the model’s build, design, and inputs. If, for example, we are building a pricing model, we need to consider the desired outcome – normally, the price we need to charge in order to achieve a certain profit margin. What is an acceptable margin? What costs should we include? What cost will the market bear? Modellers should also have an understanding of economic concepts, such as efficient costs and how these are calculated, an expected return on an asset base, operating costs and working capital, or long-run versus short-run marginal costs.

      Of course the answers to these questions can be obtained from other people, but a modeller with good business sense will have an innate sense of how a model should be built, and what is the most logical design and layout to achieve the necessary results.

      EXAMPLES OF BUSINESS KNOWLEDGE

      ■ What is cost of capital and how does that affect a business case?

      ■ Which numbers are important?

      ■ What does the internal rate of return mean, and what is an acceptable rate?

       Aesthetic Design Skills

      This is an area that many modellers and analysts struggle with, as aesthetics simply do not come naturally to left-brain thinkers like us. We are mostly so concerned with accuracy and functionality that we fail to realise that the model looks – and I’m not going to mince words here – ugly! Although it’s just a simple matter of taking our time when formatting, most of us could not be bothered with such trivial details as making models pretty, and consequently most models I see use the standard gridlines, font, and black-and-white colouring that are Excel defaults. I’m certainly not suggesting that you embellish your models with garish colours, but you should take some pride in your model. See the section “Bulletproofing Your Model” in Chapter 7 for some ideas on how to remove gridlines and change some of the standard settings so that your model looks less like a clunky spreadsheet and more like a reliable, well-crafted model you’ve taken your time over. Research shows that users place greater faith on models with aesthetic formatting than those without, so one of the fastest and easiest ways to give your model credibility is to simply spend a few minutes on the colours, font, layout, and design.

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