Financial Modelling: Diamonds in the Rough

This article is written by financial modelling specialist, Lance Rubin. You can find more of Lance's work at https://www.modelcitizn.com/

Background

Why is it so hard to find Finance staff with good financial modeling skills?

Surely all accountants and professional finance people are good financial modelers?

When I was leading a large team within the Finance function of a major Australian bank it was difficult to find good modeling skills.

This isn't just a skills gap in banks but across all Finance teams in corporates and small to medium sized entities.

It's nobody’s fault, we were never trained and everyone just got tips off the resident "Excel expert" in the team. There is always one...Or we used Google and learnt from Chandoo and YouTube videos to solve problems in spreadsheets….just like you solve anything really…YouTube saviour.

When joining a company it was expected that everyone knew how to use Excel with a high degree of competency in Financial Modeling.

But the problem, in my experience, most don't have this competency, no matter how many years they have been in Finance, even in the largest companies in Australia.

The general level of financial modeling skills in Finance is pretty poor...period.

Most just think having good financial modeling skills means you are good at Excel but its way more than that.

Let’s break it down into 2 key questions:

1)    What does competency actually mean?

2)    How do you solve this skills gap?

Competency in Financial Modelling

Is having excellent Excel skills means you are great at financial modelling?

There is certainly a strong correlation but FM is way more than just Excel formulas, functions and shortcut keys.

Does knowing how to use Vlookup qualify or is Index (Match) an absolute dead set requirement? What is your opinion?

Firstly, I believe that it really doesn't matter which formula you use in theory provided you can build a financial model that is flexible (expandable vertically and horizontally), dynamic (cope with unlimited what-if scenario analysis and possibly Monte Carlo simulation) and well structured (no hardcoded formulas and organised content)

Secondly once you have nailed the above you need to be able to comfortably build a 3-way model, the bedrock of any good modeler.

Lastly you need to be able to use the model in delivering insight, foresight and influence decision making.

Being the CFO of a fintech start-up, amongst building models for many other small and medium-sized businesses, this is where the value lies.

In reality most people don't care about the model but the decision that is made with it. Some complex decisions on working capital, global expansion and multiple debt tranches is not simply solved without a robust financial model.

But don't lose sight of the real prize here and that is influencing key decisions made by non-financial people or customers.

I originally thought competency in financial modeling consisted of 3 main technical skills, as I wrote in one of my first blogs   ….but I am now absolutely convinced that this is actually 5 key areas having presented in front of over 300 finance professionals over the past 2 years. The first 3 are a repeat of the earlier post.

1.    Excel - Understanding how to construct formula logic and model structure within Excel. This is really a competency in using Excel for more than just a fancy calculator.

Building consistent logic horizontally for example. I still see many people not able to construct a formula that is consistent and reverting to hardcoding. Learning how to build a multi-dimensional scenario managers and run monte carlo simulation using Excel formulas and perhaps a bit of VBA can be important in some instances (not all).

2.    Accounting – understanding how to build a balance sheet and have it balance is the bedrock of a good model.

3.    Business Acumen – understanding what drives value in a business and the drivers.

4.    Problem solving skills – this is something that has become probably one of the biggest skills gaps. The rest one can learn through experience and practice but problem-solving skills goes more into the way your brain works and solves problems. Some people are really good at this, others just cannot “crack the code”.  It important to understand your strengths and also areas of improvement.

5.    Technology – in particular learning how to use new technologies that sit inside and outside of Excel can enhance your existing modeling skills to build models quicker, more accurately and visualise the results in a way that is more engaging.

To get started you should probably take a look at the Financial Modeling Institute (FMI) and the Advanced Financial Modeler (AFM) level 1 accreditation. This will at least cover off on 1-4 above.

Thereafter you can explore some of the technology we use in the Future of Financial Modeling world tour. See our YouTube channel for more information.

How do you solve this skills gap?

When I started at Investec Bank as a financial modeler within the Property Investment Banking division I remember being behind the pack in my financial modeling skills.

But, with a bit…well a lot actually, of practice by the time I was in the Corporate Finance and later the Property Private Equity teams I had even surpassed those that I trailed.

Solid practical experience, late nights, learning to apply the best practice spreadsheet modelling standards and a few deals under my belt I closed in on the pack and was near the front.

Then I built one of the most complex models with multi tax, multi entity and multi currency to assist the Toga hospitality group (Adina brand) expand their presence into Denmark and Germany.

The bottom line is practice. It's in the 70% of your knowledge and skills development vs the 20% observing and 10% studying.

I also recently submitted an alternative FMI solution to the example case study. You can find it here.

Conclusion

Financial Modeling opens new doors of opportunity today and into the future.

If you don't have them in your team and don't have the time to learn it yourself here are some steps you can take.

1. Sponsor and support your team in learning through the FMI and the approved trainers (yes we happen to be one).

2. Look out for upcoming webinars and a series of workshops as part of our global tour on the Future of Financial Modeling. Consider sending them to learn some of most advanced tools for model building and visual influence.

3. Hire a gun financial modeler using the Vervoe financial modeling interview scripts. It will help you find that needle in a haystack. It will certainly give you the confidence of finding competent financial modelers.

I used it to hire our contractors now located in 5 countries, without wasting time interviewing all potential candidates who were only good at Excel.

And lastly, don’t give up and remember in the words of Dr Carol Dweck….master the art of “Yet”.

About the Author

Lance Rubin is a chartered accountant and ex-investment banker. He works in Australia, and is very highly regarded in the world of financial modelling. You can find out more about Lance and his work at https://www.modelcitizn.com/