As I head towards my 40th Birthday, I am increasingly musing upon ageing and mortality. It is inevitable that I will grow old, slow down, deteriorate and eventually die (unless something more dramatic happens in the meantime). As I sit here at my desk, staring into the abyss, my thoughts (as always) turn to financial modelling.
Financial models, like me, will grow old, slow down, deteriorate and eventually die. Does it really have to be this way?
Financial models are an asset (hopefully not a liability….) for your business. Organisations spend significant time and money in the creation of financial models to aid in decision making and to provide future benefit. The value of financial models should be recognised and like any other asset in your business, steps should be taken to maximise their useful life.
Why do models grow old?
The excel environment has remained fundamentally unchanged for many years now. Models do not generally grow old as a result of changes in the excel environment or changes in the fundamental technology of spread-sheeting.
The key reasons that models become old are outlined below.
- 1. Things change
In business, things are changing at an ever accelerating pace. Organisational structures change, cost and revenue structures change, funding structures change, accounting standards change…
As things change, your models require tweaking and can begin to lose integrity. They gradually age.
A model built to a rigid structure can very quickly become obsolete and die when the fundamentals of the business or project it is designed to simulate / forecast, change.
- 2. Models get hacked
Financial models are often left in the hands of people not trained in financial modelling for ongoing use. This is as it should be, as you don’t have to be a modeller to use a financial model.
However, the problem arises when the user needs to do something that the model was not designed to do. This generally happens under time pressure and the user will ‘hack’ the model by making a change in a non-structured way, or hardcoding where there should be calculated values.
Multiple ‘hacks’ to a financial model over time will again begin to cause a loss of integrity, and cell by cell the model begins to age.
- 3. People move on
All too often, the useful life of a model is linked to the term of employment of the person who built it.
Complex models built and owned by a single individual can leave an organisation at risk when that person moves on. Often, the models continue to be used by the people left behind, who often do not fully understand how it is working.
As complex models become further removed from the original builder, the less confidence the organisation can have in its integrity. As confidence drops, it is only a matter of time before the model dies and a full re-build is required.
Slowing the ageing process
It does not have to be this way. It may be possible to significantly increase the useful life of your models, or even achieve model immortality (at least until whatever replaces excel is invented).
Slowing the ageing process:
- 1. Keep Flexible
In designing a financial model, you need to recognise in advance that things change. Any financial model should be built with flexibility in mind.
Consideration should be given to the key structures which are likely to change as part of the design process.
Adoption of a financial modelling standard such as FAST can help significantly with flexibility. Constructing models on a granular, modular basis, using simple formulae can greatly enhance the ability of a modeller to make significant amendments to a model without in any way harming the integrity of the model.
A flexible financial model will be able to evolve to meet the changing requirements of business rather than dying as its environment changes.
- 2. Take care of your model
Try to avoid the ‘hacking’ of models by untrained modellers.
You should ensure that users of models within your organisation are trained to an appropriate level and are not expected to make model changes beyond their modelling capability.
Where it is necessary for a non-modeller to make a ‘hack’, this should be logged as such and then the model should be given to a trained modeller to process the change correctly.
- 3. Sharing
Do not allow creation and ownership of complex models to reside within a single individual within your organisation. Or worse a single individual outside of your organisation.
Your models should outlive your employees.
Model development should be treated as a collaborative exercise both within your organisation and between you and your advisors. Knowledge of the functioning of the model should be shared throughout your team.
Again, use of a shared modelling standard will facilitate modelling collaboration as your team will speak a single ‘modelling language’.
Please let me know of any other reasons / remedies you have for premature model ageing. For further information on standardisation of financial modelling, please see our E-book – How to standardise modelling.