Time to call in the financial modelling experts?

Support with building financial models

Author:

Ashish Yadav

Published:

12 Jun 2020

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Whether to develop in-house resources or call upon the specialists

Why take a driving test if you have no intention of ever driving a car? Answer: you wanted to acquire the knowledge, skills and experience to confirm that this activity wasn’t for you.

The more informed you are, the more likely you are to make sensible decisions.

At F1F9 , we have been building financial models for clients and running financial modelling courses for 20+ years. People come on our courses to learn how to build financial models in Excel and leave with extra knowledge that is equally valuable.

They come away from our courses knowing when they should call in the financial modelling experts.

Here are five indicators that you should be building your own financial models, followed by five signs that point towards calling in the experts.

Do it yourself if…


Building the skills, experience and capability of your team is a top priority

It is very satisfying to come from a training course and put skills immediately into practice to transform business performance. It’s even more satisfying if you can do that as a team. Your team culture will benefit from a collective sense of satisfaction.

You can show an immediate return on investment: increased in-house productivity and team motivation.


You have identified financial modelling as a core competence

A core competence sits at the heart of why you are in business at all. Compare that with threshold competences: activities that you undertake only to be able to compete effectively.

If financial modelling is a threshold competence, then the case for outsourcing becomes stronger. That’s based on a competence-led strategy: do what you excel at; outsource everything else.

But if financial modelling is the reason why your team comes to work every day, then keep the serious fun in-house.


The barriers to external procurement are deemed too high

Keep activities in-house if you have limited capacity to negotiate and monitor contracts.

Effective financial modelling experts will seek to make it as easy and flexible as possible to work with them. This might include: a free trial period; hourly billing (of productive hours only); short sprints with clear objectives and budgets attached; billing capped at budgeted hours.


You are concerned about being over-dependent on third-party consultants

Avoid arrangements where even tiny changes to a model have to be passed on to an external party.

Experts and clients can manage this problem jointly if they prize transparency. Don’t overlook a key advantage of Excel: it is available to pretty much everybody. Open-workbook approaches to model development can work well.

Consider carving up the work in different, imaginative ways. For example:

  • Undertake model design work in-house; outsource the spreadsheet engineering
  • Build the initial model in-house; outsource the ongoing maintenance / financial model support
  • Make minor changes in-house; outsource heavy-duty spreadsheet engineering (macro development, for example)
  • Undertake interesting modelling in-house; outsource the dull, highly repetitive tasks


You do not know what sort of financial model a consultant will build for you

Having learned one approach to financial modelling, it is painful if somebody else takes an entirely different approach.

That’s why it’s important to seek out financial modelling experts whose core activities include training as part of their consultancy offering. If you are confident that the model that you see is recognisable because it reflects how you have been taught to model, then you are much more likely to engage with a third party contractor.

The most effective financial modelling specialists will follow a modelling standard that sits in the public domain, is recognised across industry sectors and is readily available to review. Others will share with you what you might expect to see from a financial model that they build with you.

Call upon the experts if…


The benefits of having a contractor that builds financial models just like you would build yourself are immediate and self-evident

It sounds odd to consider outsourcing having just acquired a set of skills but it can be a smart move. Financial modelling lends itself to outsourcing if you are confident that you and the contractor have a common understanding. That’s why financial modelling standards are so important: they give you some assurance that the contractor will do a better job than you could.

Put another way: just because I have learned to drive a car doesn’t mean that I will never take a taxi. I’m even happier to take a taxi if I am confident that the driver drives like me – only significantly better.


You are going to be under unreasonable pressure to deliver

Experienced financial modellers are used to working to unreasonable deadlines. They will draw on their experience of previous models built and templates to optimise their productivity. They will prioritise essential work and deploy temporary coding for model logic that can be refined once time pressure is off.

The risk of an experienced modeller missing an important (even unreasonable) deadline is much lower than with a less-experienced modeller.


The assignment you are working on contains high levels of complexity

Complexity has 3 potential sources:

  • The conceptual model (how difficult the assignment is to understand);
  • The spreadsheet solution (the complexity required in formulas); and
  • The financial modeller (their efforts in marrying the conceptual model with the spreadsheet solution)

A specialist with a team of financial modellers is much more likely to work effectively to reduce the complexity arising from these 3 sources. That’s because their modellers will use a team-based approach supported by rigorous quality control – thus reducing the risk of modellers inventing and deploying untested approaches on their own.

Complexity is also easier to manage if it has been met before. Spreadsheet solutions can be designed based on previous problems solved and using tried-and-tested template coding. The skill is in identifying, from the conceptual model, what is boilerplate and what is genuinely new.


You and your team have too many other things to do

Resource issues can range from staff continuity (it is a frustration if a newly-trained modeller decides to move to another organisation) to staff having higher priority calls on their time.

There is a myth that financial modelling experts should only be given complex things to do. Use a specialist to complete the dull, highly repetitive tasks that are such a drain on internal resources (and which, through their dullness, can become susceptible to human error).

Use a specialist to complete the easy-to-overlook tasks: running quality control procedures, introducing effective checks.


The assignment goes way beyond the scope of your skill base

A team focused on data-light calculation-heavy models may struggle when asked to look at data-heavy calculation-light models. Each model assignment requires a different approach:

  • A project finance model, let’s say, of a toll road whose contract is yet to be awarded, is an example of data-light calculation-heavy. It contains a heavy-duty calculation engine for revenues, costs, financing options, reserves, taxation, optimisations (automated using VBA and macros) to support a dynamic set of forecast financial statements, ratios and returns; compared with
  • A corporate finance / reporting model – taking a trial balance as its starting point. This is an example of a data-heavy calculation-light assignment. There may be hundreds of ledger lines to which others are regularly added, removed or amended. The model is updated every month – so detailed quality control checks become critical. The calculation engine (while rich in data) is relatively simple: its focus is on cleaning the raw data, allocating it appropriately, aggregating it and presenting aggregated results.

The skills you need to build a complex calculation engine are different from the skills you need to manage large data sets. Consider using an expert if you are unable to play to your strengths.


If any of these last 5 situations sound familiar to you, contact us to talk through your modelling requirements and find out how we can help. 

Ashish Yadav
Ashish Yadav
Ashish Yadav joined F1F9 in April 2012 and is now part of the leadership team in F1F9's India office. He has worked on a wide range of modelling assignments across many sectors including real estate, recruitment services, power and financial services. He specialises in designing and creating Excel based solutions for optimising the performance of corporate finance functions.