Excellence in financial modelling: The key requirements
1. Technical expertise
2 1 Many financial models have a close relationship with financial reporting standards (be that IFRS, UK GAAP or another) and a company’s own accounting policies. Integrated three-statement forecasts form the basis of a number of modelling use cases and it is important that the inputs, mechanics and outputs are consistent with the actual accounting treatment adopted or intended. Another key sub-set is models used in valuation or other forms of investment appraisal. Such models must reflect correct accounting treatment but also the adjustments required such that analysis is conducted in a technically correct manner in accordance with best practice and methodologies detailed by the International Valuation Standard Council (IVSC). In order for such financial models to be accurate and suitable for their intended use, it is essential that modelling expertise is married with the required accounting and valuation knowledge during the planning, development and testing phases. 2. Accounting and valuation knowledge
5 3 Combining modelling expertise, best practice and experience with the necessary accounting and valuation knowledge is a good recipe for building highly functional and informative financial models. For many use cases however, specific situational experience is also of paramount importance. Where models are developed to analyse and present specific information in support of a particular situation, a detailed knowledge of the processes and commercial considerations at play is vital in order that the mechanics can be accurately developed, and the outputs properly understood and utilised. Where the purpose of a model is defined by complex rules and regulations relating to a particular situation, the right experience is necessary to ensure appropriate logic is applied to the model calculations. For instance, corporate finance experience is required to ensure deal models reflect the commercial and practical realities of M&A and restructuring experience is essential to ensure entity priority models reflect the realities of distressed transactions and liquidation. 3. Situational experience
“Financial modelling is one of the most highly valued, but thinly understood, skills in financial analysis” 1 . The ability to develop high-quality, highly functional financial models is dependent on expertise in financial analytics, coding languages and data-management. As with all technical disciplines, mastery comes through both training and experience, with a seasoned financial modeler having a fundamentally superior ability to navigate the plethora of challenges than an intelligent novice. Equally important are adherence to best-practice build processes and a deep respect for review and quality control procedures. The inherent risk of spreadsheets is widely understood, with research having shown that about 50% of spreadsheet models used operationally in large businesses have material defects 2 . A risk-management mindset is of fundamental importance.
1 Corporate Finance Institute, 2 Cornell University
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