Confessions of a serial modeller

It has been a long time coming and now it is time to confess. I am a serial modeller. There, it’s out in the open!

Confessions are normally associated with guilt, or wrongdoing or some injustice, but in this instance, I am rather proud to own up. So, why do I feel the need to confess?

Because financial modelling is such an important issue and the corporate world and the finance professionals who populate it deserve to know. Properly researched, fit for purpose, flexible predictive financial models are invaluable tools to allow management to make informed decisions.

My commitment to modelling started a long time ago. Why? Because of a serious need.

At the time I was CEO of a group of companies, expanding rapidly in terms of both products and geographical activity. And while we were profitable and cash positive, our internal cash generation was simply inadequate to fund our expansion plans.

While being very supportive, our bankers suggested that we needed to do some longer-term financial planning: simple enough in principle, but how to predict our requirements for the next five years given our dynamic expansion?

My solution, with a lot of help from my friends – in particular Dave Theron, who at the time was South Africa’s leading financial modeller – was to supply all the business knowledge, the insight, nuances and drivers of the different companies and he built the model! It took a long time and lots of work, but finally we were done.

Our first presentation to our bankers was met with patent disbelief and scepticism – understandably as they had never seen a predictive financial model before – but after a rather long and detailed “show and tell” session, we won the day and were granted the expansion finance we needed.

I had just lived through a tangible real experience of the power of financial models, hence my addiction. It’s all about belief, and nothing creates belief more than success.

Of course, my long business career has traversed many different fields, with many fascinating and different challenges, but throughout there has been one constant – financial models. Simply put, I am a believer!

There are many definitions of financial models, but to keep it simple one may define a model as:

“a means to an end - a predictive tool used to understand or analyse complex business situations - to cut through complexity” and the process of modelling as: “the assembly of all relevant components of a business case, all the drivers of business performance, in a logical and structured manner, into a predictive tool for the evaluation of financial performance”.

Below is a diagram illustrating the relationship between the real world of business and the financial model.

For the non-believers or those who may still need convincing, here is some rationale for modelling:

• Effective models allow management to make informed decisions
• Models evaluate strategy – quantify alternative strategies
• Models determine the financial feasibility of a proposed project
• Models remove uncertainty and quantify risk
• Models permit realistic what if analysis – alternative scenarios
• Models are the most appropriate tool to manage volatility, uncertainty, complexity and
  ambiguity
• Models are predictive tools – forward looking and ideal for managing dynamic change

I am fully aware that zealots can be a bit trying, even boring, but I trust the foregoing is neither.

In my respectful opinion, management who do not equip themselves with the best possible tools to discharge their responsibilities and optimise shareholder returns are not doing their shareholders any favours.