Too many CFOs spend their time as financial gatekeepers and get tangled up in accounting, says Colin Human, financial modelling wizard and CEO of financial management consultancy Goalfix.
"It is infinitely more important to know what is going to happen or to have an ability to forecast in a flexible manner, than knowing with precision what happened in the past."
After the sensational success of Colin's financial modelling presentations at Finance Indaba Africa 2017, we sat down with the Goalfix CEO to discuss the need for CFOs to look ahead, the importance of financial modelling, and dealing with the lack of certainty.
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Goalfix is South Africa's best provider of financial modelling training courses and also offers help with corporate finance, corporate performance improvement and corporate financial health assessments. At this year's Finance Indaba Africa, Colin's presentations about financial modelling were among the most popular seminars, with Boardroom 4 bursting at the seams on both 12 and 13 October.
Using Microsoft Excel, Colin started his modelling activities in the early 80s, building up vast experience and knowledge through the numerous corporate financial models he has crafted. "Let me tell you something about CFOs in this country," says Colin. "As you know, the accounting profession dominates boardrooms in South Africa. There are many people, I say this respectfully, who are CFOs of companies who should still be in the accounting profession, because they don't really understand business and they are not really involved in directing the company."
Colin believes there are many CFOs who just play the role of financial gatekeeper. "They are very good at reporting what has happened and producing monthly management accounts and all of that kind of stuff. But what has already happened is only of relative importance. History is important but it's only relatively important." While customers, value chain and other stakeholders are important, it is the shareholders that ultimate decide the future of the business, he says.
"The key to taking care of shareholders is being able to forecast future performance with some level of reliability. That is why financial modelling is fast becoming a required skill in the finance profession."
Demand for financial modelling experience continues to outstrip supply, he says. "About a year ago, one of the largest international accounting firms, Mazars, bought Corality Financial Group, which is the second biggest modelling company in the world. That tells you a huge story. It tells you that the accounting profession is recognising the need and importance of giving value-added services to their clients, helping them to look forward."
Know your business
Models are useless if they are built by people who don't understand the business case. Colin says this is the first thing he explains to those studying financial modelling, because everything revolves around having the right variables, and accurately reflecting the impact they have on the business.
"You have to wrap your head around the business case," he says. "I've built models for the Central Energy Fund to model methane gas production from landfill sites. I once built a model for the Swaziland electricity company to model the electricity requirements for the country of Swaziland for 10 years. I have also built mining models and models for insurance companies."
These examples show that modelling is pertinent and can be applied to almost anything if you can quantify it, he says. "There's an old saying that 'if you can't measure it you can't manage it' and, to some extent, that's the truism of modelling. Because, if you can't identify what the driver is, then you can't build a successful model."
One of the main criticisms that people level at modellers is that they build models but they don't really verify the underlying assumptions which are driving the model, Colin says.
"If the inputs are wrong, then everything else that follows is going to be wrong. Sometimes you have to spend a great deal of time digging, in conversation, identifying, verifying and validating input."
Corporate financial packages like IBM Cognos, Hyperion or enterprise resource planning software SAP have modelling forecasting components, but Colin says they are cost up to R2 million and are not as flexible as Microsoft Excel, which is what his company uses. "Excel is ubiquitous - everyone uses it - at all levels, in all companies."
The downside with Excel is that there is concern among people around the integrity of the software, given that the formulas are not protected, which means there will always be questions about the accuracy of any given model.
"If you and I are going to invest a billion rand in a new mine and we have a model, we want to know that this model is right. The answers that it gives us really need to be accurate. The issue of accuracy and integrity has always been a concern related to building Excel models."
The only way that you can address this issue is to adopt a methodology that is logical, sequential and structured, he says. Goalfix has adopted the internationally renowned FAST modelling standard to ensure model reliability. "I once built a model for a platinum mining company which was raising R1.8 billion on the London AIM market. It was a huge responsibility for me to build that model and present it to my client knowing that they were going to use it to talk to banks and private equity investors in London. It is a serious undertaking, and depending on the complexity, it can take hundreds of hours of work."
No matter how good a model is, there will always be uncertainty, especially when forecasting over long periods. The further forward you go into time, the greater will be your margin of error, says Colin. "The reality is that there is no certainty in prediction. The moment you enter into the future, you will be wrong. There is no certainty in prediction. It just doesn't exist."
So, how do you solve the problem? "You build a model which is driven by well-researched assumptions and is dynamic and flexible so that you can react to changes instantly. The real beauty of financial models does not lie in their absolute accuracy but in the ability to adapt quickly and easily to changing circumstances."
By Sungula Nkabinde
This article first appeared in CFO Magazine