Colin Human tells Finance Indaba audiences: the value of financial modelling lies in its flexibility.
Colin Human, founder at Goalfix, lost a bet to his sister-in-law: he was convinced that Donald Trump would lose the US presidential race in 2016. After all, Colin’s predictive skills were strong (over 30 years’ experience). Looking at historical indicators (such as Obama’s election) and other factors, there was simply no way Trump would win.
Trump’s stunning victory is known as the Black Swan in finance modelling lingo. “It’s when something comes out of nowhere and blindsides you,” said Colin. This is inevitable in forecasting – no-one can truly predict the next nano-second. “The moment we attempt to explore or predict the future, all semblance of certainty disappears,” he said.
Financial modelling was done for the build of the now-controversial Medupi Power Station in Limpopo. The initial costing forecast sat at R50 billion, but it’s now past R200-billion.
In a game of blind-folded “pin the tail on the donkey”, however, financial modelling’s tail would be the closest to where it should be.
“Financial models are far from perfect. Their real value is not in precise accuracy, but in their flexibility.”
His aim in Ballroom 4 at the Finance Indaba 2018 was not to equip finance professionals with fortune-telling skills, but to help them build well-researched, flexible, logical financial models in Excel.
Effective models should have the intention of allowing management to make informed decisions. Models should be a tool to evaluate strategy, quantify alternative strategies, understand the rate of change and to allow almost-perfect scenario planning.
Colin is passionate about financial modelling and not simple forecasting. He notes that forecasting is only good as its primary assumptions, while financial models are flexible, structured and permit easy what-if analysis.
“This is possible despite volatility, uncertainty, complexity and ambiguity. Financial modelling helps us, essentially, to cut through complexity and to have crystal clear focus. That’s its value.”