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Financial Modeling: 2 Important Questions

  • By Juan Arangote, FP&A
  • Published: 11/21/2014
At the 2014 AFP Annual Conference in Washington, D.C., Juan Arangote, FP&A, CPA, CMA, manager of treasury and financial planning for the Greater Toronto Airports Authority, shared his expertise in building financial models as well as the complexities involved. He also examined how to approach the input, calculation and output process, and some of the most common modeling errors.

Two important questions came up after my financial modeling presentation at the 2014 AFP Annual Conference.

The first question was on my opinion on how much time a financial modeler should spend between inputs, calculations, and outputs.

Like any professional, it depends. There are many variables to be considered, such whether the financial modeler is proficient with the financial modeling tool (i.e. Excel, Access, etc.), their understanding of the organization or business modeled, their familiarity with the sources of information for the model, and understanding the perspective of the audience of the model.

For example, large consulting firms who are developing a model for a new client will have teams of professionals that would focus on gathering information, developing calculations and business rules, and crafting presentation decks for the model.

If a financial modeler is relatively new to the business being modeled, the most important aspect would have to be getting the math right. There is an asymmetrical benefit-consequence ratio in getting the calculations right.  If a financial modeler gets the calculations right, the benefit gain would be negligible as it is what is expected from financial modeler. However, if the modeler gets it wrong, the outcome could be consequential on his reputation and even his career; not to say the least, to the project being modeled.

On the other hand, financial modelers who are more experienced and are proficient in the technical aspects of the business, including the use of models, would benefit more if they focus their attention on how to tell the story of the model (i.e. the output section). This is one way for financial modelers to stand out, being able to effectively and efficiently articulate the story of numbers.

The second question was what book on financial modeling I would recommend. I have read a number of books on modeling and I think there is no one “end all, be all” book. For example, creating a financial model that includes balance sheet would combine the knowledge on leverage ratios, cash/liquidity management and accounting concepts.  

What helped me though is cobbling up concepts in economics, finance and business, getting a reference book on Excel, and attending some seminars on various business-related topics such as valuation and financial analysis, project finance and accounting. It also helps to have someone to bounce ideas off of and mentor the financial modeler.

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