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Building a Financial Model – Art or Science?

  • By Meredith Hobik
  • Published: 4/23/2018

art
FP&A professionals must learn to balance both science and art when building a financial model and understand when which approach is more applicable to a particular use case. Management consultants transitioning to FP&A are trained to be strategic and creative, and are likely more apt to tackle financial models that are more like an art. Whereas accountants transitioning to FP&A and trained FP&A practitioners will be more comfortable tackling financial models that are more like a science. CFOs will expect FP&A teams to build financial models that incorporate both elements.

Let’s dive in to explore when as a FP&A practitioner you must channel your inner Einstein versus your inner Picasso.

INNER EINSTEIN

Webster’s Dictionary defines science as a system or method reconciling practical ends with laws. Financial models that are scientific can be spotted by looking for spreadsheet tabs labeled “metadata” and “hierarchies” that are pulling data from various enterprise systems. When FP&A practitioners are relying on structured transactional data and hierarchies from enterprise systems, most likely the financial model will be addressing a particular use case that is governed or influenced by GAAP, IFRS or FASB regulations.

These types of models may have multiple owners or contributors and be maintained weekly, monthly or quarterly. Multiple people will be contributing to this financial model and structure will be important to keep the model builders within accounting swim lanes. Thus, with these types of models, you will often see a team of FP&A practitioners collaborating around a white board to sketch out how the financial model will be structured before diving in to the spreadsheet to begin building.

Planning, budgeting and forecasting, revenue recognition, or capital expense planning are examples of financial models that resemble science more than art. While some creativity may be applied to drivers in these financial models, for the most part, there are practical approaches and rules to follow when a FP&A practitioner builds these financial models. Structure, precision, and accounting rules matter most when addressing these types of financial models.

INNER PICASSO

Webster’s Dictionary defines art as the conscious use of skill and creative imagination. Financial models that resemble art are easy to spot. The model builder is likely the only owner of the model, however, many viewers will be viewing this financial model to awe at the results. Limited transactional data and relational hierarchies are needed to build this financial model. GAAP, IFRS and FASB have little to no impact on how the spreadsheet was designed.

Most likely, this particular financial model is solving a strategic question the FP&A practitioner was asked to address. This will likely be a one-off or ad hoc request made by the CFO. In these situations, an FP&A model is like a piece of art and a FP&A practitioner must be creative and innovative in approaching how to structure this spreadsheet. Excel becomes a canvas to the FP&A model builder, the artist. There is little need to white board the architecture of what is being built. The FP&A practitioner dives in to the canvas—the spreadsheet—to seek the answer and has a lot of freedom in how to approach the financial model.

Go to market planning, scenario analyses, and long range plans are examples of financial models that resemble more art than science. With these financial models, a FP&A practitioner must be prepared to explain the strategy or creative approach to his or her conclusion, as opposed to justifying the structure of how the model was built. These models can be addressing a complex situation, but the beauty is often in the simplicity with which these financial models are built. As Leonardo da Vinci once said, “Simplicity is the ultimate sophistication.”

ALWAYS CONSIDER BOTH OPTIONS

FP&A practitioners will need to know when to break out their inner Picasso versus their inner Einstein, depending on what type of financial model is needed. With any financial model, balance is key but both approaches to financial modeling—art and science—should always be considered before diving in to building that spreadsheet.

Meredith Hobik is a former director with Anaplan and Salesforce. Reach her at meredith.hobik@gmail.com

 

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