“Start in haste and repent at leisure” may be a twist on an old saying, but it’s never been more true when applied to financial modelling. Before starting it’s worth reflection on six key planning considerations:
- Bodge the old model or start afresh? We came across one listed company that had no idea how the consolidated numbers came together in its model and could only review movements compared to the previous year’s model. There is no good reason for any model to be that convoluted and if a model cannot be easily understood and reused, bin it. Keep it simple, whether it be the input, workings or presentation.
- Understand the business need: There is a obvious benefit from not over complicating a financial model so it is useful to understand, at the outset, what standards need to be met to meet market expectations (for example to support borrowing) or professional standards (for example for prospectus work or compliance with GAAP) or tax requirements (for example EIS requirements) or to be credible (for example underlying sales and business KPI for PE funding).
- Consider the modelling tool: Whether using an ERP, accounting system or FR&P reporting tool there are limitations. Be very clear about the outputs, audit trail and the transparency you need before being locked into finishing the model in an inflexible analysis tool that requires training or worse, coding, to get it right.
- Get the data structure right: From the inputs (especially when updating different historic data sets or multi-currency data sets) and assumptions to outputs to help navigation and understanding. Financial teams can become accustomed to intricate reporting so it can be helpful to find the simplicity in the complexity.
- Consider how the model may need to be accessed by other parties, if required: Providing access to closed systems (for example an ERP) can be problematic; uploading a model to a data room can break external links; and confidential data and terms may need to be protected. Whether the review is by the auditors, a bank’s accountants, potential investors or reporting accountants the issues of accessibility and confidentiality will be similar.
- Consider how scenario and sensitivity analysis will be performed: This can affect how the model is set up and comparisons made. Retrospectively incorporating this analysis can be time consuming and tricky.
We support clients build financial models for a range of business requirements, from simple forecasts to developed models to support decision-making like investment appraisal, funding needs, working capital management. If you want to know more, contact richard.spilsbury@linkstoneadvisory.com.
