Financial Modeling Educator

"The Year Was..."

I'll never forget my early days on the job.

"Excel" was one thing. But "Financial Modeling" was something else.

Some elusive, highly-specialized construct that required intricate skills and business expertise.

Later on I learned that all these opaque, cryptic descriptions were really just poorly designed Excel files hiding behind the term "modeling."

So What's a Financial Model?

A Financial Model is nothing more than a tool to help you make a decision.

Everyone is used to Excel, so that's the most common association with Financial Modeling, but any spreadsheet program will do (like Google Sheets) as well as more robust FP&A Software like Quantrix.

Again, we're just trying to make a decision.

That decision can be for your personal life or your business.

It's just a tool to help us figure out what to do next.

Why Most Models Are Bad

The truth is, most of us are self-taught (myself included).

That means we learned things "the hard way" without understanding modeling best practices.

In addition, everyone learns about "the business world" in their own way, and subsequently has different exposure to different parts of a business.

For example, someone at a large company could spend their entire "modeling career" working on one line item within the P&L and never see the 3 Statements.

Contrarily, someone in Private Equity might be great at 3 Statement LBO Modeling, but have little-to-no experience with Inventory Forecasting.

Then the inevitable always happens: we're faced with a new challenge that we've never modeled before.

So, we do our best with our fragmented experience and slap together something "workable" but it has one glaringly obvious problem: the model can only be understood by its creator.

We go back and forth with our team, work out the kinks, until the model is "good enough" for prime time.

Sure, it's got too many tabs, probably missing a bunch of error checking, but it "gets the job done."

Sound familiar?

Back to Basics

In the next issue I'll get into the details on Financial Modeling best practices.

Right now I want to drive home a critical concept I never understood until much later in my career:

You don't need financial wizardry, insanely complicated formulas, macros, or anything else.

You just need:

1. An understanding of modeling best practices
2. Moderate business acumen (and in my opinion the best thing you can learn is the 3 Statements)

All the details flow naturally from there.

Action Items

Models love to over-complicate themselves. It just happens.

So this week, keep those two core pillars in mind: (1) best practices and (2) business acumen.

Where do you feel like you fall short? Self-awareness is a great first step to improving your skills.

Next week, we'll go in detail on financial modeling best practices to iron out the first core pillar of becoming a great financial modeler.

See you then.

—Chris

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Before you go...

If you want a video walkthrough of Financial Modeling best practices and fully integrated 3 Statement Modeling, be sure to check out my Financial Modeling Courses — you'll learn the basics all the way through acquisition modeling, which is some of the most advanced modeling you can do.

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💡A Financial Model is nothing more than a tool to help us a make a decision, no matter how big or small. And the simplest means of figuring out that decision is the best one. No "over-complication" is required.

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