This article is written by financial modelling specialist, Lance Rubin. You can find more of Lance's work at https://www.modelcitizn.com/
If you have recently been for a job interview or at least just taken a small peek through the door called opportunity then you may have noticed something emerging regarding a new key skill requirement, which you may or may not have.
Irrespective of your level, financial modelling skills have become one of the most highly sought after for finance professionals today.
Good news for candidates is there is short supply and huge demand. There was certainly no shortage of opportunities when I was looking for a job recently, but I decided to use this shortage to consult to many different companies rather than just one as their employee.
Bad news is if you are in a finance team and never built or know what a 3-way model is, then you have lots to learn and to catch up on. A 3-way model refers to the 3 financial statements namely an Income Statement, Cash Flow and most importantly a balanced Balance Sheet.
It is very likely that despite your career as an accountant you have probably never been given the opportunity to build a 3-way integrated model. Certainly, of the 26 people that worked for me in a large corporate, nobody had.
One might want to argue that a 3-way model isn’t entirely necessary, and in some cases it isn’t but once you have built one and integrated it with rolling actuals you never need to build another model again as all the information regarding cash flow, profitability, valuation is all there when you need it.
But have no fear, you are not alone by the way (hence the short supply). It’s as a result of a commercial and technical training gap in an accountant’s career that has naturally evolved over time.
Systems and processes in preparing financial and management reporting has only recently become more automated so up until now, a lot of what Finance does or in some cases still does is the production of financial information and forecasts and very little in the form of dynamic financial and business modelling.
The reality and irony currently is most roles don’t allow you the opportunity to gain that vital transaction or corporate finance modelling experience, yet when you pick up a job description or role purpose statement you will see the words financial modelling.
I was in a similar position as an auditor for PwC and at one stage in my career what I thought was financial modelling was simply basic financial analysis, planning and forecasting and not the sort financial modelling I am currently accustomed to. It was only following my time at Investec’s corporate finance and property private equity divisions that enabled me to really develop my modelling skills as I was doing it on a daily basis.
The challenge is up until now employers and businesses didn’t often require forecasting or modelling on a regular basis, probably quarterly at best. This means you didn’t get the vital on the job experience and training to develop those skills that enables you to build large scale complex models.
It also means you wouldn’t have had the opportunity on a more regular basis (definitely not daily) to undertake financial modelling that can help you create insight through multiple scenario analysis and even probability weighted outcomes.
Businesses and corporates have become far more digital and automated and it’s getting more complex to cope with all the information (financial and non-financial), hence the increase in demand for financial modelling which requires a thorough understanding of the financial impacts of all those complexities intertwined.
So how do you learn some of these modelling skills?
Here are my suggested 5 easy steps to get started. I say get started, because the only way you develop modelling skills (or any skill for that matter) is practicing it repeatedly.
1. Create capacity and a mindset of change
This is so important (hence it’s # 1) and probably the biggest hurdle you have now. The automation and offshoring of traditional finance tasks should not be seen as a threat but an opportunity to offload the finance production line.
I know this can be confronting as it’s probably a large part of what you have done historically and probably right now as a finance professional, but without capacity you will never get started.
Also, don’t be afraid to seek out automation and suggest it to your boss, he will certainly be impressed that you are looking for better ways to work. I have automated 26 bespoke spreadsheets using some of the latest Excel based content management technology that doesn’t require a large investment other than time (there are many other Finance automation systems but these can be very expensive to buy and implement). Reach out to me if you want to find out more about spreadsheet automation and start the journey.
I estimate that a large majority of accountants are capable of learning financial modelling if given time to focus on it. It will certainly be worth it given the current employment odds, but it does start with a change in your mindset.
Are you going to take the blue pill or the red pill?
As accountants, we are often resistant to change as we like control and for things to be in order, but following some of the largest innovations in technology we can no longer resist the wave of change.
You only have to look at what Xero has done for the role of a bookkeeper, converting a bank reconciliation into an app like process through gamification. It allows ordinary business people to match transactions from a bank transaction feed to the chart of accounts with no debits or credits, child’s play really. If you don’t change your mindset, you will soon be left with no option and that supply shortage will be well and truly gone.
Do some research and try to understand the size of the skills gap you might have today that will help you understand how much catching up you need to do. For example, if you have never used or worse even heard of the following formulas you probably have a fair amount of ground to make up:
a. INDEX and MATCH;
b. OFFSET, ROW, RIGHT, LEFT;
c. IF, SUMIF, SUMPRODUCT;
d. COUNT, COUNTA, COUNTIF;
e. EOMONTH, YEAR, MONTH
f. MAX, MIN, MOD
If you don’t know at least 80% of the above formulas, then step 3 is for you. I suggest you go on an Advanced Excel and Financial Modelling training course. Model Citizn was recently approved by the global Financial Modeling Instititute (FMI). If the above was a breeze, then move onto step 4, but feel free to take a look at a more advanced training course, especially if your employer is prepared to pay for it.
The course can be the most valuable money you will spend on your career, assuming you then apply what you have learnt in the course. If you fail to apply any of it, it will be the least valuable course you have attended.
4. Practical application of your skills
Go to www.modeloff.com and try some of their free past questions by applying your knowledge to find the solution; which you can mark in your own privacy (so nobody needs how well you do).
Perhaps even compete in Modeloff (you will probably have to wait till next year, so plenty of time to practice) just to give yourself an extra challenge, but I can assure you the competition is tough with the world class question design team making it no walk in the park.
5. Learn one of the modelling standards
Get familiar with some of the recognised financial modelling standards. I am not going to get into a debate about the best one, but any one is better than having none at all. The standards are Best Practice Spreadsheet Modelling (BPSM), FAST and SMART.
I prefer the BPSM standard but that is entirely a personal preference and you need to work out what is best for you in the time you have. BPSMS is extremely comprehensive and extensive. Most of the large accounting firms apply the FAST standard as a guideline.
Once you have been through the above 5 steps and developed your skills sufficiently start to explore some of the latest technology and become familiar with the following financial modelling software:
a. Modano, is the world’s first Excel based content management system which you can download for free in the community version. Give it a crack along with their online training.
b. Modeler, which enables you to turn your financial model into an App using only Excel and PowerPoint with no coding.
c. Spreadsheet Advantage, which helps you interrogate a spreadsheet and identify where you might have an error. Psst…don’t tell anyone but almost every spreadsheet has an error, so it’s no shame to admit it, it's only shameful to assume yours is completely error free all of the time.
I have built plenty of models and not one single model was error free at version 1…of course I found the errors using tools like spreadsheet advantage, corrected them, reviewed it again and over time built internal error checks and alerts for example a balanced balance sheet check and other techniques. only then where the errors were removed.
By using the above software it is already possible to maintain a rolling 3-way integrated financial model with accounting packages like Xero which takes only 1–2 hrs each month to update the entire model with the latest monthly actual results. You can then easily present this in an App to key stakeholders in a two way conversation to drive business value.
As I have explained to many others, financial modelling skills comprises 3 main technical components which will enable you to be a great modeler in addition to being a great accountant and finance professional:
1) Rock solid understanding of accounting and finance i.e. debits/credits
2) Business acumen or commercial nous
3) The ability to use Excel and design models logically, consistently and neatly.
This needs to be your key focus when building a robust analysis to extract insights and tweak strategic direction of the business to increase value chains and ultimately shareholder wealth.
One of the most challenging and imperative aspects will also be matching technical knowledge with building relationships to help solve problems with key business stakeholders (i.e. alignment to strategy with a focus on execution).
Being the captain of the Titanic doesn’t help when you keep on looking backwards to see where you are going. There may be an iceberg heading your way and you need to steer the ship to avoid, often unlikely yet probable, issues.
Don’t leave it too long before the supply of this skill starts to meet all the demand.
Lance Rubin is a chartered accountant and ex-investment banker. He works in Australia, and is very highly regarded in the world of financial modelling. You can find out more about Lance and his work at https://www.modelcitizn.com/
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