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By Mohammed Hussain, Finance Analyst at Amazon
Mohammed is an advocate for clean financial modelling and process automation. His key function is "modern" problem solving by blending traditional Excel techniques with BI as a visualisation tool. He strives to produce models that are transparent and easily understood by the end user. This is achieved through efficient Workbook and Worksheet design, and VBA.
His transcendent goal is life is to help others recognise where they can introduce efficiencies in their work in the hope that this extends to other areas of their lives.
LinkedIn account: https://www.linkedin.com/in/mohammedafhussain/
Disclaimer: Financial Modelling has no strict “right” or “wrong” method of application. It does, however, have forms of best practice and this what this article attempts to highlight
Driver-based modelling has been around for a long time, yet very few know the details behind it and how to implement it. Why? Perhaps because if I ask you the question “what do you think about when you need to build a model?” – the answer is verbose and lengthy detailing the technicalities of the build. As FP&A professionals, we need to transcend the low level of detail and understand the purpose of what we are doing; in this case – what drives the business?
FP&A fits into a very niche gap of empowering people to understand the “bigger picture” whilst simultaneously preparing the low-level modelling needed to see the picture through to completion. Somewhere in between these 2 roles exist a problem: Wastage
The “wastage” may come in the form of:
All of the above (and more) go into the making of the beautiful…Business Financial Model
Financial Models exist to allow people to make informed decisions. It is our jobs as modellers to ensure they have the easiest time in making those decisions
This begins from the end…how the model is presented
To draw from the FAST Standard:
“The high-level layout of a model must reflect the requirements of two fundamentally different groups of interested parties”
The two parties being the Modeller and the Intended User
As modellers, we may often lose sight of the goal and try to implement things into the model that may not be necessary. Therefore, it is vital that the vision of the intended user is always kept at the front of the modellers mind when designing and building the model
Without an Output that mirrors the vision of the Intended User, the rest of the model is of little use
Depending on the purpose of the model, consider the following in model Output:
For illustration purposes, a simplified variance analysis may show the following:
This is useful – it informs the business that month 2 provided £19,250 more receivables for the business as a result of 50% more leaders taking the course.
The storyboard may extend on this as follows:
The above is explained in words, but may often be communicated via a dashboard
Transform those Inputs, and make them more meaningful before being sorted into the correct Output sheets
Workings can be the backend layer that makes up the financial statements for example, or as simple as detailed analysis of a specific P&L item
Example: Sales on a P&L may have workings that detail all of the services the company provides that generate the sales and the drivers of each service type. Or, a CAPEX schedule that feeds the Fixed Asset Register to populate the Balance Sheet
In order to continue being effective in driver-based planning, we need to constantly be challenging the driver inputs and the outputs they produce. It is therefore suggested to leave a manual element when it comes to this specific area of Financial Modelling
If this model is to be used for weekly forecasting, automation may be focussed around ETL processes from a data source
If this model is to be used for month-end reporting, automation may be used to roll over previous accounts, and query data from accounting systems
So, somewhere in the middle of empowerment of purpose and fulfillment of detailed models, remember to ask the question:
“does the output of this model serve the overall objective it was intended for?”
I am excited for how Artificial Intelligence will empower FP&A professionals to adapt and change. A small insight into what could be different with the intent of AI is the analytical tasks could be automated away from us (such as statement creation and variance analysis). This means FP&A professionals can focus more on leading businesses in a positive and transformative direction
Whilst AI can analyse the past to the nth level of detail and generate a promising prediction of the future, the question is – can it be developed to have the objectivity of a human and interpret its own prediction to the Intended Users?
AI and Humans CAN and WILL coexist. Fear of AI taking over the world is simply the same as when an animal is threatened by a predator. This “Fear” is irrational and is representative of the reptilian brain that ensures our survival.
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