I often tell people that I built my first model 1978.
That’s a lie (albeit a white lie).
Or more elegantly put, a “perceptive inaccuracy”.
At the time I was the CEO of an aluminium company, which we were growing at a significant rate, and was a frequent visitor at our bank, always asking for greater facilities.
Then, one day our bank manager did me a great service, by saying, “Colin you can’t keep coming to us every six months for more facilities – you need to do some longer term financial planning”.
And – recognising that he was correct, I built my first ever financial model.
In truth, I didn’t build it at all.
My dear friend and colleague, Dave Theron, who justifiably could lay claim to being the pioneer of modelling is South Africa, built the model.
So what was my role? – I provided the “business case” –
And therein lays the story behind the title of this article.
We all know that effective modelling requires specific knowledge.
That the four pillars of modelling knowledge are:-
- a knowledge of specialised Excel functions and techniques
- a knowledge of accounting and basic financial statements
- an understanding of corporate financial performance
- an understanding of best practice modelling methodology
And that the input assumptions (drivers) of the model, determine the logic of the model.
And the veracity of the output.
And understanding the business case is the primary source of identifying and quantifying the input.
Quite simply put, if you don’t understand the business case, and all the nuances of the business, you will not build a successful model.
In as much as I did not understand the modelling process – and accordingly, could never have built the model – Dave, the modeller, could never have built a successful model without my in -depth knowledge of the business.
So – a symbiotic relationship between business man and modeller.
This all took place before Excel and Lotus 123, so it was a mission.
But the outcome was a revelation.
Because of the flexibility of the model – one of the key principles of modelling – we were able to execute different scenarios and play all kinds of what-if games – and provide some incredibly valuable insights.
In the end, it resulted in the restructuring of the group.
And far fewer visits to the bank.
In truth, it created a much greater degree of trust and confidence between us and our bankers, who came to realise that we really did understand the business and were making our decisions based on knowledge – and not supposition.
So, I came to modelling based on need – and I have stayed with modelling based on belief and experience.
I know that financial models – correctly built – allow business management to make informed decisions.
Colin Human
