Comparisons are odious – is a commonly heard phrase – but are they?
On the face of it, it would appear that there is no similarity whatsoever, however but on closer inspection it’s quite remarkable just how similar the two are in fact.
In the paragraphs that follow, I’m going to differentiate my comments pertaining to Lego from self-same principles applicable to financial modelling and the method I am going to use is to display the modelling comments using bold Italic font.
I recently had the privilege of listening to a very interesting discussion by Jordan Peterson, a well-known author, motivational speaker and philosopher, during which he talked about the process of learning and referred to the use of micro steps.
On reflection, this caused me to think about the process that one follows in building a Lego model.
According to ChatGPT, building a complex LEGO model involves several steps and processes.
Here’s a general guide to help you get started:
I have added comparative comments about financial model building in Italic.
| Lego | Financial model |
| Choose a Model | Decide on model objective and outputs |
| Gather Parts | Identify the key model drivers- the input assumptions |
| Plan and Design | Conceptualise the model design, sheets, schedules |
| Start with the Base | Create a sheet template, times series |
| Follow the Instructions (if applicable) | Apply the Goalfix model building methodology |
| Brick-by-Brick Assembly | Create the input sheet, support schedules, financials |
| Test as You Go | Build in integrity checks and warnings |
| Use Technic Elements (if necessary) | Use appropriate Excel functions and techniques |
| Detailing and Aesthetics | Follow FAST modelling standard |
| Functional Features (if desired) | Insert analysis, ratios, sensitivity, scenarios, graphs |
| Test the Model | Stress the model – interrogate – Operis software |
| Finishing Touches | Protect the model, exec. summary, index, control sheet |
| Documentation (optional) | Create a comprehensive user guide |
| Display or Play | Use the model to make informed business decisions |
| Enjoy and Share | Train client on model usage |
As is obvious from the above, there is a remarkable similarity in both processes.
Remember that building complex LEGO models (and financial models) can be time-consuming and may require patience and creativity. Don’t be afraid to make changes or modifications as you go along to achieve the desired result.
LEGO building (and financial models) are meant to be a fun and creative process, so enjoy the journey!
Some additional comments.
Building a model typically involves defining the particular model that one wants to build (our objective), and then unpacking and identifying the numerous different components which we are going to require. (identify the key model drivers- the input assumptions).
Of course, in Lego, processes are greatly simplified as all the necessary components are contained within the box although at first sight they can be quite confusing.
This may lead to not only the identification of the different parts but also the grouping of similar items and following the instructions carefully.
Whereas the principles of identifying components of a Lego model are relatively simple, the process of determining and identifying the key drivers of a financial model can be significantly more challenging.
In the first instance the modeller needs to have a really comprehensive, in-depth understanding of the business case – which is a fundamental requirement for the construction of an effective model.
Having completed this first and essential step in both cases, the modeller then embarks on the process of assembly or construction.(building the model).
Whereas, in the case of the Lego build, external tools or equipment are not normally required, in the case of the financial model, Excel is the toolbox.
In this regard it may be necessary to revert to the process of micro steps to identify and explain the usage of specific model building functions within the Excel program.
Some of these functions are essential for the successful building of the model.
Moving on, the process of building both models, Lego and financial, then requires creative thinking on the part of both model builders.
Whilst there is undoubtedly a certain degree of mechanistic activity in the construction of both models, the process also requires both intelligent thinking and creativity.
In the case of the Lego model, the model builder may be provided with detailed instructions, a schematic drawing indicating steps to be followed and the location or insertion of specific components.
It nevertheless is still a process.
Similarly, the building of a financial model is a process and requires the model builder to follow a predetermined and proven technique.
Designing the model
- Deciding on the time series of the model
- Creating a sheet template to ensure consistency in all sheets
- Applying specific criteria to the sheet template in accordance with Goalfix modelling conventions
- Creating the input sheet (containing all assumptions) as detailed in the model specification and
supported by appropriate research and investigation.
Input information should be grouped in appropriate categories.
- Conceptualising the model structure in terms of model “sheets”
- Deciding on the support schedules in respect of the three financial statements.
Building the model
- Building the income statement schedules
- Building the balance sheet schedules
- Designing the Income Statement
- Building the Income Statement
- Designing the Cash Flow Statement – alternative cash flow layouts
- Building the Cash Flow Statement
- Designing the Balance Sheet
- Building the Balance Sheet – balancing the balance sheet – validating the model
See diagram below.
Whereas the process of building a Lego model may vary depending on the complexity of the model, the advantage of financial modelling in this regard is that the process is logical, sequential and structured and can be remembered and internalised.
I trust the foregoing has been informative – or at least interesting – and invite anyone requiring more information about financial modelling to contact me. Or if you prefer, join me on one of our financial modelling training courses!
Colin Human CA(SA)
CEO – Goalfix Financial Modellers
