Comparisons are not always odious!

Off the peg – or tailor made?

This is often the choice that faces a person when buying a new suit.

The benefits of “off the peg” – already made suits – are normally:

1. they are immediately available
2. The cost
3. The purchaser can try them on for size
4. The colour, material, cut and fit are obvious
5. They can be adjusted – within limits – to the purchaser requirements

The benefits of “tailor made” are normally;

1. the choice of material, colour and weight.
2. a precision fit
3. trial fittings during making to ensure accuracy
4. uniqueness

In the final analysis, it’s often about the person’s appearance, the confidence with which it is worn and the importance of getting the right result.

When building financial models, the client is faced with similar challenges.

Issues critical to building an effective model.

1. What is the purpose of the model
2. What outputs and key results are required
3. When the model is required,
4. What key inputs – model drivers – are required for each component of the model
5. How important is the accuracy, clarity and correctness of the model

I recently came across an article entitled – “ Bespoke Financial Models – building tools as unique as your business” – author Tim Linke. 

The author makes the following important points:

1. Financial models are more than just numbers on a spreadsheet—they are dynamic tools that drive informed decision-making and provide clarity for business planning.
2. bespoke financial models tailored to specific business needs offer unparalleled value in navigating today’s complex business landscape.
3. it’s critical to understand the project’s goals and requirements. Tim advises starting with these key questions:

• • What does success look like for this project?
  • How can a model help quantify that success?
  • What are the essential inputs and drivers to consider?
  • What outputs and reporting will support your decision process?

Once these foundational elements are clear, the focus shifts to creating a tool with flexible levers and inputs. “A robust and transparent financial model connects key data points, enabling users to test scenarios and make informed decisions,” Tim says.

It is common cause (knowledge) that financial models are predictive tools – and as such – can never be perfectly accurate. The very act of trying to predict the future immediately introduces uncertainty – a margin of error.

But while they may lack the precision of a surgical instrument, to be of value, they cannot be blunt instruments.

Typical major categories of financial models are:

1. Time series (monthly, quarterly, annual), specific dates, model duration
2. Revenue drivers
3. Direct cost drivers
4. Overhead drivers
5. Capital expenditure
6. Financing – equity, debt
7. Tax, Inflation etc.

There is an old saying – “half a loaf, is better than none!” – and while it may be appropriate in some circumstances, it is definitely not an option when building a financial model.

If your intention is to create something of value – a predictive, flexible financial management tool, then attention to detail is an absolute prerequisite!

A fundamental principle pertaining to financial models relates to the full, in-depth comprehension and understanding of the business case – all the specific input assumptions and values applicable to the various categories listed above –  all else flows from this fundamental fact.    

If you want to learn more about building valid financial models – or if you have concerns about the integrity of your financial model, call me or send me an email.

Colin Human CA(SA)
CEO
Goalfix Financial Modellers
+27 82 888 1900
colin@goalfix.co.za