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The 7 deadly sins of financial modelling

ModelOff Global Training Camp

Presented by Rickard Wärnelid Group CEO

London 4 December 2015

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GLOBAL TRAINING CAMP, MODELOFF 2015

ModelOff Global Training Camp - London 2015

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THE 7 DEADLY SINS OF FINANCIAL MODELLING

ModelOff Global Training Camp - London 2015

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Inconsistency

Proudness of complexity

Non-guidance of model users

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Ignorance of potential future events

Acceptance of poor presentation

Ignorance of the end user

7 Negligence in model management

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SMART FINANCIAL MODELLING – 10 GUIDING PRINCIPLES

ModelOff Global Training Camp - London 2015

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INCONSISTENCY [1/7]

ModelOff Global Training Camp - London 2015

Workbooks

Individuals

Teams

Organisations

The World

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INCONSISTENCY [1/7]

ModelOff Global Training Camp - London 2015

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PROUDNESS OF COMPLEXITY [2/7]

ModelOff Global Training Camp - London 2015

Complex solutions to common problems - Nested Ifs / Indirects, Index/Offset

Innovative functionality

Excessive / Undocumented VBA

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COMPLEX STRUCTURES NEED SIMPLE MODELS

ModelOff Global Training Camp - London 2015

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COMPLEX STRUCTURES NEED SIMPLE MODELS

ModelOff Global Training Camp - London 2015

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NON-GUIDANCE OF MODEL USERS [3/7]

ModelOff Global Training Camp - London 2015

Documentation: Labels, cover sheet, user guide, version control

Summary sheet

Functional design: Styles, structure, conditional formatting

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MODEL COVER SHEET

ModelOff Global Training Camp - London 2015

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IGNORANCE OF POTENTIAL FUTURE EVENTS [4/7]

ModelOff Global Training Camp - London 2015

Flexible timing structure

Built in scenarios / sensitivities

Static: Lack of "spares", hard coding, inconsistent formulae, embedded

assumptions

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Training Academy, financial modelling, valuations, project finance, LBO modelling, Excel, forecasting and VBA

1-6 months 2-6 weeks 3-36 months

5-70 years

New project/venture Decision process Decision Operations

• Board paper submission • Business cases • Equity investment

• Valuation process • Funding analysis • Project finance structure • PFI/758/P3 bid process

• Board paper submission • Bid submission • Financial close • IPO • Press release

• Construction reporting • System integration • Performance analysis • Service contracts

DECISION PROCESS EXAMPLE

ModelOff Global Training Camp - London 2015

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BUILD FOR THE FUTURE – TIMING ARCHITECTURE

ModelOff Global Training Camp - London 2015

A financial model needs to be a dynamic representation of future scenarios. Using fully dynamic timing calculations provide our clients with flexibility to analyse a broad range of outcomes

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SCENARIO ANALYSIS

ModelOff Global Training Camp - London 2015

Scenario analysis is the core functionality of a financial model. Using a structured approach our clients gain deep strategic insights which support a stronger decision process.

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ACCEPTANCE OF POOR PRESENTATION [5/7]

ModelOff Global Training Camp - London 2015

No / bad styling

Lack of structure

Different styles across model

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ACCEPTANCE OF POOR PRESENTATION [5/7]

ModelOff Global Training Camp - London 2015

Hidden rows Inconsistent formatting

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FUNCTIONAL STYLES

ModelOff Global Training Camp - London 2015

Our approach to financial modelling includes a continuous focus on functionality for flexible, structured and powerful analysis.

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IGNORANCE OF THE END USER [6/7]

ModelOff Global Training Camp - London 2015

Purpose

Assumptions structure

Level of detail

Model architecture

Tailored outputs for purpose

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STAKEHOLDER MANAGEMENT

ModelOff Global Training Camp - London 2015

BANKS COMPANIES

ADVISORS DEVELOPMENT BANKS

DEVELOPERS INVESTORS

Financial model

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NEGLIGENCE IN MODEL MANAGEMENT [5/7]

ModelOff Global Training Camp - London 2015

Unqualified "Owner" / User

Unclear ownership of model/assumptions

Limited understanding of model interfaces

Lack of process – versions, calendar, distribution, etc.

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AUTOMATE CHECKS THAT CAN BE AUTOMATED

ModelOff Global Training Camp - London 2015

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“SURE, I’LL BUILD YOU A

MODEL. I AM AN

ACCOUNTANT AND HAVE

DONE IT ONCE BEFORE”

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FINANCIAL MODELLING ECOSYSTEM

Date ModelOff Global Training Camp - London 2015

Fund / Investor analysis

Board strategy model

12 months budget

ERP

Corporate model

Alternative business

cases

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FINANCIAL MODELLING ECOSYSTEM

Date ModelOff Global Training Camp - London 2015

Fund / Investo

r analysi

s

Board strategy model

12 months budget

10 year strateg

y

Operational cost

Corporate Model

Treasury Bank debt

model

Staff / HR

Performance monitoring

Tax

ERP

Stock exchange

communications

New ventures

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THE 7 DEADLY SINS OF FINANCIAL MODELLING

ModelOff Global Training Camp - London 2015

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3

Inconsistency

Proudness of complexity

Non-guidance of model users

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5

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Ignorance of potential future events

Acceptance of poor presentation

Ignorance of the end user

7 Negligence in model management

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CONTACT DETAILS

ModelOff Global Training Camp - London 2015