3 July 2018
Back in July 2016 the Corporate Finance Faculty of Institute of Chartered Accountants in England and Wales (ICAEW) published the second edition of a best practice guideline entitled ‘Financial Modelling’ which provided a practical guide to financial modelling in a corporate finance transaction context.
The guideline was excellent - and I’m happy to admit this despite the fact is was produced for the ICAEW by a team led by Alistair Hynd, a partner in RSM Corporate Finance LLP! It’s only available to members of the ICAEW Corporate Finance Faculty and, as it runs 127 pages, it does require a certain amount of dedication to maximise the benefit.
Financial modelling is the building of a mathematical model intended to represent the financial outcome resulting from a particular set of assumptions and decisions. This can be as simple or as complex as you, or your advisers, want to make it. In my experience over-complex models, by focusing on insignificant details, can often give a distorted outcome.
These days financial models can be produced very simply as an add-on to a cloud accounting package (such as Float which works with Xero) or using Excel to create a customised model from scratch. Specialist software is also available and although this may be more costly it can help to eliminate common errors that arise in spreadsheet-based models.
Financial models are an essential element for any good business decision and it is important to have a disciplined approach to modelling so that as the proposed transaction evolves it will be easier to accommodate these changes within the model. You should also make sure that there is adequate time for the model to be properly reviewed by an independent party who is not directly involved in creating the model. This helps to ensure that the assumptions are properly tested, the values are reasonable and the decisions incorporated within the model are realistic.
Good models can stand the test of time and be used frequently to assess the validity of business decisions and to monitor performance. In this context they are an essential business tool.
In the run-up to this year's FIFA World Cup, Fidante Capital used a statistical model to predict who will win the tournament. They have predicted the winners will be… (if you don’t want to know the results look away now) …France. It will be interesting to see whether or not they are correct later this month. At the time of writing we already know a few of the results they predicted are wrong, but one of the inherent dangers of any financial or statistical model is expecting all the numbers to be reasonably accurate - when the real purpose is to give you a better understanding of the business.
If you are interested in developing a financial model for your business then please do get in touch with me or fill out our contact form here.
