Beyond Integrated Financial Statement Modelling I
Financial modelling has a myriad of uses, and yet more often than not, it’s come to be pigeon-holed as the modelling of integrated financial statements (IFS), and there are many other fascinating areas of financial modelling which have been overlooked. In this blog, we’ll detail these areas and how they can help your financial modelling skills.
Model New Problems
These areas beyond IFS can not only be complex in and of themselves, but they can improve your modelling of IFS.
One of the best ways to become a better modeller, is to model new problems. Your creative problem-solving skills will develop in new, unexpected ways, and you will be all the stronger for it.
A Working Example
When looking at IFS, say, for a large organisation, you may have a lot of simplifying assumptions, but if you drill down into the granularity of component models, you can learn so much more about the problems faced by the divisions of the organisation, and you can add value there.
Let’s start off with staff costs. By the time they reach the overarching high level financial model, the assumptions are often simplified to two components, an average cost per head, and a number of heads/FTE’s (Full-Time Equivalents) for each period.
But an underlying staff cost model may have a whole host of additional information which has to be modelled in order to get to the above averages. We’ve listed the main groupings of components below:
- Specific plans per role, with start and end dates for project-based staff
- Base salaries per role
- Bonus rates per role
- Tax rates
- Social security rates
- Pension plan information
- Agency staff information to make up for shortfalls
- Holiday information
- Redundancy plans, including redundancy payment information
So firstly, you will be working with data you are not used to, likely with its own challenges of coming from various sources, with discrepancies needing to be ironed out. You will speak with new staff members and understand the issues they face.
Perhaps you can practice your data skills by making their life easier in the future, through automating the process of getting the data together and transforming it for better input into the staff model.
Next, the calculations themselves need to be understood before they can be built or tweaked. All of this needs to be worked out in a dynamic fashion and can present a variety of interesting challenges for a financial modeller.
As a financial modeller, you also have visibility of where the staff model outputs go and how they are used. That will help shape the work you do in the staff model.
This is just one example. Each division, business unit or function holds its own unique quirks. Consider a secondment to another team, whenever the opportunity arises. Stepping out of IFS helps you think outside the box in the future, by putting yourself in another box now. Try it, you won’t regret it.