Over the past week, two events have helped me realise how poorly Finical Modeling is understood.
A final year commerce student that I mentor described financial modeling to me as “anything to do with Excel”. What is more concerning is that at a finance networking event a few days later, there was an equally surprising ignorance as to the power and insight that good financial modeling can provide.
Therefore, in the interests of improving general understanding, I want to share this excellent article by Eric Augusta about the importance of Financial Modeling and its critical elements.
(Click HERE or on the image above to view the article)
The online world continues to unleash an immense innovation machine where anyone, anywhere can create, share and add economic value through informational goods such as software, videos and music. In simple terms, an information good is a type commodity whose main market value is derived from the information it contains. Extensive academic literature has been written on the subject, its behaviours and unique properties. Informational goods typically exhibit several key economic value characteristics. Namely they are:
1. Made by human brains
2. Made of pliable symbols
3. Consumption by one human does not exclude consumption by another
I recently presented at the Global Creative Innovation Conference. The audience was challenged with identifying three industries that had barely changed systematically over the past 100 years. The final list:
3. Professional Services
Understandably, few would argue that churches, temples and synagogues and their followers have embraced change (rightfully or wrongfully) despite the tremendous technological progressions over the past century. Plenty of people appear to be committed to ensuring the next generation have no need to learn in a grid-like classroom from the 1800s - but learn in ways that truly enrich educational learning and critical thinking. Read full article
Last week a talented 22-year old finance/law student I mentor recently faced a dilemma between joining a “bulge-bracket” Investment Bank and following his online dreams. Several of his University colleagues and recruitment specialists I subsequently spoke with confirmed that this daunting career cross-road had quietly become commonplace. Is it possible that the best and brightest finance graduates are viewing an “apprenticeship” within investment banks, management consultancies, private equity and hedge funds as a sub-optimal career path? My mentee shared some insights around the growing number of global finance graduates opting for a new career alternative – the online world – and it seems there is no turning back. Read full artile
“The whole professional services landscape is changing so fast….[s]oon everything in the natural world will have a digital equivalent. Everything from social interactions, information systems, transactions and sensory systems will be replicated on the internet” Ross Dawson
Overview - Financial Modeling Supply Chain
The financial modeling industry has long existed as a ‘black art’ or sorts. There is near universal acceptance that financial models should be built in an easy-to-use, robust, flexible and fit-for-purpose manner. One of the primary challenges for the industry, and professional services more broadly, is a highly fragmented and difficult-to-define “services” supply chain. Information asymmetries and a healthy scepticism towards collaborative innovation appear to be preventing the flow of knowledge, resources and information to where they are most valued. This article will begin to explore some opportunities for effective supply chain management within the financial modeling industry. The article also begins to examine how the internet could be the catalyst driving transparency, openness, collaboration and accessibility of such financial models in the years ahead.
A curious client recently asked – “Couldn’t financial modeling risk be diminished by introducing a Quality Assurance Review Panel (“QARP”)?” It was a simple, pragmatic question that left me momentarily perplexed. I then enthusiastically responded “I’ll look into it – it could have legs”.
And so I researched further. A threshold question is the practicable trade-off between commercial efficiency and fastidious accuracy. Although most financial modelers aspire to believe they can always achieve both – the first spoke more of dollars, the second spoke more of risk management. I quickly realised that “efficiency” challenges could be largely overcome through further training (most financial modelers are self-taught), collaborative ways to share knowledge and hard-earned experience. Finding pragmatic ways to mitigate risk appeared to be path less considered – particularly providing a second-set-of-eyes to highly-complex, thought-intensive and “high stakes” financial models used extensively throughout professional services, industry, government and education.
A recent piece in the National Journal by Tankersley and Hirsh, “Neo-Voodoo Economics”, encouraging American’s to think more boldly about new growth and markets, rather than simplistic rethreads, prompted me to think about a few new opportunities in this space. A plethora of industries have been radically transformed and reconfigured by the emergence of new business models made possible by web 2.0. Netizens (a term commonly used to describe people actively involved in online communities) have rocked the foundations, processes and relationships (and wallets) upon which they were built over the past 25 years – learning, working, media and everything in between. Inroads have begun into even the most sacred of sectors – such as religion, politics, property and professional services.
However, often these seismic transformations are as subtle, as they are gradual. A compelling case could be mounted that the financial modeling industry – part of the 700,000 firms in the $1 trillion+ professional services industry – may be next to be transformed by Web 2.0.
A recent list of the World’s Top Tools for Learning is a stark reminder of how rapidly the educational ecosystem has moved beyond the traditional classroom. Most young professionals seem to have readily embraced the ability to learn quickly and interactively formally and informally, in a real-time environment that was utterly unimaginable only a decade ago.
Many leading online educational tools are built around rapidly augmenting micro-level communications to a global-wired audience. Four key tools from the top of the list include: Wikipedia – the largest knowledge sharing encyclopaedia ever created; Twitter – the turbo-charged, real-time communication network; YouTube – the world’s largest video library; Slideshare – the emergent PowerPoint sharing powerhouse. The principles underpinning crowdsourcing resonate in a similar way – democratising discrete, micro projects by reaching a global, collaborative community (e.g. 99 Designs, Innocentive, Amazon Mechanical Turk)