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Best practice financial modelling - Organisational benefits of implementation

Best practice financial modelling - Organisational benefits of implementation
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Financial modelling, unlike other areas of finance, is unregulated and lacks generally accepted practice guidelines. Combined with the purpose of most financial models, this means that model risk is a very real concept. Accordingly, the majority of the world’s financial modellers’ work without structure and industry accepted standards regarding acceptable quality, methodology and discipline when developing and reviewing financial models. Imagine if the same were true in the legal, accounting, engineering or medical fields!

Without the implementation of a company-wide financial modelling methodology, company’s face:

  • Modelling errors resulting in incorrect investment decisions
  • High model development, audit and update cost (direct or the hidden ‘internal’ costs)
  • Staff and shareholder frustration due to inconsistencies, errors and /or significant time wasting
SMART financial modelling

The implementation of a best practice modelling methodology proactively avoids these issues. Corality’s best practice modelling methodology, SMART, is a set of best practice modelling guidelines and is internationally recognised for effective and professional financial modelling. SMART meets the needs of analysts, decision makers, financiers, management and financial stakeholders by decreasing modelling risk and increasing the confidence of all users. It helps people build better models.

Implementation of SMART financial modelling methodology comes with numerous benefits, and applies equally well in situations like GE renewable energy modelling, Brisbane Airport Corporation's financial modelling and forecasting and for SMBC's Project Finance modelling team.

The SMART modelling methodology has been the driver for Corality’s commercial success. It is the methodology we use when consulting to our clients and also what we teach in our financial modelling courses. We are passionate about best practice financial modelling, so much so that we have made it our mission to share our modelling methodology with financial modellers, globally – we want to make sure all modellers can benefit from it!

The implementation of a best practice financial modelling methodology leads to:

  • Decreased modelling risk
  • Increased team productivity
  • Increased financial returns through more informed investment decisions
  • Stronger professional reputation in the market through consistent, timely and accurate analysis to external stakeholders
  • Decreased review and audit costs

It’s an accepted fact that financial modelling errors are widespread and difficult to trap. This is called model risk and has real cost implications for organisations in terms of misinformed decisions or worse still, the wrong decision being made due to compromised financial analysis generated by poorly built financial models.

Adopting the SMART financial modelling methodology proactively reduces model risk. Implementing the SMART financial modelling methodology frees an organisation up to benefit from a more structured approach to building financial models, increased productivity and above all it will help you to build better, smarter financial models that are robust and fit for purpose.

Benefits of implementing the SMART modelling methodology

It is crucial for any organisation to have a tried and tested financial modelling methodology. A well-defined modelling methodology has numerous benefits both internally and externally. Internally, the SMART modelling methodology aids in collaborative efforts between team members and increases the confidence of management by:

  • Reducing model risk
  • Streamlining handover of model ownership
  • Efficient peer review processes and cost effective model auditing
  • Quick updates to the model to match the evolution of the transaction

The above listed internal benefits to model developers and management drastically improve the quality of the end product as it reduces the friction between parties. Ultimately, the SMART financial modelling methodology, combined with the smoother internal processes of financial model development, will result in superior financial models that deliver:

  • A platform for flexible and robust financial analysis
  • Seamless transition between stakeholders and developers
  • Increased user and stakeholder confidence in the decision making process
  • A professional and presentation-ready product

Modelling the SMART way – key principles of SMART financial modelling

Transparency

Transparency is the first principle of the SMART financial modelling methodology. Firstly, inputs, calculations and outputs have been clearly separated. This makes it clear to users of the model that there are different groups of worksheets. Clear labelling ensures that the user can readily identify the contents of each worksheet.

Flexibility

Flexibility is the second principle of the SMART financial modelling methodology.

One of the key features of the SMART financial modelling methodology is the use of a dedicated scenario manager to increase the flexibility of the model. This allows the user to programme and run multiple scenarios and readily switch between them with the click of a button, all whilst keeping the original inputs intact. In an evolving transaction or decision making process, a financial model that makes it possible to quickly and easily run different scenarios adds a lot of value to stakeholders and increases confidence in the decision making process.
An essential element of a flexible financial model is the ability for the user to dynamically define timing. Timing is important as organisations, projects and business cases continuously evolve and the financial model needs to be able to accommodate these changes to stay up to date.

Presentation

Presentation is the third principle of the SMART modelling methodology.

As the core driver of the decision making process, the summary (or output) page is essential to all financial models. The SMART financial modelling methodology preaches that the summary page should be tailored to fit the purposes of the end user. The summary page should be both meaningful and easy to understand, the use of charts and other presentation techniques outlined in the SMART user manual enhances the usability of the model

SMART has a strong focus on the consistent use of colours as a visual communication aid. User experience is further enhanced through the use of freeze panes, which allow the timing and row labels to the top and left of the page to remain visible at all times – a simple and very useful option.

Implementing SMART – how to get started

We trust that this tutorial has offered an overview of the benefits of implementing the SMART financial modelling methodology.

If you would like more information on the SMART financial modelling methodology and how to implement it within your organisations, don’t hesitate to contact us – we look forward to hearing from you.

For more inspiration you are welcome to download some of Corality's free financial modelling tutorials.

 

 


Rickard Wärnelid
by Rickard Wärnelid

Rickard's passion for financial modelling is built on specialist roles in the highly quantitative fields of derivatives and project finance, a career path complemented by an academic grounding in engineering physics. Born in Sweden and with global consulting and leadership experience, Rickard is an internationally recognised authority, speaker and thought-leader on the organisational benefits of best practice financial modelling.

Contact Rickard Wärnelid

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