There are all sorts of complicated definitions of financial modelling, and in my experience there is quite a bit of confusion around what a financial model is exactly. A few years ago, we put together a Plum Solutions survey about the attitudes, trends, and uses of financial modelling, asking respondents, “What do you think a financial model is?” Participants were asked to put down the first thing that came to mind, without any research or too much thinking about it. I found the responses interesting, amusing, and sometimes rather disturbing.
Some answers were overly complicated and highly technical:
- “Representation of behaviour/real-world observations through mathematical approach designed to anticipate range of outcomes.”
- “A set of structured calculations, written in a spreadsheet, used to analyse the operational and financial characteristics of a business and/or its activities.”
- “Tool(s) used to set and manage a suite of variable assumptions in order to predict the financial outcomes of an opportunity.”
- “A construct that encodes business rules, assumptions, and calculations enabling information, analysis, and insight to be drawn out and supported by quantitative facts.”
- “A system of spreadsheets and formulas to achieve the level of record keeping and reporting required to be informed, up-to-date, and able to track finances accurately and plan for the future.”