Using Excel for Business and Financial Modelling, 3rd Edition

CHAPTER 1What is Financial Modelling?

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.”

Some philosophical:

• “A numerical story.”

Some incorrect:

• “Forecasting ...