My thoughts about financial modeling

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My thoughts about Financial Modeling (DRAFT)
The only real in business is the money in your pockets
Since I also got involved in delivering a course on financial modelling, then I guess it is equally
important as well to put some caveats about financial modeling.
First and foremost, NEVER BELIEVE THE MODEL. Common sense, finance sense and
business sense should come first. If someone said that he/she could put a confidence as to
when, how much, how long, etc the business could grow into the financial model, then this could
arguably a fraudulent claim.
Bring Industry Experts to the business and not financial modelers. You need industry expert,
there are certain things in life that can’t be appreciated by a virgin.
The financial modeling WON’T BE ABLE to reduce or mitigate the risk.
The risk could only be able to be mitigated through:
 Contract
 Insurance
 Hedges
Then what the financial modeling could do?
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It is the risks that can’t be mitigated thru the above 3, this what I call “unmitigated risk” that
Financial Modeling could help. For example, who can guestimate future oil prices, exchange
rate…NOTHING could eliminate such risk…bringing forecasting errors into the model. However,
as there are always two things in the analysis, benefits and costs, then Financial Models could
help to see the trade-offs between benefits and costs.
Put your foot on the ground…visit your customer, talk with them…see your supply chain…etc.
this is why I love watching “Undercover Boss” tv program as it is reflecting exactly what I think
about the businessman should do…not by bringing more those degrees and certifications
considered prominent in the financial markets or job markets, etc….They probably could fix the
cost but not the tires of the business!
Don’t be fascinated with fancy financial modeling, the fancier it is with all its dashboard, the
more careful you should be, you need to take a few steps back to see whether it is intuitive and
make sense to you. The fancier it is, it might be possible, and it is done to hide real problems.
You need to go out to see what all that financial modeling say about, meet up the customers,
contracts, etc.
The only thing that is certain about financial modeling is IT WILL NEVER HAPPEN.
When your financial modeler come up with POSITIVE NPV OR IRR, then you should ask “How
much probable, we could get that positive?” Some said more than 50% will be sufficient, but
others will demand 70% likelihood.
Business risk or forecasting error?
Sanity, reality test!!!!!
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