Financial modelling is part of a bigger process.

Every financial model starts with a question.

Building a spreadsheet model is always a means to an end.

The purpose of any model is to generate insights to help answer critical business questions.

The model is a laboratory. It's a place where we can test hypotheses about the business. This is why I love modelling. Done well, it can help us explore real-world business dynamics and ultimately make better decisions.

Financial modelling, therefore, is one component of a wider business analysis process.

Tom Grossman developed a helpful framework to describe this process. He called it the Business Analysis Lifecycle.

This framework splits the world into two parts; the real world and the model world.

In the real world, we start with a business question.

Questions like how much can we borrow? How much should we pay for this business? How much should we bid?

Before we can do anything, we first need to understand. We need to understand this business, this project, the financing, the operational drivers. We need to understand these things before we can create the spreadsheet model. The spreadsheet is a representation of our conceptual model.

Creating the conceptual and spreadsheet models are two different skill sets. It's essential to know the difference between them.

It's crucial to get the technical detail of the model right. However, you're lost if you don't start with a solid conceptual understanding and clarity about what questions you're answering.

Once we have a solid conceptual understanding and a well "engineered" spreadsheet model, we can use that model to analyse the business. That analysis will allow us to create insights. Our job is to communicate those insights to inform the original business problem.

To be a great modeller we need the technical skills to design and build the model. But we also need the commercial understanding to know what to model, and the analytical and presentational skills to interpret and communicate the results.


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