IBM and Apple recently announced a collaborative effort to develop new suites of apps for various industries. Ironically, this news broke during the same week that a CEO told me of his interest in a financial model app because he wanted “to do more with his iPad than just check e-mail and surf the Web.”

Many C-suite executives are comfortable with quantitative work and understand the value of financial models in guiding critical decisions. However, their desire to take a deep dive into the numbers is often thwarted by the often unintentional (but sometimes deliberate) complexity of existing tools. Whether Finance groups like it or not, the development of new apps will bring more calls for user-friendly financial models that could wind up on the screens of many senior executives.

To understand the value of financial models to any sized business, look no further than “Shark Tank”. For those unfamiliar with this popular CNBC show, “Shark Tank” features entrepreneurs seeking investments from a panel of very successful business leaders. The initial pitch by the entrepreneur includes the business overview and an initial proposal, consisting of a funding request and the ownership stake offered to investors. Following pointed Q&A, members of the panel either forego the opportunity to invest or explore a potential partnership, usually with very different funding and ownership terms. In the latter case, entrepreneurs and panel members initiate negotiations in an effort to find a mutually acceptable deal. At this point in the proceedings, the entrepreneurs often appear overwhelmed while the potential investors remain calm.

Unbeknownst to most entrepreneurs, financial models would increase their chances of striking an acceptable deal and decrease the odds of making a critical error. Successful business leaders, through their extensive deal making experience, have a very good sense of acceptable transaction terms. In other words, they “know the numbers”. Conversely, entrepreneurs who do not have a financial model for their business face the prospect of flying blind during negotiations. Understanding the potential returns for business investments, which includes getting comfortable with upside and downside scenarios, would allow entrepreneurs to remain as calm as “sharks” when striking a deal.

Despite the availability of numerous platforms specifically designed for financial calculations, Excel still presents the best option for creating models to support most businesses. This conclusion reflects a number of realities:

1. A wide range of employees can understand and use Excel-based financial models. Even in cases where the model has a relatively high degree of structural and computational sophistication, basic navigation and input/output operations are often familiar to all Excel users.
2. Businesses incur no additional capital costs by using Excel, a standard part of the Microsoft productivity suite.
3. Use of purpose-built modeling applications can significantly increase operating costs. Specialized programs often require extensive training, which can lead to higher employee turnover due to frustration or talent poaching by other businesses using the same purpose-built application.
4. The flexibility of Excel gives users an easy route to modifying models. Additionally, Microsoft continues to actively support the application, frequently adding new and valuable functionality.

While purpose-built programs may provide the best option for certain organizations, such as large corporations with multinational operations, the vast majority of businesses will find that properly built Excel models will meet or exceed their needs while simultaneously minimizing their costs.

Despite all the user-friendly features of Excel, many financial modelers using the spreadsheet program still need to disengage from meetings in order to update their calculations. Proposed changes to assumptions during budgeting, forecasting or strategic planning meetings often elicit responses such as “I’ll need a few hours to make those changes” or, even worse, “I’ll let you know when I have updated the model.”

Offline modifications, while still accepted for many finance responsibilities, have almost completely disappeared from many other collaborative efforts. When all contributors can be assembled (in one room or by meeting software), substantial work products such as contracts, SEC documents, marketing decks, etc are routinely projected and modified in real time, thereby reducing the time commitment to complete such efforts.

Properly designed Excel models allow management teams the same collaborative convenience enjoyed by lawyers, marketers and other professionals when they use standard word processing applications or PowerPoint. Thomson Consulting LLC can provide products that will help you make the prospect of real-time financial models into a reality.

Most businesses rely on “someone in Finance” to create their financial models and therefore see no need to outsource this activity. However, while Finance or other functional groups should have day-to-day responsibility for operating financial models, development of these tools through outsourced services makes good business sense.

Reviewing five traditional criteria for outsourcing provides some perspective:

1. Is the activity primary to the business? For almost every firm, the development of projected financial statements provides key information but does not affect the core commercial and support operations that drive the business.
2. Does the activity provide a competitive advantage? While receiving more thorough and timely financial projections always helps management in the decision making process, this information rarely imparts benefits in the head-to-head struggle with rivals.
3. Is the activity required full-time? Business leaders often require frequent updating of actual values and projections in their financial models, but the creation or structural modification of these tools may only occur once per year e.g. prior to the start of budget season.
4. Are better services available externally? Many firms use substandard financial models because “someone in Finance” sees model creation as an annoying, one-off project that impedes their efforts to address more immediate responsibilities. External developers, who usually have the “big blocks of time” advocated by Peter Drucker, can dedicate themselves to creating well-structured models that offer easy, reliable operation.
5. Will outsourcing reduce cost? Businesses often believe that they incur no additional cost by having “someone in Finance” create models. However, the distraction and frustration which accompany these efforts, coupled with the demand on co-workers to cover the day-to-day responsibilities of the modeler, can exact a real and substantial toll on employees and their performance.

In many cases, outsourcing development of financial models provides long-lasting benefits for businesses.

Here is a sample financial model that we created.  Please click the link below to access the Excel document.

Demo – Corporate Financials

Dwight Eisenhower famously said, “I have always found that plans are useless, but planning is indispensable”. Clearly, as both General and President, Eisenhower developed and issued specific plans to his subordinates. However, I believe this statement sought to both highlight the folly of relying on an inflexible course of action and to emphasize the critical importance of thoroughly understanding your own operations.

For many businesses, the development of a detailed financial model represents an important component of the rigorous planning needed to reach their goals. Quantifying all potential revenue streams and costs components provides an effective structure for companies to conduct “internal due diligence” on their operations. These businesses often rely on rigorous financial models for real-time decision support, especially as they process the daily (and often hourly) flood of insights from “Big Data”. Most firms need a means to assess the new opportunities and, more frequently, new obstacles that inevitably appear.

As the start of the budget process will soon begin for many organizations, management teams may see the creation of financial models as a “necessary evil” or merely the means to record their aspirational goals. We believe that, by avoiding rigor in the modeling process, businesses forfeit an excellent opportunity to prepare for success and willingly accept a disadvantaged competitive position. In essence, they embark on a long and potentially difficult flight while leaving their navigator at home.