September 26, 2012
â€œFinancial modelingâ€ is one hot topic of recent years. The term usually refers to creating an integrated model of a company’s business and financial data within a set of spreadsheets â€“ normally with Microsoft Excel.
Investment banks, or more specifically: their equity research departments have been using detailed financial models for their forecasts and valuations for ages. However, the development of financial modeling as a service offered by specialized providers is more recent. This was mostly driven by investors asking for more reliable business plans to base their decisions upon. But also, although it may seem trivial, a lot of today’s financial models would have remained unthinkable with technical limitations that were only lifted with Excel 2007 â€“ such as the ridiculous limitation to 256 columns. Across all industries, Excel remains the single most important tool for financial modeling purposes, with only some specific tasks being solved in Access or other, more specialized software.
On the one hand, today’s market conditions require financial modeling experts that take care of the specification and implementation of a financial model. On the other hand, financials models are often embedded in a broader context, like a restructuring or a financial transaction, and against that background, advisors that provide the financial model must usually offer expertise in additional areas. It then comes to little surprise that the market is mostly divided between the â€œusual suspectsâ€: Big 4 accounting companies like Ernst & Young are in many countries the market leaders when it comes to financial models, as they already provide a lot of analyses and advice within bigger transactions; strategy consulting companies like McKinsey often deliver high-level plans with a more strategic angle, often purposefully ignoring complexity for the sake of simplicity; and specialized smaller providers offer specific industry expertise, but usually lack a global reach.
With more experience gained by both consultants and clients, financial modeling is now a service asked for from many more former and potential clients, reaching even smaller medium-sized companies that are hoping for some value from detailed financial models. One issue for the upcoming years is that, in many projects, clients realize that financial models, particularly in Excel, do allow for great simplifications and can deliver many useful results â€“ but they also learn that not every problem can be solved transparently as if magic were involved. It will be interesting to see which direction the industry will take over the next years.