All Posts by Kenny Whitelaw-Jones:

Where the @%*$ is the model?

Posted by Kenny Whitelaw-Jones

agile financial modelling, angry client
Judging by the feedback on our recent Agile Financial Modelling ebook, it seems lots of you have had similar experiences, and developed similar approaches.

One email in particular made me laugh and so I asked permission to share it:

"Dear Kenny,

I took a look at your financial modelling booklet.

Your comment relating to the ‘traditional life-cycle’ of building financial models made me smile. That is true as true can be.

It reminded me of my time at [INSERT NAME OF LARGE ACCOUNTING FIRM] and one particularly case where an Associate Director chap managed to burn a good part of the client's modelling budget (and time) in drafting a pretty comprehensive scoping document. 

It was welcomed by client FD with: 'Where the @%*$ is the model or any draft of it? You can stick that damn document in your @%£$'.

That’s the spirit."

 

Agile financial modelling, building financial models
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Benelux launch of the FAST Standard Organisation

Posted by Kenny Whitelaw-Jones

fast standard organisation

On January 23rd Morten and I joined other members of the FAST Moderation Board from Deloitte, Mazars, and Rebel Group at FAST Standard Organisation events in Rotterdam and Brussels.

From our perspective it's interesting to see how the governance framework that has been put in place since the launch of the FAST Standard Organisation is enabling more and more companies to adopt the standard, knowing that they are not going to be "locked in" to one supplier for modelling and training services.

Together with a host of company executives, advisers, practitioners, academics and financiers from a wide variety of companies and organisations we had some great discussions about FAST.

Robert-Jan Bakker, Portfolio Manager from Pension Fund APG, discussed the benefits he's seen as a result of using FAST. He noted that as modelling is never a solitary activity and that because we work together, as teams, as partners, as companies, then standardisation has clear benefits.

Kees Horcher, co-founder of Rebel, commented that while Rebel are known for normally eschewing standards, in the case of modelling they have found that adopting FAST has allowed them to focus on driving innovation in the area of analysis. He described how the standard allows Rebel to "create modules which make it very simple to build a new model. We can build a new project finance model in a less than week, for example." He continued that "modelling speed is tremendously increased by using the standard".

This short video gives an overview of the event.

 

financial modelling, fast standard organisation

 

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8 reasons why your business forecasting sucks

Posted by Kenny Whitelaw-Jones

f1f9 corporate modelling

Many decision-makers wish they had better forecasts. It is frustrating when you know that you would have made a better decision with better information.

Why are business forecasts so often unreliable?

1. Forecasting methods are poorly documented;

2. The performance of the forecasting method used is rarely evaluated;

3. Those doing the forecasting seldom understand the importance of the forecast for resource planning, decision making and the performance of the business as a whole;

4. Probability-driven forecasting based on a pipeline is usually wrong;

5. Sales teams tend to overstate the quality of their prospects;

6. Useful information from outside the sales team is rarely called upon;

7. Different business environments need different forecasting techniques and processes;

8. To many people it all seems too complicated and, given other priorities, forecasting is simply not given the time and energy it deserves.

These reasons don't mean that you shouldn't forecast. In fact, they underline the need to improve.

If you can forecast effectively you will:

Make better decisions;
Plan your business resources and purchasing more effectively;
Improve your control of cash-flow;
Look better in the eyes of external funders, potential investors and other stake-holders;
Keep your job!

How you can improve your forecasting?

1. Don't use one forecasting methodology. At F1F9 we use multiple methods in parallel and, over time, select the methodology that works best for the particular dynamics of each client’s business;

2. Update forecasts regularly. We usually support our clients with monthly updates to their business forecasts. Some clients require more frequent updates, some less frequent;

3. Measure the performance of the forecasting methodology itself against the actuals;

4. Talk to all the people involved in the process to understand why the reality was different to the plan – and refine the methodology accordingly;

5. Don’t just include the sales team; Also involve key operational and finance staff and maybe even customers;

6. Make sure the forecasting model is transparent and usable. Use a recognised modelling standard

Finance personnel spend enormous amounts of time on the regular departmental routines of year end, budgeting, forecasting and producing month end board reports and updates.

When we provide corporate modelling support we typically reduce this time by over 50%.

Better quality, timely forecasting means better decision making.

 

 

 

corporate modelling, business forecasting

 

 

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The Future of Infrastructure Financing

Posted by Kenny Whitelaw-Jones

Industry insights
We recently posted Industry Insights interviews focusing on infrastructure financing with Toby Stokes of Aviva and Dominic Nathan of Assured Guaranty discussing the lending options provided by their firms.

We're continuing on the infrastructure financing theme with Tim Stone of KPMG taking a global perspective on how Europe could fund some of the anticipated infrastructure investment requirement.

In today's Industry Insights interview Tim shares his thoughts on:

1. how we could get institutional money into deals
2. which countries already have institutional investors active in infrastructure financing and
3. why institutional money is a natural fit with infrastructure lending.</li>

There's also an interesting article on the potential effects of regulation on both the banks and pension funds ability to lend to infrastructure projects on Infranews (How a Rise in Regulation is Set to Have a Dramatic Impact on Infrastructure Investing by Mike Dunning). This article explores the negative impact the increase in key capital ratios imposed by Basel III will have on the banks' ability to lend long term, which would open up the market for institutional investors. In theory this is great news for the institutional investors but unfortunately most don't have the in house teams in place to structure and manage these types of loans. In addition to their in house problems, the European Commission is considering applying the Solvency II regulations to pension funds which would limit their ability to lend to infrastructure projects.

 

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Pension funds and infrastructure financing

Posted by Kenny Whitelaw-Jones

industry insight
There has been a lot of discussion in the industry news recently about pension funds financing future infrastructure investment and the hurdles which have prevented this from happening so far on a large scale in the UK.

The UK Treasury is currently holding a series of meetings with pension funds and industry bodies to discuss ways of making infrastructure financing more attractive to them.

One of the main hurdles is that most pension funds do not have the in-house experience to allow them to lend directly so we thought it would be useful to hear from one of the few established pension funds in this market with its own in-house team.

Today we are releasing an Industry Insights video with Toby Stokes of Aviva's Commercial Finance team.

In this interview Toby explains:

1. how and why Aviva got involved in PPP projects

2. how their loan offering differs from bank debt

3. why an Early Repayment Fee may be needed and how it is calculated

4. his view of the future of PPP and Aviva's ability to lend long term.

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Infrastructure financing: The wrapped bond is back!

Posted by Kenny Whitelaw-Jones

industry insights
With all the doom and gloom surrounding liquidity in the senior debt market and pressure around debt tenors we were delighted to see that Assured Guaranty had issued the first "wrap" for an infrastructure bond in Europe since the start of the credit crisis.

In early January Assured Guaranty signed a financial guarantee for the bond issued to fund the construction of the Worcestershire Royal Hospital PFI project. The £100m bond was issued in 1999 when the project reached financial close and was originally guaranteed by Ambac.

We thought this would be a good opportunity to remind everyone of the role of a monoline insurer and the development of the bond market in infrastructure financing. In a new Industry Insights video posted today, Dominic Nathan of Assured Guaranty explains the role of the monoline and the evolution of the bond market in the infrastructure financing

Dominic gives a detailed explanation of the differences between bond and bank funding at both a modelling and structural level and explains how the close process works when using a wrapped bond in project finance.

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Good financial modelling is like good business writing

Posted by Kenny Whitelaw-Jones

good writing is like good modelling
While reading David Silverman’s Harvard Business Review article on good business writing, I was struck by the similarities with the best practice financial modelling methods advocated by the FAST modelling standard.
“All writing is about clarity”

The proper use of paragraphs = the proper use of calculation blocks

Silverman writes – “A paragraph can express multiple thoughts. In business writing, it should express one.” In modelling – we can put lots of calculations together in the same block, but we should not. One calculation per block.

Simple sentences = short, simple formulas

If we accept that clarity and readability are paramount in financial modelling as in business writing, the formulas should be short. If sentences become too long, with multiple joined clauses, we break them down. We should do the same with our formulas. Avoid the temptation to think that long sentences make you look clever.

Reading vs scanning

Silverman points out that business documents are scanned not read, and recommends that we make it easy to find the information using clear headings and sign posts. The same is true in models – headings and labelling are crucial when users are ‘scanning’ through the model.

What’s your view? Is good modelling like good business writing?

 

free financial modelling course 31 days to better financial modelling
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Changing financial modelling: Change is exhausting

Posted by Kenny Whitelaw-Jones

Golf-Swing
When a golfer is working on improving her swing, she will exercise considerable “self-supervision”. 

She will be constantly watching herself to make sure she is “doing it properly”, trying to remember the training she has received. Compared to the more “automatic” functioning of walking or driving long distances, psychologists have discovered that, a. self-control of this nature is an exhaustible resource and, b. exercising it is hard and very draining.

Back to Chip and Dan Heath again:

Here’s why this matters for change: When people try to change things, they’re usually tinkering with behaviours that have become automatic, and changing these behaviours requires careful supervision by the Rider. The bigger the change you’re suggesting, the more it will sap people’s self control“.

Chip and Dan conclude that it’s not true to say that change is hard because people are lazy. It’s hard because people wear themselves out:

What looks like laziness is often exhaustion.

We see this repeatedly on our financial modelling training courses. By the end of day 1 of our foundation modelling course, people are surprised at how physically exhausted they are. Changing behaviours, especially automatic ingrained ones, is tough work.

Hopefully this short series has helped you consider some of the issues you will have to tackle when you strive to raise standards in financial modelling. Don’t let it put you off. The effort is well worth it. Get in touch and let us now how you’re getting on.

This post is the last of a five part series on raising organisational financial modelling standards.
Introduction – sometimes financial modelling courses are not enough
1. Provide crystal clear direction
2. Consider both hearts and minds
3. Consider the environment
4. Remember that change is exhausting

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Changing financial modelling: Consider the environment

Posted by Kenny Whitelaw-Jones

Blackboard-Numbers
If you want to impress your friends with your knowledge of psychology, hit them with the “Fundamental Attribution Error”.

This deep-rooted tendency was famously named by Lee Roos, a psychologist at Stanford. He noted that people have a systematic tendency to ignore the situational forces that shape other people’s behaviour. i.e. when the other car cuts you off you don’t think “Gosh, I wonder what could be going on in that guy’s life such that he is in such a hurry”. No. You think, “What a jerk”.

The error lies in attributing other people’s behaviour to “the way they are”, but attributing our own behaviour to “the situation we are in”.

If you want to help people to change, as well as providing them with a clear emotional motivation, clear instructions and a well identified destination, make the journey easy and obvious for them – make the situation support the change. When it comes to financial modelling there are a number of environmental factors that will help change stick:

1. Management awareness

When a model is built using FAST, the way the model has been built does not come in between the reviewer and her understanding of what’s happening commercially. The structure of the model aids readability in a way that has to be experienced to be fully comprehended. In many of the organisations that we have seen where effective modelling practices are embedded, managers simply refuse to review models that have not been built to the standard. This kind of management “pushback” quickly focuses attention and helps reinforce positive, constructive habits.

2. Clear processes and protocols

This point was emphasised by Nathan Goode of Grant Thornton. He noted that although this was hard work, getting the process documentation and clear modelling protocols in place was a critical part of the transformation of their approach to modelling. A key part of this involves building effective checklists that let people know what should be in their models. To learn more about what makes a good checklist, read the excellent “Checklist Manifesto” by Atul Gewande.

3. Legacy models

Throw them out and rebuild them according to the agreed standard. It’s as simple as that. To do otherwise is to send the message that it’s OK to use poorly built models. It will seem like a lot of work upfront, but not doing so will cause more work over a longer period.

The last of our recommendations on the effective management of a modelling change effort lies in the simple observation that, despite received wisdom to the contrary, most people are not resistant to change. It’s just that change is exhausting.

This is the fourth in a series of 5 posts on raising organisational standards of financial modelling.
Introduction – sometimes financial modelling courses are not enough
1. Provide crystal clear direction
2. Consider both hearts and minds
3. Consider the environment
4. Remember that change is exhausting

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Changing financial modelling: Consider hearts and minds

Posted by Kenny Whitelaw-Jones

Elephant-Rider
Despite what we modelling geeks might like to think, people are both rationale and emotional. 

In his book, psychologist Jonathan Haidt likens our emotional side to an elephant, and our rational side to its rider. Sitting on top of the elephant, the rider seems to be in charge. But anytime the rider and elephant disagree about which way to go, the elephant is going to win. As Chip and Dan Heath put it in their book:

Most of us are only too familiar with situations in which our Elephant overpowers our Rider. You’ve experienced this if you’ve ever slept in, overeaten, dialed up your ex at midnight, procrastinated, tried to quit and failed, skipped the gym, said something you’ve regretted. Good thing no one is keeping score

In The Heart of Change, John Kotter reports on a study he undertook with Deloitte Consulting on how change happens in large organisations. He noted that in most change situations, managers initially focused on strategy, structure, culture or systems, which leads them to miss the most important issue:

. . . the core of the matter is always about changing the behaviour of people, and behaviour change happens in highly successful situations by speaking to people’s feelings. This is true even in organisations that are very focused on analysis and quantitative measurement, even among people who think of themselves as smart in an MBA sense.”

One area that some of our clients have found helpful in creating change among their modellers is the FAST programme of certification. FAST offers an online test for modellers which provides them with accreditation as a FAST certified modeller. Our clients tell us that this testing has a number of important benefits:

1. Modellers are more focused during training, knowing that they will be tested.
2. Modellers realise that the company is serious about this change process and if their colleagues are going to have this certification, they will need it also.
3. It provides a clear reward for good performance and an incentive to practice (which is critical to the acquisition of any new skill).

In short, testing taps into some emotions that are helpful to creating effective behaviour change, both negative (I don’t want to be the only one of my colleagues that fails this) and positive (having this certification will look good). This may still not be enough to make the change stick. We also need to look at the organisational context in which modelling is happening.

This is the third in a series of 5 posts on raising organisational standards of financial modelling.
Introduction – sometimes financial modelling courses are not enough
1. Provide crystal clear direction
2. Consider both hearts and minds
3. Consider the environment
4. Remember that change is exhausting

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