Spreadsheets were still unheard of at that time, so the modelling systems were high-level programming languages. The two available at that time were FCS (later changing its name to EPS) and available on the IBM mainframe computer, and IFPS, available on the ICL mainframe computer. The main difference between the two was that FCS calculated row-by-row, and IFPS column-by-column.
Models built in these languages needed big mainframe power, only available in computer bureaux or large companies. For us at that time it meant buying computer time from companies like Old Mutual and Currie Motors from midnight to 8am (if we weren’t working through a computer bureau which was expensive). One run of the model I built for the JD Group would cost R100,000! (But still they felt it was worth it).
Then around 1980 along came the Apple II computer, with memory upgradeable to 64k. Around the same time a modelling language called Micromodeller made its appearance.
To my amazement the Micromodeller “language” was the same high-level language as EPS – but it ran on an Apple! A lot slower, but so what! The Apple computer and the Micromodeller software sold for a once-off sum of around R6500!
With the advent of the Apple came the very first spreadsheet – Visicalc – comprising 8 columns and 64 rows and only available on the Apple. At this stage it really was only a “Visible Calculator” but this heralded the advent of the spreadsheet.
Microsoft tried to persuade the authors of Visicalc to make the software available on its operating software – PCDOS (becoming MSDOS) – but they did not or could not. This opened the way for Lotus 1-2-3 to jump into the gap.
The first Lotus 1-2-3 spreadsheet was still only a one-sheet system, but with 64 columns and around 1024 rows, significantly enhanced from Visicalc. (It was created by a former employee of Visicalc).
Lotus 1-2-3 became the de-facto modelling spreadsheet of the time followed several other rival spreadsheet programs, e.g. Framework, Multiplan, Supercalc. Excel, and Quattro-Pro (Lotus’ main competitor).
Then IBM (who had acquired Lotus) made the decision to move away from desktop applications and concentrate on its communications software (Lotus Notes), and this opened the door for Excel.
Today Excel is the de facto modelling system worldwide.
HOW HAVE PEOPLE EVOLVED (OR NOT) USING EXCEL? ARE THINGS GETTING BETTER OR WORSE AS THE PROLIFERATION OF SPREADSHEETS GROWS WITH THE WORK FORCE?
According to Human, “Depending on the level of tertiary education, whether it was financial in nature, their post study experience, profession and their activity in their current employment – whether financial or not, we find quite a significant variance in modelling knowledge.”
Typically, most trainee delegates overestimate their Excel knowledge and capability – miss construe their knowledge of Excel (data management and data manipulation) – and often are deficient in those specific functions applicable to financial modelling.
The knowledge of basic accounting, financial statements and corporate finance theory varies wildly dependent on tertiary education, profession, and involvement in matters of corporate finance.
Given the (sad) lack of education pertaining to financial modelling at our universities and in the profession (SAICA, CIMA, CFA) etc., it is quite understandable the area of least knowledge and competence is financial modelling best practice methodology.
Hence the creation of certification institutes like the Financial Modelling Institute.
Human concludes, “Provided that aspiring modellers have been on a quality training course, I think that they are getting better at modelling and the application of best practice modelling methodology.”
HOW HAS FUNCTIONALITY IMPROVED OVER THAT TIME (EXCEL AND OTHER TOOLS) TO SUPPORT FINANCIAL MODELLING?
Both Lotus 1-2-3 and Excel were originally 1-sheet spreadsheet systems and were competing with the more powerful and flexible financial modelling program-type systems (EPS, IFPS & Micromodeller).
Spreadsheets, however, were easier to understand, and their popularity increased, urging Lotus 1-2-3 (at that point the most popular package) and Excel (nibbling at Lotus’ heels) to enhance their systems. Lotus’ response was to bring out multi-sheet spreadsheets (now calling them workbooks), thus increasing the dimension of the spreadsheet from 2-dimensional to 3-dimensional. Excel followed suit, improving on Lotus’ offering dramatically. (In Lotus it was initially not possible to group the sheets and insert formulas into all the grouped sheets at once. If you did group the sheets, all the sheets in the group took on the characteristics of the 1st sheet in the group, often resulting in an unholy mess).
Then came the facility to link workbooks by formula – a major advance in spreadsheet technology.
Around 2003 Lotus 1-2-3 emerged with its own macro (programming) language as part of its spreadsheet offering. This improved its functionality, and it became a real contender to the program-type of modelling system. Excel shortly followed suit with its macro language. This original macro language (now known as “Excel 4 macro language”) still exists in Excel but is no longer supported by Microsoft – so no help screens available. A pity, in my opinion, as this macro language is far easier to understand than VBA. (I still use it in preference to VBA).
As the memory in PCs increased, so did the size of the spreadsheets. Today Excel spreadsheets are limited only by the memory of the computer.
The ability to link Excel spreadsheets to other Microsoft applications (like MSWord) further enhanced their functionality.
WHAT'S THE SINGLE THING THAT REMAINS CRITICAL AS THE RISE IN DEMAND FOR FINANCIAL MODELLING INCREASES?
According to Theron, “As far as building good models is concerned, knowledge of model structure is still a limiting factor, as people still tend to do things like hard-coding data, do not use drop-down lists to minimise errors of input, do not display warning messages, etc.”
According to Human, “Of course, the very first step in building a successful model is to really understand and comprehend the business case.”
There are four main building blocks for successful financial modelling, namely: -
a. Essential Excel for financial modelling
b. Basic accounting and financial statements
c. Corporate Financial metrics and evaluation processes
d. Financial modelling best practice methodology”
The structure of the model and the need to understand the implications of changing the input data appears to be the most critical aspect of understanding Financial Modelling.
WHERE ARE YOUR GOOD PLACES (LINKS) TO FIND OUT MORE ON THE TOPIC
Given the wildly ranging skills in financial modelling, Colin’s financial modelling training company Goalfix Financial Modellers - introduced the “Course Selector” on their website.
It is simply a method to assist delegates to understand “where they are” when it comes to modelling.
There are also numerous other training providers on the Financial Modeling Institute (FMI) website which includes Model Citizn, Plum Solutions amongst others in Australia and around the globe.
There are also a fair number of financial modelling templates and example models both paid and free on the Eloquens website which help with showing what a good model looks like.
If you want to get a bit more technical in the financial modelling space download the Financial Modelling Code or wait for the upcoming series with Kenny Whitelaw-Jones on Financial Modelling standards.
HOW IMPORTANT DO YOU THINK THE SKILL OF FINANCIAL MODELLING IS IN TODAY’S BUSINESS WORLD (BY HUMAN)?
In our (early) days, there were no rules, no conventions, no guidelines – it was all homespun.
Today there are a number of recognised financial modelling standards and codes of best practice namely F1F9 (FAST Standard), Financial Modelling Code (ICAEW), Corality (SMART) and Best Practice Spreadsheet Modelling Standards (BPSMS) and a plethora of approved training providers per the Financial Modeling Institute website .
All the trainers employ a best practice methodology and many of whom publish free guidelines available on the internet. Additionally, you can purchase model templates from Eloquens, eFinancial Models and CFI to name a few as well as getting access to free templates.
Understandably, if the “modeller” has never seen a properly built model and doesn’t work with “proper” models built by colleagues, the process is something new and not always intuitive.
Self-education is available to all in the modern world – and serious practitioners of modelling have numerous sources of information and aids available.
Of course, too much, too easy doesn’t always make for success. You need to ride the bicycle to get good at it.
There is becoming a much greater awareness about financial modelling globally and the benefits of properly built, flexible financial models.
350 people attended Human’s presentation at the Finance Indaba in South Africa, the most he had seen in a long time wanting to learn more.
Human supports the FMI and the different levels AFM (L1), CFM (L2) and MFM (L3) that they offer, given its importance and believes financial modelling should be a professional qualification, like the CFA qualification for investment and banking professionals.
Financial modelling should become a corner stone skill for all accounting and finance professionals heading into the digital era.
HOW DOES ALL THIS DISRUPTION, AI AND AUTOMATION TALK IMPACT THIS TOPIC
Despite the development of automation in many areas, including financial modelling, the skill of understanding Excel, Accounting, Finance, Business and Problem Solving is still very much human led.
Design thinking and customer centric problem solving will not go away anytime soon (both human focused) and the fact remains there is no AI that can build an integrated 3-way financial statement model means that humans will still be required in building and using financial models.
Whilst technology will enable us to build models quicker and visualise them in ways we have never done before using software like Modeler and PowerBI if anything humans with the skills of financial modelling are still very much in demand in today’s digital world with all the data we have access to.
The inter-connectedness of data via APIs will even further accelerate this demand for a combination of data science and financial modelling where these skills start to converge.
If you want to find out more and follow the rest of the article series be sure to download the Financial Modelling App
If you want to find more information on financial modelling and content visit the Model Citizn website.