Why financial modelling should be a key skills focus for investment professionals

Friday 6 September 2024

Last year, CFA Institute announced the biggest changes to its program in 30 years. With the addition of Practical Skills Modules, CFA Institute recognised the opportunity to bridge the gap between theoretical and hands-on learning, highlighting, in particular, the importance of financial modelling knowledge. 

This is because financial models have become the most important decision-making tool in finance. Financial models are used extensively to drive critical decision making.  

But there is a problem: Most financial models are a mess.  

Flawed models don't just cause problems for harried managers and expectant clients, they can have potentially disastrous ramifications for organisations. (Example: The Collapse of Silicon Valley Bank.) 

A financial model simply refers to the construction of a forecast within a spreadsheet to predict financial performance so that a business decision can be made. While models typically project financial statements for three to ten years, their scope will vary based on specific requirements. 

Financial modelling has evolved into a professional discipline unto itself.  As we have come to understand the role of financial models in facilitating decisions, the imperative for professionals to have the skills necessary to build effective financial models has increased.  

Let’s look at why CFA Institute incorporated financial modelling into its program, why models so often go wrong, and what can happen when they go right. 

Key Decisions Guided by Financial Models 

A variety of strategic decisions hinge upon insights derived from financial models, including: 

• Valuations and investments 
• Budgeting, planning, and operations 
• Capital planning and allocation 
• Credit 
• Debt and equity financing 
• Risk assessment  
• Financial models can aid in both evaluating external opportunities and informing internal decisions. 

The Problem with Financial Models 

A well-constructed financial model should read like a good piece of investigative journalism: clear, concise, and compelling. The modeller’s job is to present a complex set of data in a simple, straightforward way. 

However, many - if not most - models are problematic. They are often poorly designed, overly complex, or contain errors. When a model is badly constructed, it is difficult to interpret and hinders decision-making. 

The problem is that modellers are often self-taught or have not been exposed to best practices. Sometimes, modellers simply have not had the chance to work on files that provide learning opportunities. Like any discipline, modelling work requires repeated practice necessary to gain mastery - just like any other kind of advanced skill. 

How to Build an Optimal Financial Model 

Financial modelling is a multidisciplinary skill. It requires a blend of technical proficiency and business acumen.  

Key competencies include: 

• Planning and collaboration 
• Accounting 
• Finance 
• Excel 
• Design and presentation 

At its core, a financial model is a presentation to the reader. Beyond electronic functionality, a financial model must effectively communicate insights in a visual way so that decision-makers who engage with the model - either on paper or in PDF format - can easily digest the content. 

 

Why You Want to Become a Better Modeller 

When your skills are strong, you can build models that incorporate scenario and sensitivity analysis to manage risk. A robust model fosters confidence among clients and managers because they know that “model risk” has been reduced. 

Yet, while financial models have become important decision-making tools, the need for strong modelling skills is significant for another reason: financial modelling is one of the most important skills to foster critical thinking and promote leadership development. 
 
With excellent modelling skills, an investment professional can: 

• Read and properly understand a company’s historical financial statements 
• Ask strategic questions to help frame thinking about the future  
• Perform effective research in order to determine optimal assumptions  
• Challenge conventional thinking and adopt alternate approaches 
• Coordinate the efforts of all contributing professionals 

Strong modellers can lead teams of both junior and senior professionals. When you master the ability to build robust financial models, you can communicate outputs and recommendations with poise, confidence, and assurance. 

With CFA Institute’s recognition of the importance of financial modelling knowledge, you have a tool available to bolster your skills: the Financial Modelling Practical Skills Module is available to all CFA Charterholders. Taking advantage of the opportunity to improve your knowledge about this important skill will enable you to provide the financial insights most valued by teams, clients, and stakeholders. 


CFA UK have collaborated with the Financial Modeling Institute to provide a series of technical skills based webinars on financial modelling. Book your place onto these webinars: 

• 25 September, 1pm BST -  Financial Modelling Best Practices
• 29 January 2025, 1pm GMT- Checking and Reviewing a Financial Model
• 28 May 2025, 1pm BST - Advanced Excel Skills

Ian Schnoor, Executive Director of Financial Modeling Institute (FMI), is globally recognised as an expert in valuation modelling, Excel models, and corporate finance. For 20 years, Ian taught financial modelling to business professionals and university students as Founder of The Marquee Group (acquired by Training The Street in 2023).  

FMI promotes awareness, excellence, and discipline in financial modelling globally through its world-class accreditation programs. FMI proudly provided the content for CFA Institute’s Practical Skills Module on financial modelling. FMI partners with CFA Societies to enable their members the opportunity to sit FMI's Advanced Financial Modeler (AFM) accreditation exam.