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Modeling – the creation of a model – is an intellectual act that is distinct from the act of programming a spreadsheet.

Thomas GrossmanProfessor of Business Analytics, Dartmouth College

The majority of financial models being built today are developed by untrained professionals. Inside organizations, the task of financial modeling tends to end up in the hands of those that are comfortable with spreadsheets. Simply being proficient with Excel, however, does not qualify someone to be a financial modeler. The logic is simple – you would not call someone a writer simply because he/she knows how to hold a pencil and you would not call someone a sniper because he/she can pull a trigger. Thomas Grossman, a business analytics professor at Tuck School of Business at Dartmouth College, conveys this idea well in his research paper on business modeling:

“Although it is common to speak of a “spreadsheet model” as a single entity, it is wise to distinguish between the model, which is a set of ideas, and the spreadsheet that implements that model, which is a computer program. Conceptually, the model is independent of its computer implementation. Thus modeling – the creation of a model – is an intellectual act that is distinct from the act of programming a spreadsheet. There are many benefits to paying thoughtful attention to the act of modeling: One can develop better models, create a model in less time, and be less likely to waste resources analyzing a model that is fundamentally flawed and needs to be modified.

Modeling is generally considered an art or a craft […]. Modeling seems to be an intensely personal activity.”

While this idea may appear simple to comprehend, many organizations still mistake the act of financial modeling with the act of programming a spreadsheet. Tools such as Excel exist only as a medium in which a modeler uses to crystallize the model, but the model itself is a culmination of the modeler’s understanding of business principles, his experiences, and his ability to represent the underlying business reality into a form that can be shared and studied in detail. A modeler may not even need a spreadsheet program to build the model – a whiteboard or a sketchpad can be used to decompose the business into a few fundamental drivers that can be studied and generate the same insights as an Excel file filled with numbers and graphs. This ability to do so reflects the modeler’s business acumen and profound understanding of the interdependencies inherent in a business, which far supersedes any spreadsheet building skills. This is the mark of a trained financial modeler.

Pick him/her wisely.