Empowering decision makers

- There's a perception that financial modeling is purely some kind of back office accounting activity, and I'll admit, at times, working on a large and complex financial model can kind of make you feel like a penguin lost in the Antarctic. So, let's give financial modeling some context. In 2016, Microsoft acquired LinkedIn for $26.2 billion. Then, in 2018, Uber acquired a bike sharing company called JUMP for a reported $200 million. And then in 2019, the South Australian state government outsourced its roads maintenance, saving taxpayers an estimated $9 million per annum. Now, some very senior and let me assure you, very well-paid individuals made these decisions, but the announcement of these initiatives and the decisions themselves come after a lot of hard work has been done. What started as an idea, a niggle, or even just a suggestion quickly became a major priority. This means a lot of hard work went into arming the decision-makers with the information they needed to be confident that, at least financially, it was in the best interests of stakeholders. So, how do you go from an idea to a major investment decision? Well, it's pretty simple, really. These decisions can only be made with, you guessed it, robust financial modeling. Granted, there are certainly other considerations, but the reality is, the financials are the most important. After all, if the decision-makers get it wrong, they'll quickly find themselves taking coffee orders. No pressure or anything. Okay, let's have a look at some of the more common applications of financial modeling, because you can use financial modeling for major international mergers, or even just, say, adding a vehicle to your small catering company. Insource versus outsource. Now, this can be anything from assessing frontline services such as the roads maintenance example I mentioned earlier to corporate services such as payroll and accounts. Then there's buying versus leasing. Say your organization needs a new machine to produce products, or perhaps an IT system to deliver new services. A financial model can help assist in deciding on whether to purchase or lease that asset. Investments and acquisitions is another one. Thinking about the decision that Microsoft made to acquire LinkedIn, this came after, no doubt, many months of due diligence, of which the financials were front and center. And lastly, there's credit analysis. Here, financial models are used to assess a customer's propensity to pay back a loan, which in turn assists in setting prices such as interest rates. These are just some of the many ways that financial models can be used, and it's changing all the time. So, watch this space. Having an appreciation for the bigger picture may feel a little daunting, but it also empowers you with the knowledge of how financial models can make a difference to your organization.