Again this one is something that you can fully understand only if you have already done it. If you think that the equation of “Income – Expenses = Profit” is easy to implement (in an environment of forecasts – not one of actual invoices), then I have no hesitation to say that you probably have never done it yourself on a professional level and in a live business environment. In Academia, some oversimplified examples can give you confidence, but eventually you will find out that “life in the trenches” is a completely different situation than the MBA classroom.
All these problems that you will find in the implementation in a live environment, are responsible for the creation of the “multicolored spreadsheet” monster that we have discussed earlier. On the other hand, Accountants rarely need to create notes that justify their Accounting entries. Again the frustrating part is that both Accountants and Financial Analysts deal with the same concepts in principle (i.e. sales, purchases, expenses etc).
I’m sure that you remember the previously discussed equation of:
Forecasts + Calculation Method = Result
±A% ±B% ±(A+B)%
The ideal situation, and in my opinion the only correct one, is that assumptions should belong in the business part of the Financial Analysis, or in other words the ±A% part. The calculation method, or in other words the ±B% part, should be a transparent and easily verifiable technical process, just like it is in Accounting.
Any seasoned veteran of Financial Analysis that reads these lines will probably sigh and remember the tortures that in the past he/she has suffered, and wish that there was some practical way that this wish list could become a reality.