A Financial Analyst’s wish list Part 2: Why do all Accountants have a uniform way of working, while Financial Analysts don’t have a standard way to do their job?

Posted on September 11, 2010 by CEO

If you look at the work (i.e. the “multicolored spreadsheets”) in 100 different companies, and see how they perform Budget, CashBudget, Investment Evaluation etc, you will see 99 or more different forms to do the same job. And if you happen to witness the freak occurrence that two people are doing work in the same manner, it probably means that at some time, one of them was the other one’s mentor, when they were working at the same company.

On the other hand, Accountants have a more or less uniform working environment. There might be hundreds of ERPs in the market, but they all pretty much require (in principle) from the user the same input, and they give (again in principle) the same output. An Accountant that has just been hired, is expected to be able to perform basic invoice entries within the first week, and in most cases on the first day.

Controlling and verifying an Accountant’s quality of work is relatively easy. There are countless audit firms that specialize in that task. On the other hand, auditing a “multicolored spreadsheet” is mission impossible, sometimes even for the actual creator of the file, if that work hasn’t been touched for several months, and thus the assumptions, the maneuvers and the reasons behind them, have been forgotten.

If you ask about which is the software, that is currently the global standard in Financial Analysis, the answer is that currently there isn’t one. Actually, there never was any software that can lay claim to that title. As a matter of fact, before C2BII there wasn’t any software that could effectively handle those tasks at all. But as we have already seen, the existence of C2BII is a message that needs to get communicated, so that it will become the first global standard in the field of Financial Analysis.

The curious thing for Accountants and Financial Analysts is that, even though the working circumstances vary by a wide margin, both professions deal with the exact same concepts (sales, purchases, expenses etc).

Every Financial Analyst wishes that there was a uniform way to work, and a uniform way to verify one’s work, just like Accountants have one.

Stick around, and we are going to see the other thing that Accountants have, and again Financial Analysts can only wish they had.

Posted in Budget, Budgeting, CashFlow, Financial Analysis, Financial Analysis Method, Investment Plan Evaluation | Tagged , , , , , | Leave a comment

A Financial Analyst’s wish list Part 1: Attack of the multicolored spreadsheet

Posted on September 11, 2010 by CEO

This is a phenomenon that everyone who has worked in Financial Analysis knows and dreads. If you haven’t done that, chances are you are not going to be able to fully comprehend the horror of the situation that I am going to describe, so you’ll just have to take my word for it.

You have just finished your work. It might be the spreadsheet with the company’s Annual Budget, or the CashFlow, or an Investment Plan evaluation. No matter which is the method that you have used (the “Monthly Average” method, or the “Net Present Value” method, or the “Internal Rate of Return” method), you know that there are problems and inaccuracies in the method to begin with, and that, thru no fault of yours, many of your figures are not a product of a solid calculation, but of a compromise of sorts. In order to remember that you have done this assumption or that maneuver, you have colored these cells with yellow, and those cells with red, and the other cells with green and so on. You have filled the cells with comments, hoping that when you will use the same spreadsheet again they are going to help you remember what assumptions you used. The end result is a motley looking spreadsheet.

The horror begins to kick in, when you need to update your work after a month or more. In order to factor in some new business moves, you must remember and understand which of the assumptions you have built into the previous month’s work are no longer relevant and need to be removed, and which ones need to be changed. You hope that the different colors will give you hints about what needs to be done, but you can never be sure. And even if they do, the size of the worksheet is so enormous, that you cannot really check every formula in every cell to see if there is an error.

But the biggest horror of them all, is when you go to a new job, and you inherit from your predecessor the multicolored spreadsheet of the company’s Budget or the CashBudget or so. You can spend countless months trying to understand the logic behind every formula, and still you will never be absolutely sure that you fully comprehend what’s going on. Your first reaction when you see what you have inherited is to throw everything to the waste basket, and start everything from scratch. However, that option exists only if you have just been appointed as the head of the department. If not, then you are going to continue, using the previous way of working. But even if you are the head of the department, it will take several months to create all that work from scratch. In the meantime, you still need to issue reports, so you really must continue working in the old multicolored spreadsheet, that’s sitting in your screen, ready and waiting for an opportunity to pounce at you, and shred your mental health to pieces.

I am not going to deny the huge revolution that the spreadsheet brought to the world of Financial Analysis. However, the quantity of the work, currently has reached a monstrous size. Every Financial Analyst wishes that there was a better way to do those tasks. Actually, there is one, and we are going to see it shortly.

Stick around, and we are going to see the things that Accountants have, and Financial Analysts can only wish and dream they had.

Posted in Budget, Budgeting, CashFlow, Financial Analysis, Financial Analysis Method, Investment Plan Evaluation | Tagged , , , , , , | 3 Comments

Sensitivity Analysis: How the right idea can get spoiled by the problems of the implementation

Posted on September 8, 2010 by CEO

Concerning the basic underlying idea behind “Sensitivity Analysis”, I cannot find a single negative thing to say about it. In order to understand the problem that exists in the implementation, consider the following line of thought:

Forecasts     +     Calculation Method     =     Result

     ±A%                                 ±B%                           ±(A+B)%

We begin with the creation of some forecasts, which we process thru some Calculation Method, in order to arrive at a result. Now, when we say that forecasted sales for May 2011 are going to be 10 mil USD, we know that it is highly unlikely that this is going to be the absolutely accurate actual number. Some level of inaccuracy is incorporated into that figure, depending on the quality of the forecaster’s work. Generally speaking, let’s say that it is ±A% inaccurate. If the calculation method we use has built-in inaccuracies, like we have already seen in the “Net Present Value” method (let’s say that it is ±B% inaccurate), the end result is going to be ±(A+B)% inaccurate. In other words, one level of inaccuracy gets piled up on top of the other, to create an even bigger combined inaccuracy level.

If anyone hopes that A and B in some scenarios might cancel each other out (for example A= +8.00% and B= -7.50%), then please note that:

 After the Financial Analysis work has finished, and you have established a result, any experienced professional will tell you that this is just the beginning of the real and the most meaningful part of the work, which is the “What if” scenario storm. What will the profitability look like:

  • if we make only 92% of the sales target
  • if the days of credit to the customers are 19 more than we expected
  • if the Interest rates do this
  • if the cost of TV advertisement does that
  • if the cost of raw materials does the other thing
  • if … if … if …

So, these numbers represent the variations of the ±A%. The purpose of the Sensitivity Analysis is to give us a heads-up for what is going to happen when the uncertain and the unexpected (the ±A%) occurs. However, now that we have covered the ±Α% inaccuracy, we are not really going to get an accurate result. What we are getting, is a result with an ±B% inaccuracy. So, what we need is a calculation method whose B=0, or in other words, one that you cannot put a single dime of its calculation into doubt.

Stick around, and we are going to see what’s inside every Financial Analyst’s wish list. We’ll see the calculation capabilities that before C2BII didn’t exist, and how they will revolutionize the work of almost every company department.

Posted in Budget, Budgeting, Financial Analysis, Financial Analysis Method, Investment Plan Evaluation, NPV, Net Present Value, Problems of Net Present Value, Sensitivity Analysis | Tagged , , , , , , , , | Leave a comment