If you’re running a business, you’ve probably made decisions on-the-fly and have done quick calculations in your head. But when you need to make decisions that require you to consider a multitude of factors, and the factors influence each other, it might be too complex for you to model the consequences of potential decisions in your head. The simplest way to avoid overburdening your cognitive capacity is to build a model using a spreadsheet (such as Excel). You can do the financial modeling yourself, OR you can HIRE a financial modeler.
WHY might you want to hire a financial modeler? Because as a business owner or manager, you want to focus on exploring opportunities and making decisions, and let someone else do the building and maintaining of tools to help you make the most informed decisions.
How do you hire the right financial modeler for your business? It can be costly to your business if your modeler fails to manage “spreadsheet risk”. The advantage of using spreadsheets over purpose-built software packages is that you have incredible flexibility of how you want to model a process. You can get an answer quickly without much upfront architecting of the model (which is in contrast to software development). However, such flexibility allows you to create models which give you the wrong answer.
That’s why it’s important that you hire someone who offers more than just good spreadsheet (or Excel) skills. In order to be effective in analyzing, building and testing models (the technical skills), the modeler needs to have good management skills, such as:
- Business acumen – Do they understand how your business works and what makes it successful? If they can, then they will deliver not just information, but also insight. They will know the risks and limitations of the model, be able to test the model for errors, and know what to include or exclude in the model to achieve your business objectives.
- Relationship skills – Can they build trust across different parts of your business? This is necessary to efficiently procure information to input into the model. If no one wants to talk to the modeler, then it would be difficult to get the information you need.
- Communication skills – Can they simplify complex ideas for non-financial folks to quickly absorb? They need to be able to articulate not just the result, but also the implications and actions the business should take as a result. They need to translate the financial figures into an engaging and meaningful story, so that people are motivated to take action.
When assessing technical skills, you should focus your questions on modeling concepts and problem solving, not specific Excel functions. Anyone with a good conceptual understanding should be able to quickly learn Excel functions. You should allow your candidate to tell you what functions he will use to solve a sample problem, as there are usually multiple answers to the same problem. You don’t want to exclude someone because they seldom used a function, or they solve problems in a different way than you do.
Here are some methods you could use assess the candidate’s technical skills:
- Before the interview, ask your candidate to bring a sample model and base the discussion on what you see. Go as deep as possible into the model so you understand the thought process.
- Ask the candidate what type of problems they have solved with modeling e.g. Make or Buy, Buy or Rent, Cost Benefit Analysis, Business Case, Project Financing etc. Ask them to draw on the whiteboard a data flow diagram on the inputs and outputs (which may be an input to another variable) of the model. Ask about the source of data, the volume of source data, what needed to be done to the source data to make it usable, and how was the source data or model results summarized. In this way, you’ll get a feel for how technical the candidate is as well as their ability to communicate results.
- Give an example spreadsheet model to the candidate, and ask them to explain how it works, and whether any improvements can be made to the model. Ask them to use the model to answer a specific question, for example, the model says we’ll need to pay X amount, so how would the conclusion change if we changed assumption Y? You can assess their skill level based on how quickly they find the cell(s) containing assumption Y, and making the change. The spreadsheet does not need to be easy to use. If they’re highly skilled, they should be able to work with a badly constructed spreadsheet.
- Ask about the candidate’s general understanding of and approach to managing spreadsheet risk. As JP Morgan recently learned with the “London Whale” fiasco, failing to manage spreadsheet risk can be very costly.
- If the candidate has done some financial modeling, they should have some opinions about it, be aware of some of the challenges and frustration, ways to overcome them, be able to give some insightful explanations, and not simply give a Yes or No. You can ask them “what is your biggest frustration with Excel”, “what is more important in forecasting – precision or accuracy”, or “when would you use linear regression as opposed to a simple average?”.
These are open-ended questions. I’ll talk about more specific examples in my future blog posts. If you have any challenges in financial modeling, please reach out to me as I’ll be delighted to help you out.