Are you a Generalist or a Specialist Financial Modeller?
24 August, 2011
One of the fantastic things about financial modelling is that it is applicable across so many different industries. Good financial modelling skills will always stand you in good stead no matter which industry or country you are working in! A financial modelling consultant or generalist will probably work in many different industries during their career and be able to build models for different products and services. They will probably not be an expert in the intricacies of each industry, however, and that’s why it’s important for a financial modelling generalist to consult carefully with the subject matter expert for the inputs, assumptions and logic of the financial model. Don’t be afraid to ask lots and lots of questions if the details are not absolutely clear. It’s quite likely that the person who has commissioned the model hasn’t actually thought through the steps, inputs, assumptions and even what the outputs should look like until your ask the right question.
Financial modellers working within an organisation, however, usually become experts in their own industry or domain, and will become very familiar with the minutiae of how financial models for that industry should be designed, and which assumptions should be used.
How much responsibility should the financial modeller take for the assumptions or inputs of the model?
Financial Modelling consultants are very careful to transfer responsibility for the assumptions to the end user, which is a very sensible course of action. The person building the model is often not the one who has commissioned its build or the person who is actually using it. The model builder often is not overly familiar with the product or even the organisation and they cannot (and should not!) take responsibility for the inputs.
For example, when building a pricing model, the modeller needs to understand the product and how the costs and revenue work. Experience with regulatory constraints will help to understand the form of regulation and its components, for example; cost building blocks, cost index, revenue cap, weighted average price cap, maximum prices are all considerations for this type of model. Understanding of economic concepts, e.g., efficient costs and how these are calculated, return on and of a regulatory asset base, operating costs and working capital, long run versus short run marginal costs, average costs are other examples of industry knowledge that is useful for the financial modeller.
So the amount of responsibility the modeller takes for the inputs and assumptions of the financial model really depends on whether they are a subject matter expert in the field, or simply a generalist, or career financial modeller. A financial modelling generalist who does not understand the industry would be foolish to take full responsibility for all the assumptions in the model, whereas an industry modeller will be unequivocally expected to do so. In either case, it goes without saying that all assumptions, calculation logic and methodology are clearly articulated and documented, so that they can be traced, audited and validated.