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4 Signs of an Excellent Financial Modeler

“On a scale of 1 to 10, 10 being the best, how do you score yourself in Excel?”  Quite possibly the most common and sadly the least insightful technical question an interviewer can ask a job candidate.   Sweating candidates think to themselves, what does an 8 really mean? I’m good at corporate modeling, but weak in debt, am I a 5 then?  If I say 10 will they think I’m being arrogant?  If I say 0 is this interview over?

So, if we are to avoid useless questions like the one above, how can a person tell who is good at financial modeling?  The following four signs can help you figure it out:

I.  An Excellent Financial Modeler Knows How to Move Large Sets of Data

It’s typically telling when a person states that they know how to use the PV function in Excel, but is baffled by OFFSET, INDEX, or MATCH.  While PV is a good function to know, the lack of knowing the other three functions means that the person is purely an academic with little practical modeling experience.  When a person has to roll their sleeves up and dig into manipulating or building a financial model they find themselves needing to reorganize large data blocks or referencing specific data from a block based on select criteria.  A financial modeler with some experience will have used VLOOKUP or HLOOKUP, while those with more complex models will have inevitably had to learn OFFSET, INDEX, and MATCH.  Look out for people who can properly explain data moving functions.

II.  An Excellent Financial Modeler Prefers Less Complex Functions and Formulas

Whether a single function, a formula, or a workbook, excellent financial modelers like to keep it simple.  Take the task of determining whether there is enough cash to pay an expense.  Imagine if one had \$20 to pay a \$30 expense, what function should they use?  Some like to use IF functions where they test whether they have enough cash:  =IF(Cell with \$20 available >= Cell with \$30 expense, Then Return \$30 expense payment, Or Else \$20 available).  But why make it so complicated?  Some will use MIN(Cell with \$20 available, Cell with \$30 expense).  Knowing how to simplify means the modeler truly understands the concepts.

Similarly, formulas should be broken down into multiple cells rather than a single cell with lines and lines of syntax.  Not only is it error prone to build such long formulas, but it is extremely time consuming and frustrating for others to read and assess.

III.  An Excellent Financial Modeler Creates Clear and Meaningful Outputs

It’s truly a shame when you come across an accurate, elegant model that has very poorly designed outputs.  General users and management will discount the results and not spend much time with it.  An excellent financial modeler knows that the reason Excel is used so widely is not because of its computing power nor its ability to work with large data sets, but because it is an agreed upon medium in the finance world that has smartly packaged the ability to create and use financial models in a graphical and intuitive manner.  Excellent financial modelers apply the same theory to their models.

IV.  An Excellent Financial Modeler Builds in Integrity Tests

The worst financial modeler is one that builds a seemingly complex model quickly and uses it for analysis after analysis, only to realize a long time later that there were numerous errors in the model.  Excellent financial modelers know more than just how to use a program; they mesh theory with functionality.  Those modelers build tests in throughout their model that check if the calculations are doing what they should be doing.  For instance, some of the more common checks can include:

a.  Cash In vs. Cash Out: is the cash that is generated in the model accounted for by a use?

b.  Balanced Balance Sheet: do assets equal liabilities plus equity?

c.  Debt Amortization: do liabilities pay down to zero by the end of their tenor?

Knowing what to look for and implementing little tests along the way is a sign of a seasoned financial modeler.

While there are undoubtedly many more traits of good financial modelers and employees as a whole, this list gives a sense of what to look out for.  Enstruct was founded a decade ago to ensure that companies develop their technical talent and has recently begun to revolutionize how candidates and existing employees are tested for their technical abilities and potential.  If this interests you visit www.enstructcorp.com.