Outside of work, I enjoy making up stories – mainly for young children, as I have two of my own. I recently took part in the NYC Midnight Rhyming Story Challenge, in which competitors have a few days to create an original rhyming story in around 500 words. I was lucky enough to get through the first two rounds to the final. Writing under such conditions really focused my mind on the elements that make a story work – and, I am now convinced, they are exactly the same things that make a good financial model.
So, here it is, the list that literally nobody asked for:
5 Essential Features of a Good Children’s Book… and a Good Financial Model
1. Clear Plot
In a picture book, you have a limited word count before you lose your reader’s attention (three year olds can be brutal). You need to anchor your audience in the scene immediately and cut unnecessary subplots until you can concisely communicate the story you are trying to tell.
In Excel, there is no equivalent word count constraint. Should you so desire, you can run over thousands of rows, in thousands of worksheets, in thousands of workbooks and reflect the minute detail of every single penny or cent that might change hands as part of your project.
However, as I’m often reminding the aforementioned three year old, just because you can doesn’t mean you should. A key skill in financial modelling is identifying the threads that are material to a transaction and presenting them clearly, so that those reading the model can connect it to reality.
2. Identifiable Characters
A story is nothing without its characters, and a financial model is the same. Certain swashbuckling stories are populated by princesses and dragons, whilst others feature familiar familial characters, or allegorical woodland animals. The cast you use sets expectations around what kind of story you are going to tell – though they then may or may not behave according to stereotypical expectations!
Similarly, different types of projects require different key characters in the model – in some the cashflow and the cover ratios are the stars of the show, whereas others might be more accounting and EBITDA metric focused. Whichever it is, it needs to be obvious to anyone who opens the model what kind of story is being told.
3. Coherent Structure
A good picture book should have a consistent feel to it. It shouldn’t on one page be targeting two year olds and on the next be aimed at eight year olds. If the entire story is written in rhyming couplets, any breaking of this pattern should be for dramatic effect and not out of laziness.
A good financial model should be written in a consistent style. You should have a sense that the same fingerprints are behind the layout, logic and formulae on each and every worksheet.
4. Simple But Beautiful Language
Young children have a limited vocabulary. When you write for them you mostly want to use language they understand. Occasionally you might introduce a new word – if it’s the only right word for the concept you need and it will be clear to them from the context what it means. The challenge is that, within this constraint, you want to choose a truly rich language that sparkles when you read it aloud.
Excel has a lot of functions (a lot more than it did when I started modelling *mumbling* years ago). Still, almost all of what a financial model needs to do can be done with language that is accessible to most readers. The modeller should strive for elegant and simple expressions wherever possible. And, if occasionally a more obscure function is required, the layout and labelling should make clear what is going on without the reader having to reach for a dictionary.
5. Lasting Impact
The best picture books give their readers something to take away with them. Maybe they learn something they didn’t know before. Perhaps it lets them try out certain feelings in the safety of a story. Or it could be that it just gives them the opportunity to have a good old giggle.
Likewise, a good financial model ultimately exists to give a decision maker something that they need. Maybe it’s some key result for their transaction. Perhaps it shows them what might happen in certain downside scenarios which hopefully never come to pass.
However (and I will admit that this is where my analogy falls down a little), if your model is giving you a good old giggle, it might be time to check if it ticks off the other points on this checklist.