Q: In your 25+ years of work, what changes if any have you noticed in the way financial modeling is done?
A: Surprisingly enough, I have found that sophisticated, rigorous analytical approaches have actually declined over this time span. This is mostly due to the ease of performing analyses in Excel. In the past, before the advent of such powerful PC’s and spreadsheet software, all analytics was done in a structured programming language by trained, skilled computer professionals. Nowadays, all analyses are done in Excel spreadsheets by young analysts who were finance majors who are not trained or supervised in the subtleties of designing and structuring a model.
Q: You use the word “Model” as well as the word “spreadsheet”. Are they interchangeable or are they different?
A: They are very different, and I try to differentiate between the two. At Quantinal, we create “Models”. How we create models, is by using a spreadsheet. Most other firms have spreadsheets that generally provide the correct answer. However, we adapt structured programming techniques to our spreadsheets that provide amongst other features: ease of modifying a model, deciphering a model, running sensitivites with macros, etc.. For example, we always try to have one sheet just for inputs, one just for calculations, and one just for outputs and reports. One would be surprised at how many times I have had clients tell me that there is no need for that.