Building Structured Financial Models from Chaos
Show Notes
Welcome to the Financial Modeler's Corner (FMC), where we discuss the Art and Science of Financial Modeling with your host Paul Barnhurst.
Financial Modeler's Corner is sponsored by the Financial Modeling Institute (FMI), the most respected accreditation in Financial Modeling globally.
Brian Vaddan is a distinguished financial modeler with a rich background in investment banking and financial engineering. His emphasis on intellectual curiosity, the need for simplicity, and the creative nature of financial modeling provide listeners with a fresh perspective on the discipline.
Key takeaways from this week's episode include:
A distinction between those who use spreadsheets casually and those who build models as a core discipline. He emphasizes the importance of creating models that are understandable and usable by others, akin to the difference between a sketch artist and an architect.
Intellectual curiosity, an almost obsessive desire to solve problems, and the ability to bring structure out of chaos are highlighted as key traits for successful financial modelers. Brian stresses that these traits are more critical than technical skills alone.
One of the profound insights shared is the importance of simplifying complex problems. Brian believes that the true measure of a modeler’s intellect is their ability to present complex ideas in a straightforward and understandable manner.
Financial modeling is described as a deeply creative exercise. Brian compares it to art, where each model reflects the modeler’s thought process and experiences, much like an artist’s painting.
Brian shares his experience transitioning from being a modeler to managing a team. He discusses the challenges of letting go and empowering others, and the iterative learning process involved in both building and reviewing models.
Quotes:
Here are a few relevant quotes from the episode on financial analysis and modeling:
"I guess, the easiest way for me to describe it is the difference between somebody who sketches on paper and someone who's an architect, or someone who has a hammer and someone who's an actual carpenter.”-Brian Vaddan
“One of the primary differences is that you will do it for someone else. So when I built a lot of the initial models from the earlier part of my career, it was for me. It was to derive an answer that I needed to a question that was asked of me.”-Brian Vaddan
“The way you display the depth of your intellect, to me, is not the complexity in the formula that you build, but how you take that complex formula and simplify it into a manner that anyone with just a basic understanding can understand.”-Brian Vaddan
“Never stop learning and don't quench that intellectual curiosity that will make your modeling experience and career so much richer and so much more rewarding.”-Brian Vaddan
In this engaging episode of Financial Modeler's Corner, Brian Vaddan shares his insights on the intricacies of financial modeling. He recounts his journey from investment banking to EY, emphasizing the importance of intellectual curiosity and perseverance. He advises aspiring modelers to maintain a growth mindset and continually seek learning opportunities, providing valuable insights into the discipline of financial modeling.
Sign up for the Advanced Financial Modeler Accreditation Today and receive 15% off by using the special show code ‘Podcast’. Visit www.fminstitute.com/podcast and use code “Podcast” to save 15% when you register.
Go to https://earmarkcpe.com, download the app, take the quiz and you can receive CPE credit.
View and download the Financial Modeling Code at financial-modelling-code.ashx (icaew.com)
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In today’s episode:
[00:03] - Introduction
[01:00] - Guest Introduction
[01:14] - Horror Story
[03:40] - Rule of Thumb
[04:10] - Guests’ Background
[06:28] - Spreadsheets vs. Modeling
[10:16] - Essential Traits for Modelers
[13:30] - Modeling as a Discipline
[19:00] - Simplicity in Complexity
[24:00] - Modeling as a Creative Exercise
[28:10] - Transition to Team Leadership
[33:00] - Rapid-Fire Session and Guests’ Contact Information
[38:10] - Conclusion
Full Show Transcript
Host: Paul Barnhurst:: Welcome to Financial Modeler's Corner, where we discuss the art and science of financial modeling with your host, Paul Barnhurst. Financial Modeler's Corner is sponsored by Financial Modeling Institute. Welcome to Financial Modeler's Corner. I am your host, Paul Barnhurst. This is a podcast where we talk all about the art and science of financial modeling with distinguished financial modelers from around the globe. The Financial Modeler's Corner podcast is brought to you by Financial Modeling Institute. FMI offers the most respected accreditations in financial modeling. I'm excited to welcome to the show, Brian Vaddan. But Brian, welcome to the show.
Guest: Brian Vaddan:: Thank you. Thank you for having me.
Host: Paul Barnhurst:: Excited to have you, Brian, and excited to talk about financial modeling and get to nerd out with somebody. So we're going to talk about some of the differences between modeling as a skill set and a discipline. But before we get there, I have the first question I ask every guest, and I know you have your story. Tell me that horror story. What's the worst financial model you've ever seen?
Guest: Brian Vaddan:: Yes, it's the one that still wakes me up in cold sweats at night. I remember it very distinctly. I started at EY and I was very, very new to the process and as part of a large review with the larger team, we had a model. We tend to do model builds and model reviews and part of our process was reviewing a very large model that had been within the company for a long period of time, as these things tend to do, and there's lots of work bolted on on top of this. I had never in my life, in all my experiences in financial modeling, and investment banking, come across a model that was 104 megs as a starting point. I didn't even know Excel could open something as big as that. That was a whole host of nightmares in one box. It was years and years, as I'd said, of one person's idea stacked on top of another. I think I probably spent about 2 to 3 weeks being entirely lost. It's like walking in a forest with no compass, no map, no Google, no GPS. It might as well have been on a foreign planet and spending days and days just wading through the details. I'll never forget that it taught me so many lessons of how I would do things, and how I wouldn't do things. It's very much the principle of treating others like you'd want them to treat you well, give others a model like you'd want them to give it to you. Same principle. It's the same way.
Host: Paul Barnhurst:: I think that's going to be my new golden rule of modeling. Give on to others as you want them to give on to you. I'm going to put that out on LinkedIn and I'll credit Brian for that one. So you'll see it coming soon.
Guest: Brian Vaddan:: I love that.
Host: Paul Barnhurst:: When you said size, I once had a model. I wouldn't call it a model. I would call it a database with some files that were used for some calculations. I used the term model loosely, but it was two gigabytes in Excel. The person's like, it doesn't take too long to open on my gaming laptop or gigabytes and I was just like, no, this is just so wrong on so many levels.
Guest: Brian Vaddan:: I'm always inclined to deal with situations where I get the guys who are not working in the modeling team to open a model, and if it opens on your laptop, they'd be good. If it doesn't open your laptop and only opens your mind, well, we've got a problem just starting there.
Host: Paul Barnhurst:: Yes, exactly. Because they might have 32 gigs of Excel or they have eight gigs of memory or whatever. So like, hey, if they can use it on their machine, then it's been designed to a size that should work on just about anybody's versus. Does it just work on mine? Because I have a ton of memory in a really fast computer. That's a good rule of thumb. I hadn't thought of it that way, but that makes a lot of sense. I like that one. So why don't you take a minute, Brian, and just tell our audience about yourself, your background, kind of how you ended up where you're at today?
Guest: Brian Vaddan:: My background has primarily been in investment banking. I started in structured finance. I then went into financial engineering, then into structured derivatives, and asset sales and structuring. Then I sort of took a little bit of a left turn in my career and education. For a good while, I worked in an education organization primarily focused, as you imagine, on investment banking and education. Then about five years ago, I joined the EY financial modeling team. Yes, I guess I found my calling. Because of that, I have a really good appreciation of the difference between Excel and modeling being an addendum to your role as opposed to being your primary role and what the differences I see between that as being. So I guess, as with many sorts of modelers and accounting, accountants in South Africa, I'm a chartered accountant. I've also done the three levels of the CFA exam. In that final bit of a passion for math, so I went off and studied some pure and applied mathematics too. I've found it augments my modeling and the structure and thought processes that come with that have been very beneficial to me. So that's kind of a little bit of who I am. So when I'm not in front of my computer, I'm probably in front of my gaming console. I'm proud of my gaming console with my daughter because it's a wonderful bonding exercise. Yes, I'm on the Mac and I'm doing jujitsu, or I'm playing paddles, and from those two things.
Host: Paul Barnhurst:: I love it. So it sounds like enjoy video games and jujitsu, and have a family to spend time with, a big math guy. I can see if I did level one. I didn't do the rest of it, but I can do a lot of math in that one. All right, so there were some you said in there that I wanted to ask you. You mentioned kind of building the model and understanding discipline and a thought came to mind. Describe the difference between someone who's what I would call how you would think of this as a spreadsheeter. They use a spreadsheet versus a modeler. How would you separate those two? We're going to go a little bit and build on this. But I'd get your thoughts. How do you kind of separate somebody who may be great in Excel and they're a spreadsheeter versus somebody who's a modeler?
Guest: Brian Vaddan:: I guess, the easiest way for me to describe it is the difference between somebody who sketches on paper and someone who's an architect, or someone who has a hammer and someone who's an actual carpenter. That's the fundamental difference between those things. I guess the old adage of standing in a garage doesn't make you a car. Those types of principles. So a lot of the roles that I've been involved in up until this point required a quantitative expression of an idea, and typically that would involve doing it in a spreadsheet or doing it in some form of program that had its output in a spreadsheet. But the purpose of my role was not to build a model, it was to provide funding, or to raise a deal, or to create a structured product. Within the context of my modeling role, my job is to build the model now, always with the question in mind. I think oftentimes the difference between a spreadsheet and a modeler is not just the tools that you work with, it's about how you think about a problem and how you break that problem up into its component parts.
Guest: Brian Vaddan:: I love the business analysis lifecycle that the Gridlines team used and the labels that you typically find in your career as you move through that lifecycle. I think those are primary distinctions. Being a modeler is not only what you do, it's also kind of the way people think about problems. There are certain similar characteristics that you'd often find even within personality types that modelers kind of share. It's not exclusive. I mean just like any other skill set, you can learn it. I can learn to play the piano, but without a certain degree of acumen for the space, I'm probably not going to become a concert pianist. So there's a degree of drive and a degree of passion for knowledge in this space that distinguishes you and sets you apart. It's kind of a pursuit of your passion also. I spend time in this space because I guess if I was entirely independently wealthy and I didn't have to work, this is probably still what I do.
Host: Paul Barnhurst:: That's when you know you love it. When you mentioned piano. So I took a couple of years of piano lessons, but I had such a bad ear when I started. One time, I was playing one note off on the entire song, and I didn't realize it till my roommate pointed it out. So that tells you how bad my ear was. I'll never be a concert pianist. Did I get to the point where I could play some basic songs? Sure. I could still sit down and I know all the notes versus my wife. She could sit down every night, is compose music. She has perfect pitch, as does my daughter. My daughter will call out as somebody who misses an obscure flat in a song, she'll pick it out. She'll let them know we just gotta fight it because she's moderately autistic, so she's very frank in what she shares.
Guest: Brian Vaddan:: Okay, okay.
Host: Paul Barnhurst:: She'll like, you missed that note. They're like, how did you even know that? Nobody else would have picked that up.
Guest: Brian Vaddan:: I use that analogy particularly because I'm tone-deaf.
Host: Paul Barnhurst:: Oh, good, we're on the same page then, you and I.
Guest: Brian Vaddan:: The song that I hear in my head, what comes out of my mouth, no relationship to each other whatsoever.
Host: Paul Barnhurst:: Well, we're on the same page then. Well, going back to the modeling, we've talked a little bit of kind of that different spreadsheet or I want to get a little bit more into modeling as a discipline. But before I get there, I'd love to get your thoughts, on what's necessary, what are the skills that great financial modelers have? You mentioned how often you see them kind of similar personalities in some ways cut from the same cloth. But if you were a list 2 or 3 things that you think great modelers need to have, what would those be?
Guest: Brian Vaddan:: What I have noticed is that works well within my team. I guess it's this is probably a more personal viewpoint, and I guess everyone will probably have a different perspective on what those particular characteristics are, but I would say the ones that have, I guess, more of a trend basis being fairly common across the guides have done well in our team is one, intellectual curiosity. You must be curious about the things that you're working with, and you must be willing to sort of pursue it and see, how you put this together? And if you pull it apart, what does it look like? And two positive and a negative and almost obsessive nature of wanting to solve a problem, drive, and desire and believe that there is an answer and will find an answer. I guess the last part, I would say, is the ability to take chaos and make a little bit of structure out of it. You must be willing to do that. One of the things I tell the guys in my space, is because we are quite an industry agnostic, but more than that, we are question agnostic, we walk into a space where we don't know the industry necessarily as well as the client.
Guest: Brian Vaddan:: We don't even know what the question is. Sometimes we need to work out the question with the client. It may not have initially been the right patient. That's quite an iterative process. But there's a tearing that comes with that learning. There's a discomfort. There's a not knowing where you are and being willing to wait and be willing to be lost for a little while, and having a very strong belief that I can take the chaos in the space and bring order. That order is generally then expressed in a spreadsheet. But that willingness to bring order and to be uncomfortable, I found that quite necessary. There are a lot of people who don't enjoy that. They prefer being a little bit more comfortable. They prefer that their learning comes with a little less intensity and a bit more in a stable, structured manner and that's great. we've had guys in our team that have done that have gone on to be in space, that are more suited to that style of learning.
Host: Paul Barnhurst:: There are a couple of things I love that you said there. One, I love that you didn't start with, hey, Excel, three statement models, the typical things that we have to learn. You started more with traits and kind of abilities or willingness as those keys to being a good model. You have that intellectual curiosity. You're willing to keep asking why and dig into things. Then you said you're almost obsessive, which is a pro and a con to having to solve it, to get to that answer, to find out the solution. Then the third I liked is, being able to bring structure out of chaos. You're not going to always have all the data you need. Sometimes you're modeling something that's never been done before, and you're dealing with somebody who doesn't think like a modeler at all. It's kind of that mad scientist to just throw ideas out and you're like, okay, how do I take these ideas and put a model that I can have any level of trust in, that they can have any comfort and provides value? So I think that was a great, great way to get people thinking about at a deeper level what's required. The rest is things you can just learn, so to speak. I can learn the basics of Excel, I can learn three statements, I can learn accounting, I can learn visualization. But I need to be willing to dig deeper in certain areas. That's kind of what I'm hearing. Is that a good summary of what you said there?
Guest: Brian Vaddan:: Yes, I think that's a great summary. I guess the tools within the space are kind of what augments your ability or augments your willingness to work in that space. But it's very difficult for me to teach you to be willing to work within chaos and to bring order. That's a part. Yes, you can learn over time. It's much easier if you have that, for me to teach you how to work within Excel or how to work within Power BI, how to work within Index. Those are tools, If you have no coordination, don't be a carpenter. You will break all your fingers. Let's just kind of start there and there's been a point in time where guys have come into our team and we've said you are a wonderful person and you're going to do well in your career, but it's not going to be in this space. Just because it's some of those cracks you see. Oftentimes you probably belong and you fit well into another space. By doing this, you're kind of robbing yourself of the joy you're going to get from working in the other space. Then some guys come to our team who display these types of characteristics that do well in it. I think it's there's a degree of self-knowledge behind that also.
Host: Paul Barnhurst:: Great point. There are people who may be fabulous, but this isn't the right career for them. Then there are people who may not thrive under chaos, but they may be comfortable with it. Yes. So they can be a good modeler because they enjoy all the other aspects because. We never get the unicorn that does everything perfectly. If we do, they never want to work for us anyway. If we find them right either can't afford them or they don't want to work with us.
Guest: Brian Vaddan:: The principle of if you know how to make gold, you make the gold inside it and you tell someone else how to make gold. You probably make the gold in the salad,
Host: Paul Barnhurst:: Exact good analogy. I like that one. So I think we've covered that. Where I want to go next is how you see the difference. I think there are a lot of people have the skill sets to build models, but being able to build a model is different than doing it as a core discipline, as your primary job, to be all-around models. We talked about the spreadsheet, but going a little further, I worked in FP&A and I built plenty of models, but I'm not sure I would say I'm ready to do modeling as my core full-time discipline in the sense that there's a lot of reviews, there's consistency, there's team, there's more that goes to it than just being able to build a good model. So maybe talk a little bit of kind of that difference and then a little of your transition because it sounds like you started with a lot of quantitative inputs in a spreadsheet to kind of building some models to eventually it becoming your discipline. So talk a little bit about that.
Guest: Brian Vaddan:: So to go back to the analogy I used when we started and said the difference between someone who draws and sketches it and someone who was an architect, one of the primary differences is that you will do it for someone else. So when I built a lot of the initial models from the earlier part of my career, it was for me. It was to derive an answer that I needed to a question that was asked of me. It was just about the answer. It wasn't about the process of how I needed to get there, nor did it need to be replicable. Neither did it need to be used by someone else or understood by someone else. That's fine. So if I draw my drawing, I know what my drawing looks like. I know what it represents. No one else may see it considering how I draw. But if I'm an architect, I'm building this. I'm drawing this so someone else can take those plans and implement them. What goes into that? The spatial geometry, the understanding of three dimensions and tracking it into two, the precise measurements that go behind it. That doesn't come from casually sketching on a Sunday. Now, that comes from a deep analysis and understanding of that discipline. That, for me, is the primary difference between someone who's a spreadsheet builder and has a knack for building spreadsheets, and someone who has modeling as a discipline and a job. Most of the time you're doing it so that someone else can understand it, It's the difference between writing in your journal and publishing a book.
Host: Paul Barnhurst:: I love that analogy, and I would say I'm starting to get more and more where I build models so others can understand it more toward that discipline, but that's a great analogy. When you first start, so many of us, whether we're building a budget for ourselves or just trying to get an answer for a boss it's not going to go beyond just maybe sharing it with one person, kind of figuring out that answer. you move on versus now I got to be disciplined enough that if I leave tomorrow, someone can pick this up, and I can share it with others. Others can update it like the architect understands everything well enough that you can hand those plans to someone else, and they can build the house, versus somebody who just tried to figure out how to build something. On the weekend, I go out and put the shed together and it has four walls and a roof. Okay, well, you're not an architect.
Guest: Brian Vaddan:: And within that construct. Because of that, so you have to use the writing as an analogy. You want to learn how to write in a manner that communicates your thoughts. So let's assume that you're writing in English as a starting point because that's my home language. You can't use the syntax and grammar that you deem to be appropriate, There's a certain syntax and grammar so that when you read it, it means something. So that's why standards are important because they make your work communicable. They make your work easy for someone else to understand. But when you start in your all these wonderful formulas that are phenomenally long and complicated, and you give yourself that high five and you walk away and you think, that's great, the poor schmo that has to come after that and update that and decompose the thoughts that you've worked in. He is reading in English, you've written in Cyrillic. It's so rough. You're almost reading backward. he's reading forwards. That's where the intersection is. For me, the greatest benefit of standards comes in. It takes you from being a shared builder in your analogy to being someone who's an architect who can give their plans across, who's got a standardized way of doing it, as part of an association of body, of people who do things in a particular manner and are subject to academic rigor also.
Host: Paul Barnhurst:: In today's business world, financial modeling skills are more important than ever with the Financial Modeling Institute's Advanced Financial Modeler Accreditation program. You can become recognized as an expert in the field by validating your financial modeling skills. Join the Financial Modeling Institute's community of top financial modelers, gain access to extensive learning resources, and attain the prestigious Advanced Financial Modeler accreditation. Visit www.fminstitute.com/podcast and use Code podcast to save 15% when you register. I had a laugh when you mentioned the complex formula because I was just thinking, just yesterday I was working on something that only I will see. I remember thinking, this would be terrible to use it if I was building a model for somebody building some reporting it was an xlookup with a large in a sequence. Is the lookup value Most people are looking like, what are you doing? But it worked for what I needed. But that would not be what you would typically want to see in a repeatable process of a model that you're handing to others. I think it's why I wouldn't think I know. It's why there's so much debate around what are the right modeling standards and so many standards and guides out there we're trying to find a way to make it easy to review it. It's that whole idea that around those standards we're trying to make it easier, because every modeler has their own kind of fingerprint, like a painting, Every artist has their own style, and you can tell that even though they follow certain rules and certain ideas, and so it's trying to marry the two, because no matter what, everybody's going to have their own style. How do you put guidelines in, so even though the styles are a little different, it's transferable?
Guest: Brian Vaddan:: One of the things I say to my guys quite frequently, and I've got a bright bunch of guys who work as part of our general team, is the way you display the depth of your intellect, to me, is not the complexity in the formula that you build, but how you take that complex formula and simplify it into a manner that anyone with just a basic understanding can understand. That is the measure of your intellect. When you can take something that complex and explain it in easily easy to understood communicable words, that's really for me what the fundamental role that I play is. I take complexity, and from that complexity I bring order and I bring simplicity. Now, it doesn't mean that there isn't rigor behind it. There are certain things that no matter how much you simplify them, they're always a little bit complicated. When you put all of those simple, complex simple, steps together, it doesn't mean we detract from that. But that's my objective. My objective is that when you look at my model, you look at this and go like this, you don't know the thought process that went behind it. The amount of times I've banged my head against the wall. But when you look at it, you go, this is so simple.
Host: Paul Barnhurst:: I think I want to inherit your models, not the one you mentioned at the beginning. One of my favorite quotes is simple is hard. Complex is easy. It speaks to that whole idea of what you're talking about. It's often easier to write that complex formula than to spend all the time on how to tear it apart in a way that even the junior modeler can understand it. It's something I constantly struggle with because it's easy, okay, I know how to write a complex model or a complex formula. I'm just going to do it here because I don't want to spend the time to figure out how to make it easy.
Guest: Brian Vaddan:: Yes, sure. I know people don't necessarily always see it this way, but modeling by its nature is an incredibly creative exercise., and modelers are often quite attached to what we built, rightly or wrongly. So half the time I'm trying to say to my guys, what you build is not who you are. It's simply an expression of what you do. But you get so attached to what we build. Sometimes with some of the things you write right, when you put them in a bit more opaque manner, you put your crazy out there. But not everyone can decode it. But when you do it so clearly your crazy is out there for the whole world to see and you've made yourself a lot more transparent. So it's sometimes that willingness to kind of put yourself out there because simply communicable ideas are easy for people to criticize. They are because the output is quite straightforward and you can understand it quite simply. Therefore sometimes people make things a bit more complex because the more complex you make it look, the more right you have to be wrong. That's a good way of saying it. It's okay to be wrong when things look complicated. It's not okay to be wrong when things are simple. That's often what people sort of think. But if you get sort of the concept, the simpler you make it, the more subject to criticism your work is.
Host: Paul Barnhurst:: I'd never thought of it that way. I'm going to have to give that some thought. I mean, on the surface, it makes sense to me, but I'm going to spend some time thinking about that one. I like how you said that the more simple you make it, the more open you are to criticism, which I think in a lot of ways is true, that that's a really kind of profound way to think about it. I hadn't thought of it quite that way, but I like that. But I also loved how you got to remind people because I've been there. This is my baby. You're attacking me. No, I'm saying the model has opportunities to improve. We as modelers can be territorial, as can all people, We care about what if we're passionate about what we do, we care. Therefore sometimes we're going to take it personally, even if ideally we never should.
Guest: Brian Vaddan:: And I think it's a deeply, especially, if you are passionate about what you do, it's putting your artwork out for the world to see and our canvas just happens to be Excel. That's the only difference. That's still an expression of how we think and the total of our experiences. But it's like criticizing an artist's work and saying, don't feel bad about this. It's 0a challenge,
Host: Paul Barnhurst:: And if you notice, it's why I start every show saying we talk all about the art and science of financial modeling like it's not one or the other. It's a combination of the two. I think the difference between us in some ways, like we said, that spreadsheet or a modeler or kind of getting that discipline is if all you have is the art, you're not a modeler. The science helps bring the structure and the rules around it. The art allows expression and creativity and helps you get to simple and think of solutions that you might not be able to otherwise, but you need to do that within constraints to ensure that it can be used again and that there's value to what you end up with versus a standalone one-off that nobody's ever going to look at.
Guest: Brian Vaddan:: Again, 100%. A scientific process has both inductive and deductive reasoning in the process. So taking a concept and simplifying this math will never be 100% approximate. So you're trying to get a real-life problem into a mathematical problem and then into a spreadsheet problem. Because those are different steps. Those are different skills. Because it'll never approximate like there are going to be points where you need to apply inductive reasoning. So there are going to be points where you need to use your intuition. There are going to be points where you need to make inferences from the data that you have. But all the dots are not connected. But you do that within the constraint of a scientific methodology and process. You don't sort of, while we start at every particular point and trace every thread, that's not the way you work.
Host: Paul Barnhurst:: You mean you don't just throw darts at a dartboard and hope one of them is right.
Guest: Brian Vaddan:: Sometimes it feels like that, though. At 2:00 in the morning,
Host: Paul Barnhurst:: There are times when you feel like you're guessing and trying to get there. We've all been there. I want to ask one more question here, kind of going in a little different direction before I move into a couple of standard questions and we move on to rapid fire. So the question I want to ask is, as you said, kind of just building for yourself to building for others, to managing a team. Now, you also not only help make sure there's consistency across the team, but you review models, you audit models. How do the skills need to change? How do you go from that modeler to being the one that's kind of helping manage that team and reviewing and auditing? What did you have to learn along the way? Maybe just a little advice there on that journey?
Guest: Brian Vaddan:: Yes. It's interesting. The skill sets are almost iterative, So what I like to do with guys who join our team is that we train you in the basic processes of how you build a model. We train you in our methodology. Obviously, it's a methodology and a process that's constantly evolving as the modeling construct in the world is constantly evolving. Once we've trained you and you understand how to build models and you've built a few, then we will look at the review. So with review, you're looking at the lens of someone who knows how to do it. When we look at a review process, there's we also have a specific methodology that we follow. we'll go through an entire model and the model review process, it's so incredibly helpful. It augments your build process because you get to see how other modelers think of things. It's a great way to add value to our clients in that particular sphere. So when we look at a model, we look at a model from two lenses, a top-down and a bottom-up approach. A top-down approach would be to have you pull all your formulas correctly. All the formulas are appropriate for the math that you're trying to solve. A top-down approach is where you're starting with the variables. I work with SMEs quite frequently. One of the things that entrepreneurs are always saying to me, Brian, the one thing we can say to you is the numbers are wrong, the forecasts are wrong.
Guest: Brian Vaddan:: They're never going to happen. So what's the point of even building a model to begin with? We might as well just run with the process and see where it takes us. There are certain processes that have a lot of room for divergence and a lot of room for error. My starting point when I'm speaking to those guys is saying the purpose of the model in your construct and your style of thinking is not initially to give you the right answers, it's to help you think about the relationships between the variables in your business. It codifies that and forces you to sit down and think about that. So when we are reviewing a model, we start with our understanding of the business, our understanding of the transaction, what are the variables and how should they behave and relate to each other. That's a different skill than building a model, Because in building a model you're starting and you define those variables. So there's kind of an intersection. But at the same time, when you're viewing a model, you're starting by saying, what do I understand these variables to be? And how should they relate to each other? Then you go back to model building. So the process is quite iterative, like in one learns from the other, and the better you become, the better of you you will be and vice versa.
Guest: Brian Vaddan:: That's kind of the way we see it and I guess the second part of your question is, how do you transition from being a financial modeler to taking care of a team of financial modelers was a great deal of difficulty and a lot of willingness to let go, because I guess there's things that you accumulate over time, and there's a bit of skills that you build at the time, and there's a part of you that kind of wants to go through the process and just do it yourself. You've done it. I'll change it. This is a better way to do it. now I've made them. I've made the mistake before. That type of thinking is disempowering and it's not scalable. It's disempowering to the guys that you're working with. You'll never be able to do all the work that you need to do to run a team, and that's been one of the hardest transitions for me. It's moving from being the one who's fundamentally more in the technical detail. My input with them ensures that the quality of the output is what we expect it to be. That's been a very hard transition for me and one that I'm still living through. I don't know the answers to those questions. I'm still working through that.
Host: Paul Barnhurst:: I appreciate it. I think it's a hard transition for everybody, whether it's modeling any kind of management where you have to let go and help teach and recognize there are different approaches, you have to recognize the art side of things. You got to teach them the science, but you got to recognize the art. Yes, I think letting go, as you mentioned, is probably one of the hardest things. accepting that everybody has their own way. how do I help guide them and be successful knowing that some of the things they do may drive me crazy, but it's not important. Then there are ones where it's in it is important. You're like, okay, how do we have this conversation?
Guest: Brian Vaddan:: Yes, yes. No. Sure, 100%.
Host: Paul Barnhurst:: We're going to move to the rapid-fire section. I'm going to add one question here that's new that we're going to start with versus our normal. So I'm going to mix it up a little bit right now. What is the number one Excel shortcut you can't live without?
Guest: Brian Vaddan:: It's such an odd one, Alt+EIL.
Host: Paul Barnhurst:: What does that one do? I don't know that one.
Guest: Brian Vaddan:: And you typically shouldn't if you are a very stringent financial modeler, it copies left.
Host: Paul Barnhurst:: Oh, okay. That makes sense. All right. We will go through the rest of these just to remember to level set as we go through all the others. No "it depends". You get 15 seconds at the end, you can elaborate. Circular or no circular references in models?
Guest: Brian Vaddan:: No circular references.
Host: Paul Barnhurst:: VBA or no VBA?
Guest: Brian Vaddan:: VBA.
Host: Paul Barnhurst:: Do you prefer a horizontal or vertical model?
Guest: Brian Vaddan:: Financial horizontal, data vertical.
Host: Paul Barnhurst:: Okay, fine. Excel dynamic arrays. Yes or no?
Guest: Brian Vaddan:: Yes. Absolutely, yes.
Host: Paul Barnhurst:: Workbook links, external workbook links. Yes or no?
Guest: Brian Vaddan:: No.
Host: Paul Barnhurst:: You don't even have to say just you're shaking your head. I could tell what the answer is. Named ranges. Yes or no?
Guest: Brian Vaddan:: Yes.
Host: Paul Barnhurst:: Do you follow a formal standard like smart or fast or one of those that are out there for your modeling?
Guest: Brian Vaddan:: Yes.
Host: Paul Barnhurst:: Will Excel ever die?
Guest: Brian Vaddan:: No, not in my lifetime of bones.
Host: Paul Barnhurst:: I've had some answers "yes". But just please don't happen in my life. Will I ever build the models for us?
Guest: Brian Vaddan:: Yes.
Host: Paul Barnhurst:: Okay. Well, should we use sheet cell protection in our models? Yes or no?
Guest: Brian Vaddan:: Yes.
Host: Paul Barnhurst:: Do you believe financial models are the number one corporate decision-making tool?
Guest: Brian Vaddan:: No.
Host: Paul Barnhurst:: What is?
Guest: Brian Vaddan:: I'd say it's more political role.
Host: Paul Barnhurst:: Spoken like somebody who's had a lot of politics in their career. The last one is here. What is your lookup function of choice, CHOOSE, VLOOKUP, INDEX MATCH, XLOOKUP, or something not on the list?
Guest: Brian Vaddan:: It's going to be an INDEX MATCH.
Host: Paul Barnhurst:: Not surprised. Now is the INDEX MATCH or do you use INDEX XMATCH now?
Guest: Brian Vaddan:: So my preference now is INDEX XMATCH. I guess it's the bigger one. The go-to is Xlookup, but for functionality, it's the INDEX MATCH.
Host: Paul Barnhurst:: Fair enough, I get it. I know there are some things that you can do with two indexes in a row and some things you can't do with Xlookup. I know some people will stick with the INDEX MATCH. All So that rapid-fire, are there any of those questions you want to elaborate on your answer about?
Guest: Brian Vaddan:: Sure. So the question around VBA or no VBA and named ranges or no named ranges, I've yet to meet someone who says yes to the VBA and no to the name ranges. That's making your life very difficult, to be honest with you. So they kind of pick up the second part. Will I build our models? The answer, I believe, is yes. Will they build them completely? The answer, I believe, is no, because there's always going to be a degree of human intervention to tweak the process. But man, the day that I got there, I've seen some pieces of technology that are getting there quite quickly where you simply take the. The ask, and you pop out an exile with all of the standards in place, with all of the admin done. That just makes my heart sink because there are so many parts of what we do that are kind of administrative, Like getting the right formats, etc. Those types of things are very mechanical and a machine should do that 100%. Yes. we have a lot of software automation that does that, but there's still a bit of human input required. If I can add something in there and just say, here you go, go and borrow that piece and I'll do the 10% higher in our higher order thinking. Absolutely. Then specifically around the horizontal and vertical question, I mean, I think that's a good question. I started in structured finance using, vertical modeling. I think there are not many people I've met in my career who can conceptualize timing flags vertically. Very few people I've met that can understand the timing vertically, very few. But when it comes to data modeling and database construction, I think horizontal modeling or spreadsheet-style Excel where you've got a time series is pretty inefficient.
Host: Paul Barnhurst:: Yes, I'll make sense. Thank you for elaborating there, I appreciate it. I have one more question. Then we're going to go ahead and wrap up. So if you could offer one piece of advice to our audience today that would help them be a better financial modeler. If you could only pick one, what would it be? What would be that one piece of advice?
Guest: Brian Vaddan:: Never stop learning and don't quench that intellectual curiosity that will make your modeling experience and career so much richer and so much more rewarding.
Host: Paul Barnhurst:: Have a growth mindset. Never stop learning. Love it! I figured you were going to go with intellectual curiosity. That's where I thought you would go. I can usually get a pretty good idea by the end of the interview how they'll answer that question. Yes, I've done about 150 of these now, so I'm starting to get the hang of it. So I thoroughly enjoyed having you on the show. What we'll do is we'll put your LinkedIn in the show notes. I'm assuming that the best way if somebody wants to get a hold of you is to reach out on LinkedIn on the show will come out in a couple of weeks. So thank you so much for joining us. I appreciate you spending some of your Friday evening on the phone with some guy who wants to nerd out. So thank you. you have a great evening, Brian. You too.
Guest: Brian Vaddan:: Thank you so much for having me. It's an absolute pleasure. It's not a chore when you're talking about what you love to do.
Host: Paul Barnhurst:: Yes. No, I hear you. I love doing these interviews, so it's a lot of fun. Thanks.
Guest: Brian Vaddan:: Great. Thank you. Have a great weekend.
Host: Paul Barnhurst:: You, too. Enjoy your weekend.
Guest: Brian Vaddan:: Bye bye.
Host: Paul Barnhurst:: Financial Modeler's Corner was brought to you by the Financial Modeling Institute. Visit FMI at www.fminstitute.com/podcast and use Code podcast to save 15% when you enroll in one of their accreditations today.