How Simplicity in Financial Modeling Enhances Decision Making
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.
In today’s episode, Paul engages in a conversation with Scott Rostan, Founder of Training The Street.
Scott found his passion for finance with his dedication to teaching and has been driving innovation in financial training ever since. As CEO of Training The Street and as an adjunct professor at UNC Kenan-Flagler Business School, he inspires the next generation of finance professionals.
Through his leadership as CEO of Training The Street, Scott has reshaped the landscape of financial education, equipping individuals with the skills and knowledge needed to thrive.
In this episode, expect to learn:
The significance of technical skills, such as financial modeling, accounting, and Excel proficiency, in the finance industry
How specialized training programs can help individuals enhance their financial knowledge and technical abilities
The evolving role of AI in finance and how it complements human expertise rather than replacing it
The balance between technical proficiency and interpersonal skills to excel in their careers
How individuals can build trust with clients, colleagues, and stakeholders, ultimately contributing to the integrity and credibility of the finance profession
Quotes:
“It's really easy to start throwing stuff together and writing a nasty old nested if formula or whatever it might be, but that doesn't always mean it's clean or effective or meets those requirements we talk about.”
“And when you get good with the prompt engineering typing, questions, and answer, you can get a lot more productive and faster.”
“It's not ideal because circular references can make your model more complex and harder to understand, but in certain situations, they're necessary for accuracy.”
“If you just blindly took the financial information from this database, it could be off by a big factor. So again understanding what's going on, understanding the nuance, understanding the limitations is going to be much more valuable.”
“They're going to trust you and value you to distill what's important and then present it in an easy-to-digest way so that they can understand in simple terms what is happening. The analysis comes from the model, but the story is going to come from you.”
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Go to https://earmarkcpe.com, download the app, take the quiz and you can receive CPE credit.
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In today’s episode:
[00:45] Introduction;
[01:00] Scott’s horror story of the worst Financial Model;
[01:58] The KISS principle;
[03:53] Scott’s background;
[05:56] Key projects that helped Scott;
[19:17] Training the Street courses;
[21:02] How is AI changing modeling;
[28:59] Skills required for a great modeler;
[42:50] Scott’s favorite Excel shortcut;
[44:18] Rapid fire;
[48:55] Scptt’s final piece of advice;
[50:10] Wrap up;
Full Show Transcript
Host: Paul Barnhurst: Welcome to Financial Modeler's Corner. I am your host, Paul Barnhurst. This is a brand new 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 the Financial Modeling Institute (FMI). FMI offers the most respected accreditations in financial modeling. I am excited to welcome on the show Scott Rostan. So, Scott, welcome to the show.
Guest: Scott Rostan: Thanks. Glad to be here.
Host: Paul Barnhurst: Excited to have you. So we're going to start with, this is a question we ask everybody. One of our favorites. Tell me that horror story. I'm sure you have it. What's the worst financial model you've ever seen?
Guest: Scott Rostan: I've seen quite a few bad ones, but like one in particular stands out in my mind where you want to change the revenue growth assumption, you traced it to another cell which traced to another cell to yet another cell to another cell. I can't, it was five, seven. There was a certain number of links. You finally got to the hardcore driver and you're like, aha! But the sad thing is that you're my colleagues. It was kind of like a rite of passage when you got staffed on this model, with this certain managing director, you had to find all these special little Easter eggs and find out where they are. No one told you because they're like, I learned it the hard way, you learn the hard way. I guess that I don't know. So that was this kind of brutal. I mean, like, this is so inefficient. I'm very, very inefficient.
Host: Paul Barnhurst: Yeah. Sticks are seven levels deep to find a hard code that's painful.
Guest: Scott Rostan: That's really, it's very painful.
Host: Paul Barnhurst: So what was the outside of a rite of passage? What did you learn from that experience?
Guest: Scott Rostan: The one thing I learned and a different one my bosses used to love to use this phrase of KISS, so keep it simple. I'm going to say this don't be offensive. Keep It Simple Stupid. It is obviously the acronym for that of keeping things easy to understand. I like to tell people in class at training the street that look, a spreadsheet, a fancy model. It's just a calculator that you as an artist, you mentioned art and science during your intro. The science part is the math, but the art side is you can format it and present it however you want. The presentation in many situations is more important than the analytics. And I think for a lot of people they're like, well, wait a minute, I've done all this analytical work. Yeah, but you have to be an artist and present it well, and communicate it well, and format it well, or the story is going to get lost. And so this is a perfect example that everybody just got so frustrated of trying to find where the assumption is. If you just set it up the right way, it's easy to use, it's easy to understand, it's simple, and then you can get to the story.
Host: Paul Barnhurst: Yeah, I love the KISS principle. You know, one of my favorite sayings, I use it all the time in my training is, I will say, complex is easy, simple is hard. It takes extra work to design something that's simple, whether that be adding a helper column, a really spending time to lay out your assumptions properly. It's really easy to start throwing stuff together and writing a nasty old necessary formula or whatever it might be, but doesn't always mean it's clean or effective or, you know, meets those requirements we talk about. So I'm with you.
Guest: Scott Rostan: Great point. And using cell comments now and then and leaving. You know paper trails that someone else can understand. I mean there are so many simple things you can do. To me, I like to tell people and in a similar way as you've liked, the true sign of intelligence for me is being able to tell something in a very simple and easy manner so that someone else can understand.
Host: Paul Barnhurst: Yeah, but I'm still working on that one. So next question here. Can you tell our audience about yourself? Just let us know your background and how you ended up where you're at today.
Guest: Scott Rostan: Yeah, So I was raised in North Carolina. I went to Princeton Undergrad as an Econ Major, and also in their teacher's preparation program. And I'll come back to that later on when we'll be talking about the founding of Training The Street. And I had a summer internship with Merrill Lynch and the Mergers and Acquisitions Group, and that kind of exposed me to not only to Wall Street and Corporate Finance, but also to financial modeling and the technical analysis that parlayed into my full-time role with Merrill Lynch, down in, New York City at the World Financial Center, as it was called then, now Brookfield Place. And then, I got involved with their training program, doing their Investment Banking Training Program. And then I went and taught in high school for a couple of years at a day school in Washington DC, called the Field School, and taught algebra one and 10th-grade history and so on, coached soccer, basketball, tennis, and kind of had it was great. After being behind a computer inside for 100 plus hours a week to being outside as much as I'm inside, it was wonderful, it was very exciting. But because I was in the teacher preparation program, I knew I wanted to be a teacher. And so my summer jobs were to run Merrill Lynch's training program and teach a lot of the core technical financial modeling type topics. So that's what gave me the idea to start 'Training The Street' in 1999. And so here we are in our 25th year. And now we have a 100 full-time professionals around the world and with a truly global footprint. So it's been a kind of a wild ride, but that education of finance and bringing that, teacher together is what you brought me to where I am today. I should say in personal note, I'm married to my lovely wife, and I have two kids, a first year in college, and a 10th grader.
Host: Paul Barnhurst: Got it. How fun. That's exciting. And you know, I love that you've grown that into what it is today. You mentioned 25 years, having done both the teaching and the finance, bringing those loves together. And so I'm curious, you mentioned you started your career as an M&A analyst for Merrill Lynch. Maybe talk about that experience and what were some of the key projects you worked on, maybe share a little bit about that?
Guest: Scott Rostan: Yeah, I spent and if people have gone through my training programs, you will hear me say this, that I weigh more about the US and North American freight railroad industry than I care to know. My first staffing and this was the Friday before Labor Day in 1995, was for Norfolk Southern Corporation. And then my last thing I did on June 30th, 1997 was something for Norfolk Southern Corporation. So I spent about half my time, which is a very high percentage, for a junior professional in, just a banking role with railroads. Norfolk as a client, they acquired Conrail, which is this huge, large, hostile transaction. But what that did from a modeling perspective gave me a great experience because we effectively custom built a M&A model where we had every major North American freight railroad that they can then merge into by each other and merge in and do it. So you're looking at possible combinations and what-if analysis and how if this would impact there and that and going in with a hostile bidding process with CSX Corporation and CSX selling sea land. I mean, so there's divestitures flowing in. So I got a great crash course in financial modeling and building that model from scratch, but also about valuation and some accounting, topics that just trial by fire if you will. I'm learning through that.
Host: Paul Barnhurst: Yeah. I could imagine being involved in well, you said divestiture multiple M&A was watching hostile. And then, one industry with all those different companies. So I'm curious what advice would you offer for anyone out there that's doing any kind of freight modeling? What were maybe some of the key takeaways on the industry?
Guest: Scott Rostan: Well, understanding the nuance of every industry is important. So for example, railroads are very capital-intensive. So there's a lot of CapEx spending to maintain and grow their rail network and even just maintain it. Right. If they're not necessary, but they're they're spending hundreds of millions of dollars per year. And the deferred tax implication that is extremely important because, for financial reporting purposes, you're going to expense the depreciation on, typically a straight line method, it can be very long or you think about rail tiles. But for tax purposes you get accelerated depreciation for on your tax return. So that's going to generate a lot of deferred tax liabilities which is a big source of cash flow. So learning how to model that properly was a huge benefit because the companies looking at it that way, because they're effectively like we're getting basically a tax break I mean, it is a tax law advantage where we can finance a lot of our capital or CapEx spending through this deferred tax advantages. So we had to be very exact on modeling the deferred taxes. We got the inputs from the tax department of the company because they knew their tax schedules and they knew their CapEx spendings, but we made sure it's flowing through the model correctly so that's the cash flow analysis we're doing was properly capturing that for. So therefore there's cash available for dividends, there's cash available for buybacks. It's all integrated in that manner. So the the detail like that can be very very specific. And again that's industry-specific. But every sector has got its nuance that you want to make sure that you really understand whether it is the revenue growth. If you're talking about a software company and how to layer in on a waterfall, All of your retention rates and the like, or the deferred tax for a capital-intensive industry, whatever the case may be, find out what that similar value adds can be. And then the financial model can be that much better when you can elevate it up.
Host: Paul Barnhurst: Two things stuck out to me from you saying that. One is just the importance of knowing the industry. Your modeling, knowing about it, taking time to get educated so you can catch the nuances. You don't have to be an expert. You're not going to spend your career in it, but you need to know it well enough to not get caught in those pitfalls. And then the second one is just, talking about tax. It's amazing how little things can have such a huge difference. I mean, little is often people think of tax as an afterthought in many businesses. Right? I just apply a rate and I move forward. Here it's really funding the growth. It's funding the CapEx. That deferred tax is huge to the cash flow. And so it's just amazing to see how, even sometimes things that in some models might be an afterthought are so critical in others.
Guest: Scott Rostan: Well. And that's exactly right. I totally agree with you. And then one other nuance that I tell people is like that deferred tax doesn't impact the income statement. Earnings aren't impacted here. It's the cash flow statement. So a lot of people, especially if you're just looking at like, hey, what's the EPs estimate or my EPs forecast for this business or my EBITDA forecast? They don't have to worry about the tax that much. They can just apply the rate. As you said before, what's the effective tax rate? Bing bang done. But if you're trying to do a full three-statement analysis, get to the actual cash flow, then it becomes very important. Like in this case, it was a very significant number given the level of their CapEx spending.
Host: Paul Barnhurst: Yeah, exactly. Most of my career has been large FP&A where I'm supporting a business unit, don't even worry about tax rate. I'm not forecasting that. I'm just doing the P&L. And so it's just the difference depending on what kind of transaction, what kind of model you're building, what you're doing, really guides where you get deep and what you have to learn some who do leverage buyouts. It's huge on debt. Others, if you're working on the P&L, you're probably not doing much on the debt side at all, outside of maybe an interest number.
Guest: Scott Rostan: Exactly. And knowing where to go down that grab that detail and pull it out, that's relevant. I think a lot of people try to do everything, and you can't. You need to be focused, right? Because there's a limited amount of time, there's a limited amount of attention. You want to keep it simple, as we said before, but like understanding, like, okay, this is what's really going to matter. This is what's really going to drive things. That comes with a lot of experience and understanding the companies and what they do and the sectors and what the nuances in this sector.
Host: Paul Barnhurst: Well, I'm going to kind of shift gears here a little bit. I'm curious what led to you deciding to be a teacher after two years at Merrill Lynch? I know you've always liked teaching, but maybe talk a little bit about that transition from a great proving ground where you're involved in some major transactions, it sounds like, and learning about railroad to high school teaching and sports. What led to the transition?
Guest: Scott Rostan: Yeah, So as I mentioned in your earlier in my intro, I was in the teacher preparation program. And so I completed the teacher preparation program, except I didn't do my practice teaching. So I knew I was always interested in doing it. My roommate in college, his father, was actually worked at Merrill Lynch and was giving me some career advice with this. And I was saying to him, I want to be a teacher, should I go, take this job with Merrill Lynch? And his advice was, I remember when he told me this over dinner, he's like, my advice to you is go work on Wall Street, have the experience while you're young and make a lot of money, and then you can go to teaching later. Now, I didn't actually, and this is easy for me to say, but I didn't do the job as a banker for the money. I knew I was doing it for the experience, But the pay is good, don't get me wrong. But then that allowed me to then think as I'm doing this I like what I do? I'm just doing way too much of it. And there's got to be something better that's going to be more fulfilling to me.
Guest: Scott Rostan: And that's where I went. The teaching route, all of my colleagues in the similar situation who are thinking about their, as they leave, it's typically a two-year investment banking analyst program. Many people go on to private equity. Many people do a third year in a different role, maybe global markets or in a different office in the London office or the Hong Kong office. So there's a lot of internal opportunities, but private equity is a very popular one. I was the one who was, I want to go be a teacher. And everybody kind of thought I was a little bit nuts because I took a significant pay cut. But it was very rewarding. it actually made me a much better professional today because, if you think teaching financial modeling or Excel can be tricky to people, imagine teaching an eighth grader an algebra topic in May when it's 75 degrees outside and they start class like any questions, and they raise their hand and be like, can we have class outside today? No. So here we are.
Host: Paul Barnhurst: Got it. No, I can imagine, yes, teaching an eighth grader is very different than, as you said, doing the model or teaching an adult. And so I could see that's kind of fascinating, as you mentioned. You know, I'm sure the hours, the work-life balance was probably quite a bit better than those first two years of IB. I know how intense those can be.
Guest: Scott Rostan: It was, but I will, and I'm defending all the teachers out there and the people who know teachers very well like you work hard during those 9-10 months. Everybody's like, they have the summers off. They work hard for those other nine, ten months. They need that summer off to recharge, recruit, and the children need it also. So, it was a different level of intense, because, you're making the connections with the students, you're impacting their lives, you're being a mentor, you're being a coach, you're being a teacher. But it was extremely robotic. And then I was, look, I was fortunate that I then, almost kind of stumbled into, Merrill Lynch. And it was actually, the 1990s. It was about this time of year, right before Easter 1997, where Merrill Lynch, you know, said to me, hey, we like you to come back this summer, and run the analyst program like you did. I was like, sure, no problem. And we also want you to come back and do the associates, the MBA, recent graduate training, which was in September and October. And I remember saying to them, preseason soccer starts in August and school starts around Labor Day, I can't do September, October.
And by the way, you want me to train the MBAs? I don't have an MBA. And the business manager at the time at Merrill Lynch, pop really said to me, she's like, you know what they need? you're a great teacher, and you know what they need to know. So we'd love to have you do that. And that's what got me thinking. And so I spent that Easter weekend, talking with my girlfriend at the time, now, wife and my and her brother, who went from teaching to business school, about the idea of maybe I could turn this into a job, like a profession of actually training people on Wall Street. And that's what kind of gave me the idea for Training The Street, it's almost this kind of like. I thought it was a summer engagement and they were like, we'd like it to be more. And here we are, 25 years later. Sorry. It's not 1997. it was spring 1999.
Host: Paul Barnhurst: Makes a lot of sense. And yeah, totally agree with you about teachers. They work hard. They deserve to have a break. And I'm with you on that. I think that's kind of, that's a great path it sounds like. So you did the you did the teaching. You did the summer program. You started Training The Street in 1999. So I'm assuming a lot of that came out of Merrill Lynch. But what made you decide to make that jump from training some of their people to starting your own company? What was the kind of impetus that led you to go down that route?
Guest: Scott Rostan: Yeah. So my brother-in-law, when I was meeting with him that Easter weekend in spring of 1999, talking about this idea of starting a training business. And he was a first-year MBA at Duke's Business School at Fuqua. And he said to me, you know what actually would be helpful? And I was like, what? Doing an interview prep workshop for interview for MBAs who are interested in going to Wall Street. I've been helping him with interview prep, just ad-hoc over the phone. And I was like, I'm sorry. What? He's like, MBAs would love to have a practitioner's view of Wall Street and valuation topics and modeling topics and the like and that kind of like, wait a minute, maybe there's something much more here. So that kind of gave me an idea of starting the academic offerings Attorney Street has right now of our on-campus stuff and then with Merrill Lynch, I quickly saw like the Merrill Lynch and in the world at large corporations. I'm sure you've seen this, Paul. Like there's a lot of turnover and people will leave and people will move.
Guest: Scott Rostan: And so a couple of the people who were at Merrill Lynch went to Bank of America, and they contacted me, hey, we heard you're starting off doing this here. Would you like to come to Bank of America and do training here? Ironic that, how the world works that Merrill Lynch was my first client, and then Bank of America was my second client, and then later they're combined and then I networked and one of my former coworkers was had moved to UBS and I contacted him and he's like, we'd love to bring you in. One of my old friends from college who was working at, predecessor to Wells Fargo, First Union, now Wells Fargo. And it just kind of started rolling through word of mouth and through networking. And so I leveraged a lot of that Merrill Lynch network, and that was very, very valuable, to it. But quickly, I had more business than I knew what to do with. And so I was looking to bring on others and I brought on some wonderfully talented people to help us get us to where we are today.
Host: Paul Barnhurst: Always a good problem have to have more work than you can manage, right? It's what we all want to have in the sense of being able to have our choice of business and growing if we want to grow and all those type of things. So talk a little bit. What are the primary services your firm offers? You know, the training. What is it you're doing today primarily?
Guest: Scott Rostan: So training the street specializes in getting people desk ready and getting people ready for their, lack of a better term, like the technical aspects of the job, whether it's an accounting financial statement analysis, number two, corporate valuation. So how to value a business, especially in M&A context. Number three, financial modeling. And I put Excel into that to think about how to be efficient with spreadsheets and do analyses, whether you're a consultant doing a lot of data sorting, cleaning, and manipulation, or a, research analyst or a private equity professional looking at a leveraged buyout or, someone who's analyzing companies forecast models. and then number four, our fourth pillar would be a lot of capital markets. So teaching you the equity capital markets and debt capital markets, we also have a data science practice. So everything from computer coding from a finance perspective, such as Python and VBA. We've got a new co-pilot for finance class that we're rolling out now that's getting a lot of great feedback from our clients. data board storytelling type analysis too, is all in that data science area. And then we have a bunch of sector-specific classes too. But it kind of those weave in themes. So for example, our software as a service modeling and valuation, its valuation modeling. But for SAS, very specific from that or energy oil and gas, its valuation modeling and accounting. But for energy company and the like.
Host: Paul Barnhurst: Definitely a lot of value to have industry-specific. I appreciate that. You mentioned a co-pilot for finance and I'd love to get your take. how do you see AI changing modeling even just right now and in the future? What do you think about that and how do you see it kind of playing out? What's your thoughts?
Guest: Scott Rostan: It's really exciting. And I think the first thing I tell people is put perspective. Because when the spreadsheet first came out and really kind of took hold in the late 80s, early 90s, people were like, the accounting industry is dead. There's still plenty of accounts around, so it just makes them much more productive. So I personally think that AI's going to be much more of a productivity tool as opposed to a replacement tool for a lot of this financial analysis and financial modeling. Sure, it can get you started, but you still need to, as we said before, understand the sector and the nuance and whether the drivers and how this is going to work and AI is going to constantly get better, but it's going to be the human brain for stuff like that. It's still going to be better because it's going to be able to be more creative and more, nuanced into the details, but using it for your preliminary research and using it to get started. And when you get good with the prompt engineering type, question and answer, you can get all you can get a lot more productive and faster. But you're still going to ultimately have to do the analysis and put it together. So I think it's going to be a fantastic productivity tool, but not necessarily a replacement tool yet. And let's see how, the technology evolves over time. But as you said before, it's a lot more art. It's art and science. And I think it's a lot more, the art side is the harder side, the science you can learn, you can learn accounting, you can learn spreadsheets, you can learn formulas. But the art side is where the human is needed, because the AI is not going to be able to do that type of creative communication yet.
Host: Paul Barnhurst: Yeah, And I totally tend to agree with you. We'll see what the future holds, but especially today. And what we're seeing is I agree, it's a productivity tool. That's how I look at it. It makes me more productive. I use it almost every day in one way or another. Help write an email, help summarize something, give me some ideas for a course I'm training on something I'm not as familiar as I normally am. All right, well, let's just see what it has to say. In many ways, it replaces things you used to Google or search on the web.
Guest: Scott Rostan: Much better.
Host: Paul Barnhurst: And you still may use the web, but it summarizes things well. And then you might go out to the web and kind of validate it or go to your own resources. And that's the key that I always tell everybody - validate, validate, validate. You would never take an intern's work and give it to your CEO without looking at it first. Don't do the same with generative AI.
Guest: Scott Rostan: Or another example that your audience may resonate well with, is databases, like you're just blindly downloading something from a database can be a perfect example. Like for example, there's a very popular database that does not put in long-term investments as cash and cash equivalents in their net debt or enterprise value type analyses. Now, that may be fine because that's long-term. So it's more than a year. But in the case of Apple, where they've got over $100 billion in long-term investments and mostly corporates and US treasuries, that is a cash equivalent. It is a liquid financial asset. Even though they're holding it, it's like a ten-year bond. Let's say it's a US ten-year. It's classified for accounting as long-term. But from a valuation perspective, it's cash equivalent. And so just understanding those nuances, if you just blindly took the information from this database, it could be off by a big factor. So again understanding what's going on, understanding the nuance, understanding the limitations is going to be much more valuable.
Host: Paul Barnhurst: In today's business world financial modeling skills are more important than ever. With Financial Modeling Instite'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 advance financial modeler accreditation. Visit www.fminstitute.com/podcast and use code "PODCAST" to save 15 % when you register.
Host: Paul Barnhurst: Yeah. And any advice to people of how you go about understanding that, you know, kind of learning those nuances, any thoughts as people are trying to be more productive?
Guest: Scott Rostan: Honestly, I think a lot of this is experience, and I think that's where you need to be a student of insert whatever topic you want to learn with. I mean, you mentioned, so you can read about the company, you can validate information, you're looking at their financial reports, you're looking at research reports, checking if you have access to a database. Let's just, Capital IQ or FactSet or Bloomberg of like pouring the information to compare with the actual SEC filings. If you're talking about US company, what are the differences? Why they are different? Being a student and getting into that level can really help now also, and this is again why my formative years of working at Merrill Lynch M&A. I got that by fire, right? Because that was effectively a corporate finance degree. A capital markets degree, if you will, by working. So a lot of people are attracted to that learning experience in the financial services field because you get exposed to so much stuff, and information so fast.
Host: Paul Barnhurst: So I'm going to step back to the training for a minute. And I'd love to ask you, do you have a favorite experience, maybe a funny story or something you can share from your career and training? I'm sure you've seen a little bit of everything.
Guest: Scott Rostan: Well, I have seen a little bit of everything. One story that always sticks out minus it's not directly in class, but it was going to a class. Flew to LA to do a financial modeling workshop at UCLA Anderson School of Business. and was checking into the hotel, the W Hotel on Hilgard, which is right by the campus there. For those of you who know the LA area. And as I'm getting on to the elevator with my coworker Billy, there's DMX, the rap star, and his group, his posse, his entourage. Billy and I get on. So here we are with our wheelie bags and our computer bags, and we get on to the elevator and then they get on two and which causes us to split right opposite sides of the elevator like two guys there to do a financial modeling workshop at a business school with a rap star, his bodyguards and his entourage. And they were having a good time. they were kind of teasing us a little bit about, what are you here for, what you're doing. So that was a good experience. And then that the next morning, Billy and I went to the Denny's down the street to eat breakfast before we went up to the campus. And there was DMX. He still went out for the night before he was coming into Denny's, and his evening, we had woken up and were starting our day with Denny's. So it was kind of it was good to see him again. So, R.I.P. DMX but yeah. So I love that financial modeling in LA. I jokingly told some people, like, I'm doing modeling in LA and people are like, look at me. Like what? I'm like financial modeling to MBAs, but I happen to meet DMX, but, we became acquaintances.
Host: Paul Barnhurst: So then that's a fun one. I appreciate that, and it kind of makes me laugh. Yeah. So you're getting started. He's just finishing the day, so to speak. So, or the night, whatever you want to call it. All right. Love that story. So next one here, when you and I chatted, you mentioned that many people fail to realize kind of the diverse skill set needed to be a great modeler. So what are those skills in your mind that a great modeler needs?
Guest: Scott Rostan: Yeah. Look, this is a standard intro that Training The Street instructors will say as we embark on the financial modeling. I think a model is a blend of four important skills. Number one, we've been talking about understanding the company's operations. What's their business plan? How do they make money? What is their understanding? You should be able to explain in two-three quick bullet points how does this company make money or their business model for that matter? Number two accounting. You don't have to be a master's in accounting or a PhD in accounting or an accountant per se. But understanding the nuance of how assets and liabilities and equity and how funds flow through the business, the financial statement analysis, basically. Number three, corporate finance. You got to understand which growth rates are going to be important, the interest rate that's going to be relevant and important. Understanding this interest rate environment we are now and what that means for the cost of debt potentially for the company and how it can be financed. And you know what dividend payout ratio makes relative sense for this company or dividend growth rate, whatever the case may be. And then the fourth skill is Excel. And you don't have to be a master in Excel. I personally say, Paul, I think I told you this when we're getting to know each other, it's like I don't consider myself an Excel master, but the Excel I know, I'm really fast. And so for us at Training Street, we're really teaching people about how can you be more productive and how can you be faster. A lot of that is shortcut keys and just using the keyboards with repetition to be able to take a ten-minute formatting task and get it down to 60 seconds as our, kind of our famous formatting exercise that we love to do, but it's just getting that repetition so that you can, you don't think about the Excel. You can focus your energies on what is the company doing, what's the accounting treatment for this deferred tax, for example? And how is that going to work with? Because that's what's going to slow you down as these like these bigger issues with the company that require some accounting knowledge and a deeper dive, get the Excel knocked out. So you're not even thinking about Excel.
Host: Paul Barnhurst: Appreciate that and I can understand those four areas. But it leads to a follow up question. Where does you know, communication skills and the storytelling and many of the other things that to me are critical for modelers come in. You talk about those four core, but where does that fit in the picture for you?
Guest: Scott Rostan: Great point. So when it's all said and done, what does it mean? Right. What's your advice to the client if you're a research professional, What are you going to say to your investment committee or shareholders, if you're a research analyst? You've got to be able to articulate the story. What's the value proposition? For example, your Chipotle just announced for the Chipotle fans out there, sorry if I've made someone hanker for a burrito, but, they're announcing a 50 to 1 stock split. That's a very high number. I can't ever, I'm not a stock expert, but I can't tell you I ever heard of someone greater than 10 to 1. I'm sure there are a few, but that's a very high number. But then understanding, like, what is the signal? What does this mean? That Chipotle is signaling to the investment community? And what does it mean from liquidity perspective? So getting into that nuance and that discussion and being able to articulate it, and let me summarize by saying, put it this way, my bosses at Merrill in particular, and the people I meet over the years. The really good ones are storytellers. The modeling skills, and I'm not trying to. I'm just bringing it down a little bit that can be learned. You can have someone else do it. That's somewhat of a hey, we're you know, there's better and good modelers, but once you get above a certain level, like going from being a really good modeler to an excellent modeler, the marginal return is not going to be that huge. But the storytelling of the analysis to a client, in the case of an investment banker, or to your investment committee for a private equity professional, or to your CEO, in the case of an analysis, that's going to be priceless, right? Because they're going to trust you and value you to distill what's important and then present it in an easy-to-digest way so that they can understand in simple terms what is happening. The analysis comes from the model, but the story is going to come from you.
Host: Paul Barnhurst: I like what you said there, and if I heard it right, the way I look at that is you got the four core skills you need to hit a certain level. You need to be good. You need to be able to be fast in Excel. Understand the basic accounting, build your model. But after you hit a certain point, it really comes about learning to be great at storytelling, communicating, influencing. That's what's going to take you from maybe average or mid-level roles kind of more toward management, more toward responsibility, greater trust. So get the basics down and then really learn how to manage relationships, tell stories, communicate those type of things.
Guest: Scott Rostan: Collaborate within people. How to be an exclusive member of your team so that you can build bridges between different people with different opinions. How can you get consensus from five different opinionated people? Those are very important life skills to keep moving up in your career. And look, unless you're going to be like a financial modeling whiz at a hedge fund and all you're going to do is build models to analyze things, if you're going to be interacting with other people, those skills are going to be extremely important. So yes, and I should have a caveat when starting out at that entry-level, get the technical foundation down, as you said, like get that solid technical foundation you want to be a go-to. So if someone has a modeling assignment you want to go like, huh, I'm a little nervous about giving this a shot. Maybe it's in over his head. You want to be like, I know Paul can do this, and then you, Paul, want to even do it better than they anticipated. Like, do it quicker, do it more accurately, add another level that they didn't anticipate so that you build that trust. And then you could start to learn the next levels of storytelling, the interaction with the client, taking the client information, how we're going to digest it into the financial analysis.
Host: Paul Barnhurst: Yeah, I agreed. I often say technical skills get you the first job. Soft skills or human skills, as I like to call them, are typically what get you promoted.
Guest: Scott Rostan: That's exactly right. There's your career progression. It's going to be with the human soft skills.
Host: Paul Barnhurst: So you know you talked about how a lot of things in modeling are simple. When you and I touched base we talked about you know a lot of it is adding mass, some division, some multiplication. So in your mind, to build the typical three-statement model, how many formulas do you think someone needs to use in Excel?
Guest: Scott Rostan: Not many. I mean, a min function for your cash sweep on a revolver. And I was thinking about this. I can build a three-statement model. That is just addition, subtraction, multiplication, division. As you said, a main statement on the cash sweep. That's it. Now, maybe a max ought to max out the revolver and then. Okay, what about a DCF output page? Okay, if you're going to do a DCF valuation, to me that's an extension of a three-statement model that's getting your valuation fine. Then you're going to have an NPV, probably a PV-type function. You're going to do some sort of discounting back. But you can really keep it simple just by doing simple references and math that addition subtraction, multiplication, division, Many people are shocked how easy you can make it. And that's one thing we really take pride in at training Street of like, let's build a three statement, a pretty robust three statement model with working capital, depreciation, amortization and equity schedule, the buyback and dividends and a debt schedule with long term debt repayments and a cash sweep on a revolver. And people are like at the end of it, they're like, that was pretty easy. And like they're all easy references. But you got to put them all together in the right way or the whole thing falls apart.
Host: Paul Barnhurst: Totally agree. I think you know, it is amazing how simple it could be. You have potentially your lookups. You might do a little lookup from the schedule to that. You have your basic math. You have some places you might need a min or max, maybe one if statement, but often you can do min max for a basic model that you can do that can be pretty complex. It's really amazing if you learn how to lay out your schedule and link everything and build it right, you can keep it really simple.
Guest: Scott Rostan: And two thoughts that made me think of number one. The formatting is critical, right? To make it tell its own story. It's easy to understand blues or inputs and blacks or formulas. We, at Training Street like to teach people to use green from a link from another sheet or schedule, stuff like that. Keeping the formatting consistent with aligning decimals and little things like that matter. And then you also for scenarios like, often you're going to have like different cases, like an upside case, a downside case, a consensus case, management case. You might be using a Lookup, as you said before, or a Choose function or an index match or something like that. But again, I would keep it simple, like if you need, if you only have two, use an If. If you have 3, 4, 5, use Choose. If you have more than that. Now you can get a little more sophisticated with index matches and the like, you oftentimes don't need that level of sophistication just to keep it simple.
Host: Paul Barnhurst: Yeah. It's a great point. And I know you and I talked a fair amount about that. And we talk about the basics, the building blocks. I'm going to throw a question at you that doesn't come from kind of what we talked about before, but what do you think of what the Financial Modeling Institute has done with AFM is a way to validate people's training and their skills, and they can build a model really focusing on that speed. Three-statement design and keeping it simple. What are your thoughts of that program?
Guest: Scott Rostan: Yeah, accuracy, ultimately right. You'd able to prepare that way. Look I think what um, Ian and the FMI are doing is great. I mean, because it gives a way to validate these skills. And to me, it's just like a logical extension, if you're serious about it. We've always at Training Street thought of like, look, ultimately if you can do it, you're going to be doing it on the job and it's going into the pitch books. It's going for the clients and you're going to prove it that way. But the FMI gives a way, here's a certification route to validate that you are competent in those areas. So again I think it's a wonderful idea and wonderful program.
Host: Paul Barnhurst: So we're coming up close to the rapid-fire questions, which is my favorite section. We just have 1 or 2 more questions for you. So the first thing I want to ask is you look back over your career, what is maybe one thing that you've learned that's helped you the most when building financial models, something you could share with our audience?
Guest: Scott Rostan: Speed, It's the most important thing. And I just being fast. If you. And the reason this is important is, this reminds me of a story where I was putting together a data table analysis for this railroad model where we're comparing, like, different percents of cash and stock offers at different offer prices and sensitizing the amount of synergy realization and just seeing how that's going to impact the accretion dilution in our M&A analysis, let's say. And one of my, deal team members was like, can you do that? What if analysis for us now, that was his phrase for a data table, but he didn't know how easy a data table was once you set the data down. Now, this is back, you know, 26, 27 years ago. So process was fast. It would take this model about 10-15 seconds to calculate. Fine. Now it would be instant with any of the faster processes. But. So therefore once I set the data table, I could just hit F9. I could wait for a few seconds and then I've got the data table done. It literally what he was asking me to do, I had to change a few things. I get done less than an hour, but he thought I was going to take me multiple hours.
Guest: Scott Rostan: Now, I didn't lie to him, but when he said, can you get it? For example, you know, I'm looking for two 2:00 right now and East Coast time. He's like, can you get it back to me by, say, seven tonight? Sure. No problem. Knowing I could probably get it done in 30 minutes, 45 minutes. So when I then get it to him in two hours, I look like a rock star, right? I got it before he wanted. He's like, wow, this is great. Hope this wasn't too much. No problem at all. It's this super simple. And I bought myself time. And I remember I went to the gym and actually worked out for a little bit and broke a sweat, took a shower, came back, reviewed it one more time, printed it out, took it to him two hours in advance. He's happy. I'm happy. I feel good now. So understanding how to do things quickly and accurately, confidently, you can then control time. And especially with that junior professional level that's really important. If people are asking for something, hey, we need this by tomorrow or we need this and you're like, oh my gosh, it's going to take me 12 hours.
Guest: Scott Rostan: If you can get faster instead of 12 hours, it takes you four hours. You're creating time. That's huge. So speed is extremely important so that you can be much more control of your workflow and your staffing levels. I will say as a caveat, I always tell people I was like, be careful. If, you know, let's say there's ten people in your class who are doing the modeling stuff, you probably don't want to be the first. And they always look at me like, really? I don't want the first, want to be like second or third, because you'll probably get paid the same as the first because you'll be a tier together and your second in line, like the first in line, is always going to get called up, right. Whenever there's a fire drill, they're going to get called up the second line. You miss a couple anyway, I kind of jokingly tell people it's like, yes, you want to be in the top, but look at some point, just do what works for you, but be as quick as you can so that you can get it done accurately on time and be in control.
Host: Paul Barnhurst: I like the strategic thinking there. So one last question before rapid fire, what's your favorite Excel shortcut?
Guest: Scott Rostan: I'm waiting for this. I've been thinking a lot about this one. It's my favorite because I think it's underutilized. And I'm going to give two because they're together. It's the fill right. And fill down. So control R and control D I don't think it utilized nearly enough. It's easier than copy and pasting if you want to keep the formatting the same. Don't copy cell comments like you do with copy and paste. It's one keystroke. You can be more flexible and turns your starting point because it just copies the leftmost cell through the highlighted area. So I was actually teaching this on Monday at my UNC class that just kicked off. I teach a modeling class, an investment banking class at UNC in the spring. I'm a huge control R, control D fan. I don't think it gets nearly enough attention or utilization. I should say.
Host: Paul Barnhurst: I use those two quite a bit. They can become very helpful, big fans of them. So you and I are on the same page. Those are two great ones, not ones I necessarily mention as favorite, but ones I really like. So I agree with you a long time. All right, here we go. Rapid fire. I'm sure you know how this works. You get 10 secs, to give me an answer on each of those. We're looking for you to kind of take a position here. And then at the end, we'll give you the opportunity to elaborate on 1 or 2, because I realize you could say it depends for every single one of these.
Guest: Scott Rostan: Fair enough. So you want me to elaborate at the end?
Host: Paul Barnhurst: Yeah, we'll elaborate on the end. If you want to add a couple seconds to one, that's fine. You got ten 15 seconds, but no long answers. We want to kind of hound through all of them and then let you expand. So circular or no circular references?
Guest: Scott Rostan: Circular, three statement model. You need that average debt balance the average cost balance for accuracy. But I totally understand the non-circular world. It makes things a lot messier.
Host: Paul Barnhurst: All right VBA or no VBA?
Guest: Scott Rostan: VBA productivity tool. It can help you do automate tasks.
Host: Paul Barnhurst: All right great, horizontal or vertical model?
Guest: Scott Rostan: Honestly I'm indifferent on this one. I know a lot of people I prefer to teach on horizontal models. I think it's for someone easier to learn, but the vertical model is nice. Think about that M&A model. Put the acquirer in one tab, the target on one tab, and everything lines up. It makes a lot easier when you then get to the third sheet and do the pro forma combined.
Host: Paul Barnhurst: Excel dynamic arrays. Yes or no?
Guest: Scott Rostan: Personally, no. In my three-statement model experience, this doesn't add value to me. However, I understand the value, but that's just a kind of a different level of modeling, a different modeling corner. How about that?
Host: Paul Barnhurst: That works. We'll take that external workbook links. Yes or no?
Guest: Scott Rostan: Absolutely not.
Host: Paul Barnhurst: You know, there's a lot who have strong opinions like you. It's it's a firm no. Named ranges versus no-named ranges in your model?
Guest: Scott Rostan: By ranges can it be one cell.
Host: Paul Barnhurst: It can be. Yes.
Guest: Scott Rostan: I personally use cell references. For example, here's a tip. Cell A1 is the name of the sheet, and that's with a horizontal multiple sheets. That way you can quickly jump between sheets by just hitting IS for income statement, F5 go to. You can jump to the depreciation schedule real fast. So for navigating purposes like that I love named ranges. I personally don't like it for building formulas, but that's a personal preference.
Host: Paul Barnhurst: Got it. And I hadn't thought of that. That's a great tip on using if to navigate the sheets off to remember that one. So do you use a formal standards board like fast and some of the others when modeling? Yes or no?
Guest: Scott Rostan: No, But I've been told by smart people that we effectively are doing those things.
Host: Paul Barnhurst: Sure that is not a surprise. You're often teaching many of those things, but not exactly following one. This is, always a controversial one. Will Excel, ever die?
Guest: Scott Rostan: Not in the foreseeable future.
Host: Paul Barnhurst: Yeah, basically not in our lifetime is what it feels.
Guest: Scott Rostan: And not with Co-Pilot helping us out here.
Host: Paul Barnhurst: Good point. All right. Will AI build the models for us in the future?
Guest: Scott Rostan: As a first working draft? Yes, i can't put a time frame on that, but it's not going to be a fully complete thing unless you're using canned templates which existed far before AI.
Host: Paul Barnhurst: Good good. So Cell protection, should you be using that in your models? Yes or no?
Guest: Scott Rostan: I would personally say no unless your audience needs you to control access. Again, we're teaching people. We're teaching them skills so they can go and model their own. So we want them to have unfiltered access. But if you are in control and the audience is not as sophisticated a user, there's a time and place for those.
Host: Paul Barnhurst: Got it. Fair enough. Do you believe financial models are the number one corporate decision-making tool?
Guest: Scott Rostan: No.
Host: Paul Barnhurst: What is?
Guest: Scott Rostan: That storytelling. If you can't convince someone on that story, don't care what the spreadsheet tells you.
Host: Paul Barnhurst: A lot of validity to that. We'll take that one. So what is your lookup function of choice? You would choose person Vlookup, index match, Xlookup, or something else I didn't mention.
Guest: Scott Rostan: I would say I'm a big offset fan. I love offsets. Though, they're really hard to audit, but I love the flexibility of offsets. I would say xlookup in your list in there.
Host: Paul Barnhurst: Okay. Yeah. And offset is another great one. I agree. We just you can only list so many. I've had a few people go I would challenge if that's the only four. And I'm like yes, I realize.
Guest: Scott Rostan: I actually love using offsets for summing ranges. So that way your your ranges are a lot of people say you know one and it equals plus one equals previous year plus one, previous row plus one. I do an offset there instead. So when I'm copying it when you insert or delete rows, the offsets dynamic, you always do it. So I will sometimes build offsets into sums also. So it's always going to start summing one row below a certain level, and then stop summing one row above the sum of the row I'm in. So that way the offset allows you to have an accordion, right? You can always constantly grow and stuff. So again it's a little more trouble putting in. But once you do that, like offsets can be very, very helpful. But it's really hard to audit because you work with relative references.
Host: Paul Barnhurst: Makes sense. So we're coming up on our concluding section here. And I'd like to ask what is one piece of advice you would share with our audience if they want to become a better financial modeler. And I think I may know what that answer is based on our conversations, but what's that one piece of advice you'd give?
Guest: Scott Rostan: I would tell people, take control of what you can learn, like Excel. You can get faster in Excel. It is learning like the type showing a student recently in a class and they were. I was standing over the computer like just when I was saying things like for example, control R. just watching their brain, well, not watching their brain or how they're processing it. They're like control R like their hands were crossing. And I'm like, whoa, no. Like control R like, you know, so getting quick with the Excel is a skill. You can learn. You can learn the fundamentals of accounting. You can learn about a company and how the business model works. You can learn the basics of corporate finance, but you have to experience that storytelling right. And that comes with a lot of wounds, a lot of paper cuts, a lot of, working on projects, a lot of mistakes, listening to other people, watching Ted talks, watching your podcast, and be a sponge so that you can learn that way. So take control right now of the technicals that you can learn so that you can then focus on the big picture, focus on the storytelling to accelerate your future career.
Host: Paul Barnhurst: Got it. Appreciate that advice. So if our audience wants to learn more about you, what would be the best way for them to get in touch with you or learn more about you?
Guest: Scott Rostan: Yeah, So through our website, there's, our emails are up there and on our team. So my email is scott.rostan@trainingthestreet.com. So all one word training the street. You can email me. You can also connect with me on LinkedIn. And then we can message that way. But yeah, Training Street, we're doing a lot from, marketing perspective. You know, we do a lot with corporate clients and for academic clients. So, if there's something you're looking for, whether we do public courses that are open enrollment for individuals, we have self-studies we do on-site. So whatever. If you're an individual, we have options for you. If you have a group inside your company, we have options for you. But we'd love to hear from you and how we could meet your needs.
Host: Paul Barnhurst: All right. Great. Appreciate that, Scott, and thanks for joining me today. I enjoyed getting to chat with you.
Guest: Scott Rostan: My pleasure. This is fun. Enjoy March Madness.
Host: Paul Barnhurst: Yes, it is that time of year. I will be enjoying it.
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.
