Unlocking Financial Model Secrets and Advanced Techniques

Written By Ankita Ghosh

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 Stephen Aldridge, to discuss developing and implementing Financial Modeling standards and best practices, including insights from his work on the Financial Modelling Code. This conversation is packed with practical advice and fascinating anecdotes.

Stephen, the founder of Numeritas, has over 20 years of experience in Financial Modeling. Stephen has worked with and for top firms like KPMG and Deloitte. With a background in engineering, sales, and corporate management, he offers a unique perspective on Financial Modeling standards and best practices.

Key takeaways from this week's episode include:

  • Standards in Financial Modeling ensure consistency and reliability in financial models. Having an agreed-upon approach within a firm allows for seamless transitions when different individuals work on the same model, promoting accuracy and ease of understanding.

  • Financial modeling involves various acceptable methodologies, making consensus on best practices challenging. Flexible guidelines, like the Financial Modeling Code, help streamline processes and ensure consistency across different approaches.

  • Prototyping in Financial Modeling bridges the gap between modelers and users by creating early mock-ups of input areas. This approach ensures the model meets user expectations and captures necessary inputs accurately, saving time and resources in the long run.

  • Human factors, such as biases and assumptions, significantly impact financial modeling. Effective communication and understanding stakeholder interactions are crucial for creating accurate and practical models.

  • In implementing Modeling Standards, Firms should adapt modeling standards to their specific needs with a focus on basic principles like avoiding hard coding and maintaining consistency to enhance model quality and reliability.

Quotes:  

Here are a few relevant quotes from the episode on financial analysis and modeling:

“I suppose a few things within a firm, you probably want a house style, at least an agreed approach, so that if somebody else picks up the model, has to work on it or somebody leaves, then you've got continuity.”

“Prototyping helps the user to see what they like to get. If they think, oh no, this isn't what I would imagine, what about these things then? You're getting all that out in the open before you start coding.”

“It's very important to think about the human aspect of modeling and what goes around it as well, and the assumptions we make and the bias that can creep in and all these sorts of things.”

“Keep the user at the center of everything you do, keep them at the center of your thinking, and that way you'll produce a model that's much easier to use, and likely to have a longer life.”

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:  

(00:50) Introduction

(01:40) Guest Introduction

(01:45) Horrifying Financial Models

(04:10) Approach to Financial Modeling

(05:25) Guest's Background and Career Journey

(08:20) Developing Modeling Standards

(15:09) Divergent Views and Common Agreements

(18:15) Best Practices and Lessons Learned

(24:30) Importance of Prototyping

(28:00) Most Enjoyable Modeling Project

(30:30) Joking on Big Numbers

(33:20) Rapid-Fire Question Round

(44:20) Guest's Advice for Aspiring Financial Modelers

(44:47) Guest's Contact Information

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. Every week we talk 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 am excited to welcome to the show Stephen Aldridge. Stephen, welcome to the show.

 

Guest: Stephen Aldridge:: Thank you, Paul, a pleasure to be here.

 

Host: Paul Barnhurst:: Excited to have you. So we kick off every episode with this question and I'm sure you have an answer. Tell me about the worst financial model you've ever seen.

 

Guest: Stephen Aldridge:: This one did get me thinking a bit because what is it that makes a model bad? What makes it the worst? So there were a few candidates. I think the one I've gone for though is, one that we were auditing, some years ago, and, the way we do that is we look at all find, all the unique formerly, and then we'll check each of those, and 62% of those had some kind of error or query about it. So I think it has to take the prize for the worst model, and that includes all sorts.

 

Host: Paul Barnhurst:: 62% of every sale like that had something in that.

 

Guest: Stephen Aldridge:: Every unique formula. So one that's not a copy. Yes, 62% of them. So effectively 62% of all the formulas had some kind of issue with it that we raised a comment on. It wasn't a great model. It had lots of indirect, some ifs over huge ranges and all these sorts of things. But the thing that strikes me, or I remember about, the client's attitude to that project was what they wanted us for is, to sign it off. They didn't want to do any work to the model. They just wanted to do the bare minimum. So we had some fun and games with that one.

 

Host: Paul Barnhurst:: I could imagine if they are like, no, just sign off. It's all good. We don't need to do anything.

 

Guest: Stephen Aldridge:: It's not really.

 

Host: Paul Barnhurst:: Indirects, I think, everybody's used them some. But you just have to be careful when and how. If you have nothing but indirect, it can be concerning.

 

Guest: Stephen Aldridge:: Sure. It's like most things. There's a time and a place and if you know what you're doing and you know what risks you're taking and you mitigate those, that's fine.

 

Host: Paul Barnhurst:: That's how I am with most things. It's like, there's rules and there's almost always a case where you're going to violate those rules. But if you understand why they're in place and you know the risk you're taking and you're doing it appropriately, then I'm okay with that. I may not choose to do it the way you did, but I can at least understand it.

 

Guest: Stephen Aldridge:: That's No, I think so.

 

Host: Paul Barnhurst:: So what was the key to learning or kind of your key takeaway from that model and that whole experience?

 

Guest: Stephen Aldridge:: I think the key learning from that was about the people side of this. The model is just part of it, but there are always people involved. In that case, we had, what we call a picnic problem, which is a problem in the chair, not in the computer.

 

Host: Paul Barnhurst:: I've heard that one. As soon as you said it I was chuckling.

 

Guest: Stephen Aldridge:: So it's very important to think about the human aspect of modeling and what goes around it as well, and the assumptions we make and the bias that can creep in and all these sorts of things.

 

Host: Paul Barnhurst:: I agree with you. There's a human component that just cannot be overlooked. It is so important to the overall model. The rest of it is a kind of math and design.

 

Guest: Stephen Aldridge:: That's right, it is. It's a dangerous generalization. But modeling attracts a lot of people who like working with computers more than they like working with people. But you need to be able to work with people as well and understand how they're interacting with the model.

 

Host: Paul Barnhurst:: Totally agree. Well, Thank you for sharing that experience. Can you tell us a little bit about yourself? Just introduce yourself to the audience here.

 

Guest: Stephen Aldridge:: Sure. I'm quite old now, so I've got a lot of background in my career. I started out in engineering and I started with Excel. My early engineering jobs were testing physical components and using Excel to do the analysis on that. I was writing what then were Excel for macros and reading stuff in through CSV files and this kind of thing from transducers and all sorts of stuff with little programs to make that all work. I enjoyed that, and I carried on finding a way to use Excel in everything I did, even for a while I was a salesman. I wasn't able to do much there with Excel, but I was studying for an MBA there, so I was able to use Excel on all the assignments for the MBA as much as I could and that sort of thing. Then I went to a sort of corporate management role where I was again using Excel, Excel was also Lotus one, two, three in those days depending on which firm you were dealing with. So I was doing a lot of analysis in sort of a corporate role.

 

Guest: Stephen Aldridge:: I got made redundant from that role and then found out that KPMG was advertising for what sounded just like what I've been doing, and they were calling it financial modeling. I'd not heard the term before, but I applied for that and got a job with them. I spent about six years there in their financial modeling group, and then about another year with Deloitte in their modeling group, before joining former colleague David McCann, who left KPMG about the same time as I did. He'd started doing modeling as a contractor, but he found an Numeritas and we'd been talking and it's got a long story short. We joined forces, and I sort of launched Numeritas as a firm rather than one person. That's 20 years ago now. We've been going since then and sort of tried to grow the business, and offer similar sort of standard and quality as you would get from one of the biggest firms, big four firms, or whoever, though with a more personal touch, of course.

 

Host: Paul Barnhurst:: Well, it sounds like quite the background engineering, sales, and modeling in there. A little bit of everything.

 

Guest: Stephen Aldridge:: A little bit of an all-rounder.

 

Host: Paul Barnhurst:: That's good. It's good to have a variety. I think it makes it a lot of fun versus doing the same thing the entire time.

 

Guest: Stephen Aldridge:: I mean, having some sales experience is a useful skill if you're running a business as well.

 

Host: Paul Barnhurst:: Yes. I've had to learn a lot of the sales side. It's a useful skill to have. Now that I'm running my own business, wasn't something you did as an FP&A professional.

 

Guest: Stephen Aldridge:: Sure, and it's all important, isn't it? Without that, nothing else happens.

 

Host: Paul Barnhurst:: So true. So I want to talk about something you and I chatted about beforehand before we recorded this. We discussed modeling design principles, and how there are a lot of different standards out there. You mentioned you worked on a project to help kind of create a framework for modeling. So can you talk about that experience, and share what that was like?

 

Guest: Stephen Aldridge:: Sure. So this goes back a few years now. If you see, government procurement or anything of that sort, then they're often having to procure financial modeling, and they are looking for a way to kind of set a minimum standard. I started to see them specifying the first standard. I'm not a huge fan of the first standard. It's not the way I like to build models. It's not to say it's terrible. I agree with quite a lot of what's in it, but I didn't want to. So what this was effectively was people who were non-experts telling people who are experts how they want them to build a model by specifying this standard, and I thought, well, that's not a great situation. So I had a lot of contacts. Well still at KPMG and Deloitte and some of those people had moved to Ernst and Young. Some of them have moved to BDO and various other, big accounting firms. So I managed to get contacts in, I think, the top seven accounting firms and a handful of independents and said, here's a case for putting together some kind of framework, are you in? Most of them said, yes. So it's been quite a long process. We started to pull what we each thought was best practice. We, each, had an in-house style guide or an in-house methodology. We essentially put those on the table and then argued points out, and debated over which points we all agreed on, which points were different, and tried to come to some kind of consensus about what we could all agree on as a framework that allowed the broad range of modeling approaches, but provided some kind of useful guidance if you didn't know where to start.

 

Host: Paul Barnhurst:: Got it. That makes a lot of sense. I'm like you, I've read the fast and to me, it just felt overwhelming. I'm like, really? Do you want me to follow this many pages of rules? I'm going to spend six months just understanding all this.

 

Guest: Stephen Aldridge:: Well, I know how it originated, because I know the guys who originally wrote it, and they did come, talk to us at the time and said, will you adopt this? We said, well, it's a bit too prescriptive, a bit too down in the detail. If you take it up a level, then we will. But they went ahead with the way it was, and I think that was because they were hiring MBA graduates. It was originally a methodology of a single firm, and they were hiring MBA graduates, and teaching them from scratch how to build models. So they needed a set of rules that they would all stick to. So it's very much rules-based, but it doesn't allow for a great deal of creativity, I think, in the way you set out your inputs and things like that. I've got a few other problems with things like sign conventions and things like that. So I prefer something that's a little bit higher level in terms of the direction it gives.

 

Host: Paul Barnhurst:: You worked on that project and tried to come up with some kind of framework. How did you come to the conclusion of what you thought was the right level? Because it feels like that's always kind of a challenge, what is that right level? How descriptive do we want to be versus how general do we want to be?

 

Guest: Stephen Aldridge:: Well, that was one of the biggest challenges, and also when you've got like about a dozen firms. But one of the interesting things that I took away from that is that these are all professional firms, all doing this as a specialism, but each had a slightly different way of doing things depending on their focus, exactly who their clients were or if they were doing mostly mergers and acquisitions, or if they were doing mostly project finance and so on. So that was partly why it took so long because trying to find a consensus was tricky. But what we ended up settling on were things that we recommend or suggest as a good thing and things that we suggest you avoid. So we kind of left a fair amount of latitude if you like in exactly the approach you take. So we came up with things like, you should have a sign convention. We didn't specify necessarily what it was, but that you should have a sign convention. I know I have a preferred sign convention, but not everybody agreed on that. So this was very much the work of a large number of people rather than. So it's not my standard.

 

Host: Paul Barnhurst:: Sure, it was a group of people where you all had to come together and try to find consensus.

 

Guest: Stephen Aldridge:: Just to sort of finish the story. We then wondered, what do we do with it? Do we form an organization and publish it? There was no appetite for doing that. So in the end, what we did was hand it over to the ICAEW, who adopted it. They redrafted it, putting it into more layman's language, and published it as the Financial Modelling code.

 

Host: Paul Barnhurst:: I recently shared that on LinkedIn. I thought I thought it was good. I browsed through it. I didn't read everything, but the guidelines of the general rules all made sense to me. There are 1 or 2 areas where I might see it a little differently, but in general, overall it's all right, this seems solid and it felt like it struck a good balance between being very rules-based and not being so high-level that you can't implement anything. I thought, overall, it was a pretty solid document. So what was maybe your key takeaway or learning from that whole experience? What did you take away from that project?

 

Guest: Stephen Aldridge:: Well, I think it was this fact that there were so many slight differences in approach, all of which were valid to these people who did this. As a group of people who developed what they consider to be a best practice or something that worked for them. But there were nuances about how that would differ between different firms. So that was interesting, so it kind of says there's no definite right way to do these things. There are a number of things which you can argue are equally as good as each other.

 

Host: Paul Barnhurst:: What were the areas that you tended to see the most discussion, like divergent views? Was it around signs? Was it around using VBA circular? Were there certain areas where there was just a lot of discussion and it was hard to come to any kind of general consensus?

 

Guest: Stephen Aldridge:: That's a good question. Hard coding, for example, nobody likes hard coding. But what do you consider hard coding, is 12 a hard code? It's obviously the number of months in a year. There were some people saying no, that's fine, or seven if it stays in a week or whatever. Then I'm a bit of a purist on that and I prefer to have it as an input. That's labeled, and maybe it's got a named range as well if it's something you're going to use a lot and then it's obvious what it is. But there are differences in just a lot of things. There was very little that was unanimously agreed on. I think circular references were probably the one thing that we all agreed on, we didn't like them.

 

Host: Paul Barnhurst:: I don't know that anyone likes circular references. A lot of people view them as kind of a necessary evil on a big debt model to at least get that calculation going and then maybe use a macro or whatever solution you have.

 

Guest: Stephen Aldridge:: There are some things that project finance, particularly, where there's an inherently circular problem because you're forward-looking for example. But I would have a macro or a goal to seek to break that. So I don't consider that to be a circular reference. When I say circular reference, I mean that you switched on iterations in Excel, and it's kind of trying to resolve, and you can get divergent ones, which is scary. Each time you press F9, you get a different set of results. But the other reason I don't like circular references is that sometimes we receive a model for auditing, and I notice it's got iterations turned on. So switch them off and you find it's got a circular reference and there's one that was intended. But if you break that one then you sometimes find there are a few others in there. Because as soon as you switch iterations on then it doesn't report any others. You can accidentally introduce other circulars that you didn't intend to. So that's the big reason I don't like them.

 

Host: Paul Barnhurst:: I have a model whose version would build us a long, quite a while ago now and five, ten years ago, and he built it and I remember it had some circular references. I don't know if I ever found all of them, but we still used the model. I probably shouldn't admit that, but that is exactly the type of thing you're talking about. So I get it. I had one like that, and I think I finally got rid of them all when I completely rebuilt the model. Why do you think having a standard is so important? What do you think the benefits are of having some kind of general standards out there for people?

 

Guest: Stephen Aldridge:: I suppose a few things within a firm, you probably want a house style, at least an agreed approach, so that if somebody else picks up the model, has to work on it or somebody leaves, then you've got continuity. That's a big thing for us. So we have a more tightly defined standard in-house than the financial modeling code. But I think in the wider world, having something that procurement people can point to and say you should use something that complies with this. I think that's helpful. Because as I said, you often get people who need a specialist to do financial modeling. How did you choose or how did you procure something that you're not an expert in when you're having to rely on experts to do that work? So I think it's useful for particularly that point of view.

 

Host: Paul Barnhurst:: I would agree. So how do you guys think about that at Numeritas? Are you using kind of the guidelines you put together? The code, is that generally what you guys follow for your style now or how do you think about it there?

 

Guest: Stephen Aldridge:: Well, we've sort of established our own methodology, if you like, that sort of fits within what we call "SCILS" which is spelled with a C. So that's separation, consistency, integrity, linearity, and simplicity, and you can sort of drill down on each of those and there's a bit more within that. So separation means separating your inputs from your calculation from your outputs. But also that includes hard coding. You'd separate out assumptions from calculations at that level of detail. So that's a kind of a high level. It's a nice little mnemonic that helps to remember it. We've got that broken down to further levels. There are some videos on our website if anybody wants to drill into that. You can just search for SCILS. Spell either spelling and you should find it. There's a search on the website.

 

Host: Paul Barnhurst:: So it's SCILLS, is that it?

 

Guest: Stephen Aldridge:: That's SCILS.

 

Host: Paul Barnhurst:: Alright.

 

Guest: Stephen Aldridge:: The last one is simplicity, a lot of people, I think, who have been on the show agreed that simplicity is important.

 

Host: Paul Barnhurst:: That's another habit that's taken me a while to break. Everything I'd make is complex and the older I get, the more I realize, just keep it simple.

 

Guest: Stephen Aldridge:: Well, that's I mean, we like to break things down and have flags and counters and things like that to when you're trying to figure out when things happen on a timeline and that sort of thing. Break those formulae out into small steps. So I think there's a lot of agreement on that. But, amongst most people.

 

Host: Paul Barnhurst:: What advice would you offer to firms, or companies as they're trying to implement a standard or guidelines to mention, as you mentioned SCILS that you guys use, you've helped with others. Any thoughts you have about going through that process? Because I think it's something, especially, in corporate finance, when you get into more modeling and consulting firms, I think they tend to have standards. But what I've seen in corporate finance is it's often the Wild West. Any advice on kind of how companies should think about that or go about potentially implementing some guidelines and standards for models?

 

Guest: Stephen Aldridge:: In a way, that's kind of what the financial modeling code is about. It's like, here are the things that you should consider and that you should decide how you're going to approach those for your particular needs. If you're in corporate and there is going to be a fair amount of financial modeling being done, and you probably need an expert to set that up, you maybe have somebody to lead that. They're naturally going to bring with them their own history and background to it. So it's going to probably look like what they're used to, whichever firm they came from. But yeah, I think about the particular type of modeling that your firm is doing, or that you need to in your company. I think there are a few basics that pretty much everybody probably should stick to and things like copying formulae across and not using hard coding. I mean, some basic stuff like making sure everybody understands about absolute and relative referencing, that in itself helps considerably. But I'd also say, use styles. I think Excel styles are kind of underused, but that helps keep everything looking consistent as well. You can set up things like your input cells that have protection switched off so that those can still be accessed, even if you activate the protection. So we've got our own set of house styles that we use, which helps keep everything consistent. It has that sort of thing already set up. So I think that's probably the sort of approach I would suggest, start with something like the code, here are the things to consider, and try and work through what you think you need for your own purposes.

 

Host: Paul Barnhurst:: In today's business world, financial modeling skills are more important than ever. With 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 think that's good advice, and I'll make sure to put a link to the code in the show notes for people so they can access that. The next question, I want to kind of switch gears a little bit. I was reading a little bit about some of the stuff you have on your website and different things before we did this podcast. One thing I came across is just the importance of prototyping before you build a model, and that you're a big believer that we should spend some time prototyping. Can you talk about why you see that as such a big benefit? Why should we do that before we jump into Excel and just start building that model?

 

Guest: Stephen Aldridge:: That's part of the process. You kind of alluded to it there that there's a whole design part to building a model, and that's about understanding the business. What are the important things, what are the key drivers, and so on? So then there's also that human element, again, how are people going to interact with this? That will depend on who the users are. It might not or it may be more than one person who deals with the different set of inputs and things like this. But you also want to make sure that it's easy for them to use. So I would say particularly around the input areas, we often mock those up so that they can see what that looks like. And also, what units it's going to be in, and should this be a percentage or should it be an absolute value and all those sorts of things, you easily test those even if you just mock up the inputs. So I think it also helps the user to see what they like to get. If they think, oh no, this isn't what I would imagine, what about these things then? You're getting all that out in the open before you start coding, and it's much easier to do it at that stage. If you've already started to build a whole bunch of calculations and then you have to reconfigure things because in our case, the client or the user is saying, well, no, this doesn't look right to me, I would prefer it to be like this, and then it's a lot harder to do it later on.

 

Host: Paul Barnhurst:: I like to compare the modeling process a little bit to home building. Nobody just starts building a home. You go to the architect, you get blueprints. You have them done by somebody who's qualified. You have an inspection process and kind of step by step. There's a lot of sThere areties to how a model should be built. Unfortunately, and we've all been guilty of it. A lot of times you just jump into Excel and start building, and that's usually when you end up with what I like to call Franken models., kind of that Frankenstein model that you get all done and you're like, what have I built?

 

Guest: Stephen Aldridge:: Well, that's right.

 

Host: Paul Barnhurst:: I'm a big believer in that. There is some value in just stepping back and thinking about things.

 

Guest: Stephen Aldridge:: We will sort of sketch or sometimes even sketch out schematics and show the client. In a more complex model, then you might have a portfolio. So you would set things up with that, perhaps with a sheet for each unit and some through those, or you may do it differently. You may do it in blocks down or so you need to think about how you're going to lay these things out. We also thinking about future-proofing. We try and ask the client, where do you think this might go in the future? Not necessarily that we build it now, but so that we don't kind of make that difficult in the future, and close the door on anything.

 

Host: Paul Barnhurst:: Makes a lot of sense. The next question I want to ask you is if you look back over your career, what's the most enjoyable modeling project you ever worked on, and what made it so fun? What did you love about that project?

 

Guest: Stephen Aldridge:: There was one project. It's been a few years. I've enjoyed many projects, and this is going back a little while because I don't do quite so much hands-on stuff from start to finish these days. But, going back a while, I was the primary modeler for a big project with electricity North West, where in the UK we have distribution network operators. So these are the guys that manage all the wires, all the grid in their local area. This company had been part of another company, United Utilities, and it spun out as an independent firm. So I didn't have lots of things, it was just a bunch of technical specialists and then a whole load of consultants, initially to get them off the ground. So I built them a model with some help from colleagues, and this was the whole company. So it was all the regulatory stuff. It was all the statutory stuff. It was a whole bunch of holding companies with bonds being issued at different levels with different risk ratings and cash moving up and down. Then they wanted a macro to optimize it all. So I built them a button and said, show me the money on it. You click the button to optimize it, it has multiple different versions of finance. So what did I enjoy about it? It was just I got under the skin of the company, and kind of got to know it thoroughly. This model had just about all the challenges you could imagine in it. So it was kind of fun to get stuck in with that.

 

Host: Paul Barnhurst:: It sounds like that could be a challenging but fun model. I love the button at the end. Show me the money, that's great. I'm sure they got a laugh out of that one when they saw it.

 

Guest: Stephen Aldridge:: But there was an investment banker there, one of the people who was one of the shareholder companies, and he wanted that button and said, show me the money.

 

Host: Paul Barnhurst:: No, I could see that. You have to have a little fun in the process, for sure.

 

Guest: Stephen Aldridge:: Absolutely.

 

Host: Paul Barnhurst:: I appreciate you sharing that. The next question here is I know you run your own podcast. You do The Forward Thinking CFO podcast. Can you tell us a little bit about the show? How it came about and what is it all about?

 

Guest: Stephen Aldridge:: Well, it's part of our marketing effort. We thought a podcast might be a good idea to supplement what we were doing. I went to a guy who I know does organize podcasts and so on and said, I'm thinking about doing a podcast. He said you want to get all your other marketing sorted out first. So we did that first for about six months, and then we came back to the podcast idea. I thought about doing a podcast like yours, a financial modeling podcast. But then we thought, well, the people we want to talk to are more like our clients, the CFOs. So hence we went for The Forward Thinking CFO and I tried to find CFOs and people who deal with CFOs, who might be interesting to CFOs to talk to, and I found it. I'm sure you're all the same. I learned so much from that, from getting into those conversations. You can ask people questions that you would not normally get to ask them. There are some great lessons there as well from what the CFOs have been through. Also, we've had some funders on there, people who lend to companies, so you get to hear a bit about what they're looking for. Every now and again I go a little bit off-piste. So we just had one about hydrogen which if you're in the sort of renewables sector, and then hydrogen is one of the next big things. So that's interesting to quite a lot of our audience as well. But I thoroughly enjoy it. We had some great conversations and I learned a huge amount from them.

 

Host: Paul Barnhurst:: I totally agree with you. I love talking to people and learning from them. I've had the opportunity to talk to somebody from pretty much every continent in the world. I haven't got Antarctica yet. Probably, won't, but you know, what I mean? It's just fascinating,.

 

Guest: Stephen Aldridge:: Not many penguins do this kind of thing.

 

Host: Paul Barnhurst:: Exactly. There are not a lot of penguins in modeling, FP&A, or finance in general. But it's a lot of fun to just learn from others and hear their stories. I got to just hear you talking about show me the money or you're telling about how you thought about modeling standards. I know, for me, if I went back to being a day-to-day practitioner, instead of running my own business, I'd be a better practitioner of what I've learned from everybody. All those lessons I've absorbed because we all have our strengths and weaknesses. And if we're open, we can all learn from everybody out there at the end of the day.

 

Guest: Stephen Aldridge:: Absolutely.

 

Host: Paul Barnhurst:: So this this is a fun question I'd like to ask. What is your favorite Excel shortcut?

 

Guest: Stephen Aldridge:: I'm a bit old school. I know other people have had old TSV as theirs. I still use that.

 

Host: Paul Barnhurst:: I do too. I'm a little old school with you as well there.

 

Guest: Stephen Aldridge:: I thought what they used the most was probably F4. You had to toggle between absolute and relative, but I think my favorite, I've gone for control, semicolon, which just puts today's date in which I think is a great time saver. It's quite neat. It's not what many people know as well.

 

Host: Paul Barnhurst:: I had to think about it for a second when you said it. I'm like, well, that's right because it's not one I've used much. All the others, I'm like, all TSV, of course, F4, ctrl+C because it wasn't until later in my career that I started using shortcuts. It's something I was never taught. I didn't start kind of that investment banking route. I started not in finance. So it was a long time before I even started learning shortcuts, and I finally feel comfortable where I can do it most of the time. I still find myself sometimes being like, forget it, I'm just using my mouse.

 

Guest: Stephen Aldridge:: We use them all the time, and in fact, we've got some of our own as well. We have a tool that has additional shortcuts that make us more efficient. It certainly does lots of other things. There's a free version that we give away as well. So that does the mapping of workbooks and analysis and all sorts of things, useful navigation tools.

 

Host: Paul Barnhurst:: I think I saw that online. Make sure to send me that link and we can put that in the show notes. I know shortcuts can save you time. As I said, I'm kind of one of those that's in the middle. You have those people there like the No Mouse Club, and you have others that have no idea there are shortcuts. I'm one of those who's here a little more toward the No Mouse club these days, but I do my share of keyboard. Sometimes I'm like, why am I doing this? I know this is inefficient.

 

Guest: Stephen Aldridge:: Well, when you're doing it day in, day out you can say quite a lot of time and I even have the same keyboard. I've got one at home and I've got one at the office because I have to have the exact same layout because it becomes muscle memory.

 

Host: Paul Barnhurst:: I had a boss. You'll laugh at this. He told me he worked in modeling for a long time. He didn't do it anymore, but he had done certain keys so much that he would be sitting there, tapping them on the table like certain keystrokes, like a nervous habit, almost like a twitch. He goes like F4, different things, just out of habit.

 

Guest: Stephen Aldridge:: I thought we were going to say some of the keys had rubbed off. I'm sure some of my have.

 

Host: Paul Barnhurst:: Sure, there were some of that too. One more question then we're going to move to our rapid-fire section where we get to put you on the spot. So as you look back over your career, what's the one thing you've learned that's benefited you the most in your career? Maybe either saved you the most time or helped you the most throughout your career?

 

Guest: Stephen Aldridge:: I think, there was a job I did in my 30s just before I joined KPMG, and there was a guy there who was about my age now. So he seemed old to me at the time, but I was his right-hand man, doing this analysis work. So I was working with him day in and day out, and I'd see other people come in because he was the big boss for the whole region and so on, they were almost quaking in their boots sometimes, but I was working with him closely. So I got to realize that he's just the same as anybody else. He doesn't have all the answers. So it just gave me some lessons there about how people perceive you, and also that not everybody has all the answers. Well, in fact, nobody has all the answers. You can get good ideas and get advice from everywhere. So that's the thing that I would say is stuck with me that you can get good ideas from anywhere and everybody can have good input. So nobody's got all the answers.

 

Host: Paul Barnhurst:: I like that. It reminds me of the way somebody summit summarized it. I had a podcast I was doing recently, and there's a guy by the name of Jim Cook, and he commented, I came to learn that the smartest person in the room is the room. I like that. He's like, it's not any individual. It's how you collectively come up with the best solution.

 

Guest: Stephen Aldridge:: That's right. It's like the wisdom of crowds. I wrote an article about that a little while ago, and it's quite a famous story, I can't remember all the names now, but it was about a farmer's market, and they were trying to guess the weight of an ox. And each of the crowd, if you average it out, got it almost spot on. So whereas there's quite a big range. So there is wisdom in crowds.

 

Host: Paul Barnhurst:: That's the example I shared when I was chatting with them, not the ox, but just they've done a lot of studies where count the number of M&Ms or Skittles or whatever, and you get a lot of people high, a lot of people low. But generally, when you take the average of all those people, it's pretty close to the answer.

 

Guest: Stephen Aldridge:: That's right.

 

Host: Paul Barnhurst:: It's that idea. There's a lot of wisdom in crowds. You just have to be able to contain them sometimes. But that's another story. That's probably a whole podcast, isn't it?

 

Guest: Stephen Aldridge:: Yes.

 

Host: Paul Barnhurst:: Alright. So rapid-fire, how this works is I got, I think, about ten questions. You get no more than 15 seconds to answer each of them. And you can't give me an it depends. So you have to pick a side. Then at the end, you can elaborate on 1 or 2 where you're kind of like, yes, I can answer that, but there's this and this and this you need to think about because all of these are nuanced. That's why we do this a little bit.

 

Guest: Stephen Aldridge:: Okay.

 

Host: Paul Barnhurst:: So here we go. Circular or no circular references?

 

Guest: Stephen Aldridge:: No, no circular references.

 

Host: Paul Barnhurst:: I knew the answer to that one. VBA or no VBA?

 

Guest: Stephen Aldridge:: I like the VBA. But there's a caveat to go with it.

 

Host: Paul Barnhurst:: All right, well, we'll get to that here at the end. Horizontal or vertical?

 

Guest: Stephen Aldridge:: If you mean time, a timeline going across, horizontal.

 

Host: Paul Barnhurst:: Do you like to put all your schedules on one sheet, or do you like to use a lot of sheets, a horizontal type model, or kind of stacking it in one sheet? Do you have a preference?

 

Guest: Stephen Aldridge:: That is a "it depends" question. So I'm going to have to go for horizontal, I think.

 

Host: Paul Barnhurst:: All right, I get it. Excel dynamic arrays and models. Yes or no?

 

Guest: Stephen Aldridge:: No, for financial modelers.

 

Host: Paul Barnhurst:: External workbook links. Yes or no?

 

Guest: Stephen Aldridge:: No, but we can talk about that one maybe as well.

 

Host: Paul Barnhurst:: This is what makes it fun. Named ranges or no named ranges?

 

Guest: Stephen Aldridge:: Yes, I like named ranges.

 

Host: Paul Barnhurst:: I talked quite a bit about that.

 

Guest: Stephen Aldridge:: Sparingly.

 

Host: Paul Barnhurst:: I could buy that. I've had a few people say that. The next one, I think we spent about half the show talking about kind of the formal standards. So we'll move on past that one and just run to the next one here. Will Excel ever die?

 

Guest: Stephen Aldridge:: No, before I do.

 

Host: Paul Barnhurst:: I've had a few people say that. I had one respond with, yes, but just doesn't happen in my life. Will AI ever build the models for us?

 

Guest: Stephen Aldridge:: Some would argue it already is, but I don't think it will, in a useful way, any time soon.

 

Host: Paul Barnhurst:: Fair enough. That's a question there's a lot of nuance to. That's kind of a discussion in and of itself. Are you a believer that you should use like sheet cell protection in models? Yes or no?

 

Guest: Stephen Aldridge:: I'd say, use protection generally wouldn't use a password, but it just helps avoid accidental damage.

 

Host: Paul Barnhurst:: Sure. The next question here is, do you believe financial models are the number one corporate decision-making tool?

 

Guest: Stephen Aldridge:: Yes, I think so.

 

Host: Paul Barnhurst:: Here's the last one. What is your lookup function of choice? You would choose Vlookup index match, Xlookup, or something different that I didn't mention.

 

Guest: Stephen Aldridge:: No, I'm old school. So it's INDEX MATCH.

 

Host: Paul Barnhurst:: That's a common one.

 

Guest: Stephen Aldridge:: I like that because you can separate the index and the match, and sometimes you can use the match multiple times and save yourself some coding.

 

Host: Paul Barnhurst:: I know. I like that I finally started using XMATCH. Because you get the extra arguments. It's just hasn't been a habit. We all kind of use match. And I was doing something, and I'm like, I should use XMATCH. That would have solved this problem I had.

 

Guest: Stephen Aldridge:: Some of the new functions are powerful. I'd like to say, to some extent it is a habit.

 

Host: Paul Barnhurst:: So you wanted to elaborate on the VBA one a little bit. I think that's one you wanted to elaborate on.

 

Guest: Stephen Aldridge:: VBA, I think, so I would generally not use it in the way of sort of custom functions or things like that. I think it's great for tools, we've built loads of tools. Let's say, some we give away, but those have made us very efficient. Also, when you're doing that sort of project finance, circularity breaking stuff, then just a simple macro there typically to drive a goal seek. So you just click a button and drive a goal seek. But I'd say, avoid it for actually doing calculations.

 

Host: Paul Barnhurst:: That's what I've heard a few people say. Like, use it for formatting, you're talking about tools, and things like that. But don't be writing a bunch of custom functions with VBA. We can do that with Lambda now if we want to be dangerous.

 

Guest: Stephen Aldridge:: Well, that's right. I think the same. I would apply the same there. I know other people might disagree, but I would tend to avoid that if there's a simple way to do it using regular formatting.

 

Host: Paul Barnhurst:: I believe there is one other you wanted to elaborate on. Do you remember which one that was?

 

Guest: Stephen Aldridge:: What did it say? I think, Excel workbooks. I mean, generally, you don't want to do links to Excel workbooks, but sometimes I know that people feel they need to, or what I would say is, if you do, then have a kind of an airlock. That's an identical sheet in both so the links between those are sort of just 1 to 1. That's a way to reduce the risk of that. I wouldn't recommend it. I still say avoid it, but if you do have to then that's the way to do it.

 

Host: Paul Barnhurst:: I try to avoid it. I've used it some and I've been bit a few times, so I try to avoid it.

 

Guest: Stephen Aldridge:: No, as I said, try to avoid it as much as possible.

 

Host: Paul Barnhurst:: I agree. Well, I appreciate you joining me. That kind of leads to the end of the show here. I have a wrap-up question for you. If you could offer one piece of advice to our audience to be a better modeler, what would that be?

 

Guest: Stephen Aldridge:: I think it would be, keep the user at the center of everything you do, keep them at the center of your thinking, and that way you'll produce a model that's much easier to use, and likely to have a longer life.

 

Host: Paul Barnhurst:: I like that, so keep the customer front and center.

 

Guest: Stephen Aldridge:: Yes.

 

Host: Paul Barnhurst:: Then if anyone wants to get a hold of you or learn more about you or your company, what's the best way for them to do that?

 

Guest: Stephen Aldridge:: Probably, through LinkedIn. If you click on the button there that says view my portfolio. There's a whole bunch of links there to things like a YouTube channel, a company page, the podcast, a blog, and all sorts of things. So that's probably the best way.

 

Host: Paul Barnhurst:: Great. Well, I appreciate you joining me, Stephen, and look forward to sharing this episode with our audience. So thanks for being with me today.

 

Guest: Stephen Aldridge:: Thanks, Paul. It's been a pleasure. Thanks for taking the time to talk.

 

Host: Paul Barnhurst:: Financial Modeler's Corner was brought to you by Financial Modeling Institute. Visit FMI at www.fminstitute.com/podcasts and use Code Podcast to save 15% when you enroll in one of their accreditations today.

Ankita Ghosh
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