Episode 2 - David Brown: The Future of Modeling
Show Notes
Welcome to 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 Financial Modeling Institute (FMI), the most respected accreditations in Financial Modeling globally.
In this episode, Paul Barnhurst is joined by David Brown, the Managing Partner of D Brown Consulting and one of the most respected financial modelers, consultants, and educators in the field of finance with offices on multiple continents.
Listen to this episode as David shares:
His journey and background into Modeling
How to find your passion and be willing to put yourself out there
How he learned he had a passion for teaching at a young age
How intuition is a good place to start, but the model helps validate hunches and numbers
How he explains the balance sheet without using numbers to non-finance people
Ways to embrace AI and use it to be more efficient in the work you do
His position on controversial modeling issues, including circular references, dynamic arrays, modeling standards, and more
Follow David:
Website - https://www.dbrownconsulting.net/
Twitter - https://twitter.com/dbrownanalyst
Instagram - https://www.instagram.com/dbrownconsulting/
YouTube - https://www.youtube.com/c/dbrownconsultingdbrownconsultingtv
To learn more about David Brown and his offerings, see below
Learn more about dbrownconsulting and their practices and methodologies for working with data, by following this link: https://youtu.be/4qp8f3u3NvM
Take your financial modeling skills to new heights with dbrownconsulting’s Advanced Financial Modeler Certificate Course!
If you want to get World Class Financial Modeling Training, join the wait-list for updates on the Next Cohort enrollment period for the Financial Modeling Academy Intensive 6 Weeks Online Program!
Follow Paul:
Website - https://www.thefpandaguy.com/
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Sign up for the Advanced Financial Modeler Accreditation or FMI Fundamentals Today and receive 15% of by using the special show code FMC15.
Visit www.fminstitute.com/podcast and use code FMC15 to save 15% when you register.
Quotes:
“When building a model, patterns are key, structure is key.”
“Excel is all about solving problems.”
“When you solve people’s problems, you see things in a different perspective. You just get better with models.”
“Embrace AI! Consider it as your personal assistant.”
“The key is to visualize your model before you build it.”
Go to https://earmarkcpe.com, download the app, take the quiz and you can receive CPE credit.
On each episode, we will have a section called “Ask the Host” in which you can ask your own questions. You can submit your questions about financial modeling to pbarnhurst@TheFPandAGuy.com or DM on LinkedIn.
At the end of each episode, we will also talk about interesting news regarding financial modeling. So if you find something which is worth a share, send it across so that it can be discussed on a future episode.
In today’s episode:
(00:22) Intro;
(00:50) Welcoming David;
(01:06) The worst financial model David has ever seen;
(03:17) David’s take away from the worst financial model;
(04:35) David’s background;
(09:40) The deliberate move to solve problems;
(12:31 - 13:17) Validate your Financial Modeling Skills with FMI’s Accreditation Program (ad);
(13:18) The story behind “Story Telling With Ratios”;
(18:00) Why are we so dependent on models?;
(20:26) David’s view on FMI accreditation;
(23:56) Intersections between tools like Power BI and Data Analytics;
(26:40) How does David see AI changing Financial Models?;
(30:20) David’s advice for modelers;
(31:21) Rapid Fire;
(33:22) David’s view on Formal Standards;
(35:25) Nugget on how to become a better modeler;
(36:07) Connect with David;
(37:31) Paul’s Top Picks from the episode;
(43:37) CPE Credit with this episode;
(44:03) Outro
Transcript
Host: Paul Barnhurst
Welcome to Financial Modeler's Corner, where we discuss the art and science of financial modeling with your host Paul Barnhart. Financial Modeler's Corner is sponsored by Financial Modeling Institute…
Welcome to Financial Modeler's Corner. I am your host Paul Barnhurst This is a brand new podcast where we will talk all about the art and science of financial modeling with distinguished financial modelers from around the globe financial modeler's corner podcast is brought to you by Financial Modeling Institute. FMI offers the most respected accreditation's in financial modeling. I am excited to welcome this week's guest on the show. David Brown.
David welcome to Financial Modeler's Corner.
Guest: David Brown
Thank you Hi Paul. Thanks for this This is great.
Host: Paul Barnhurst
Yeah no very excited to have you here. So we'd like to start every interview off with a fun question because we see our share of challenges in financial modeling So I'm going to ask you, what's the worst financial model you ever saw.
Guest: David Brown
Wow That's a tough question I've seen terrible I've seen I've seen SINS, well I call it sins right I've seen since done on Excel sins lots of sins. The worst one I guess is the worst one because of the impact that is supposed to have had. So there's this model that
I wouldn't mention but I mean probably couple of millions of people relied on this model. I'm put it that way. Right. Huge model that had huge impact.
The model was kind of analyzing probably like 500 different entities right 500. It did that by just analyzing one and projecting what the rest were doing I mean, this is a huge model right? With millions of people relying on the data and you're only estimating 500 by kind of an average of one model I mean that's one thing. And then the other thing was there were inputs and calculations.
There was no input sheet, calculation sheet, output sheet. It was all a mish-mash It was all a very colorful mishmash. And that's another thing color.. They loved color, color everywhere man It colorize It was more like a cake It was more like a pizza. Right with lots of extra toppings.
First of all I was like in shock that look this is what you're using to make these critical decisions. I was supposed to kind of rebuild the entire model. So yeah that was to be absolutely the worst looking the calculations didn't make sense. It didn't balance. There was one suspense kind of accounts to balance it.
It was a nightmare.
Host: Paul Barnhurst
Yeah it sounds bad
Guest: David Brown
Color Yeah. When they put color everywhere it's painful It's like I teach a data visualization course and I always try to tell the students use color sparingly. And have a purpose for using it Don't just color the rainbow because it looks pretty. Yeah go read Stephen Few Right I read Stephen Few and read Edward Tuffty
Host: Paul Barnhurst
Got one of his books right there.
Guest: David Brown
So those are the people that I can give you a name to go read and understand that look color is so powerful. Yeah you don't need a traffic light You don't need red yellow. Red Amber Green. You don't need to do that.
Host: Paul Barnhurst
I hear you. So yeah from that model what was the takeaway. What was your learning experience from working on that model?
Guest: David Brown
My learning experience was I like structure right I kind of like a structure I like to spend extra time building structure so that everything else is fully automated.
So that's my approach. I learned that that approach really made sense because it takes it longer I mean I can remember some projects where two project teams I was looking for the structure around the project We're doing. And days and days my manager was like how far have you got I'm like 0%. The other team was 10% 15% up to 40% And I was still at 0%. Once you find the structure and you find the drivers and you find what is wrong, then guess what Immediately you are done. because I moved from 0% to a hundred percent in one day because I'd found the pattern.
So I find the patterns are key structure is key. When you're building a model you need to have structure that didn't have any structure whatsoever so error rates were huge. And so yeah that's one key thing is structure. You need proper structure.
Host: Paul Barnhurst
Couldn't agree more
Guest: David Brown
I mean structure really is how do you design the model Right You got to think about it logically otherwise, that error rate goes up so much higher because it's so easy to have errors in Excel.
Host: Paul Barnhurst
I totally agree with you. So could you start now by telling us a little bit about your background. How did you end up where you're at today. Just give a little bit of your history to our audience.
Guest: David Brown
All right so for me, I have a mismatch of history So I have. I was born in Nigeria, in a town called Kano. Kano Nigeria is in Northern Nigeria. And then I grew up there and I kind of liked challenges growing up so I really like to kind of solve problems and stuff. Then I got introduced to Excel very early my parents ran a school there and they had payroll and stuff. So I started working doing the payroll around the late eighties early nineties. I was working on payroll as a kid.
Doing the actual calculations of taxes and stuff kind of like that So, I was Excel Early early early Excel then I mean, then that's kind of graduated to okay I like math for some reason I thought math and accounting were the same thing. So I went to study Accounting in university big error. It's not maths for those that don't know Accountant isn't math.
I got a real shock there but then I learned accounting and I liked it a lot finance. I started doing finance, I was involved with CFA, a chartered accountant chartered tax. I did a lot of management and then I love Excel. Then I joined Andersen at the time. That was in 2001 actually in September 11th, 2001.
Host: Paul Barnhurst
What a day.
Guest: David Brown
Yeah What a day really. September 11th, 2001 is when I joined the Anderson. Arthur Anderson at the time. That's my birthday by the way for anyone listening you can send me a gift on 9-11 anyway so yeah, so the. Let me write that down real quick Make sure I got that gift to David on 9-11.
Yeah So, so I joined and that was really great tax. So all my modeling skills so to say I was using that too as a tax consultant and building models around tax. And then I joined the corporate finance team building models around that. So building really detailed models the only negative side there was no one who review my models because no one really had financial modeling skills. My manager my partner, they really didn't have any actual money skills. Thank goodness I was building it very structured and right So hopefully most of them didn't have errors.
So that was my love for modeling right from there and then I decided you know that I'm going to start my firm And that was in 2006. So I started at D Brown consulting and the main thing there for me was look Excel is useful solving problems. And, at the time I was spending 30 minutes every single day solving problems for people on Excel, 30 minutes every day.
I saw thousands of different issues so I kind of build a database of problem solving with Excel and most of them were really modeled Every problem was an input was an output that couldn't be done, right. Because the inputs and the calculations didn't make sense. And that is a model input calculations outputs. That is a model, financial model the apples are really financial statements. It's just like a natural progression to just move to financial modeling. So I was using my structured approach and Excel to solve all sorts of problems building that database. And I thought you know what the world needs a training on effective use of Excel to solve problems and that's why I started my firm in 2006 mainly to solve problems and teach people how to solve problems with Excel.
Oh well I didn't know much about business I started and of course no clients. You go to a client and say Hey I can solve all your problems. Yeah very nice who have you worked for before I'm like, eh nobody you'd be my first. We will call you.
So that's how I started but I did a lot of free trainings and stuff and of course the rest is history. So my friend's gig was really raising finance building a detailed model to raise finance for our clients. And we kind of moved on from there and now what we do is we have a Financial Modeling Academy. We do quite a bit of work. I'm collaborating with all sorts of wonderful people all over the world I'm so glad to meet Paul so hopefully we will collaborate with Paul as well So we were based in Africa.
So we have this Financial Modeling Academy where we are trying to get lots of people to become top modelers right.. And to be able to help the organization make better decisions with the models. Because really modeling is the core of what we do but we do two kinds of modeling. We do the data modeling, which we build data analytics solutions on power BI and all that analytics. And they would do financial modeling which I think is more like future yeah projecting for the future. So the past and the future together I think that's really what we do now. And yeah it's been great.
Host: Paul Barnhurst
Thank you I really appreciate that background and I can relate to some of the things you said there you know Excel is really about solving problems. As you mentioned whether it's financial outputs or operational outputs or whatever those outputs are you got some inputs you got some calculations I appreciated that And I loved your story there starting the business and trying to get it off the ground and the challenges of getting that first client. I think everybody can relate to that on some level that's gone into business for themselves. So one thing you mentioned is for five years you spent half an hour every day solving a problem. Was that deliberate like did you just say look I'm going to spend 30 minutes and where did the problems come from or how did you go about doing that?
Guest: David Brown
I love to teach right as a kid my teaching career started at age eight. Wow. How did that start? What happened at age eight was my teacher in class was trying to teach algebra or something I can't remember the topic and no one was getting it except me she tried for two days in maths an no one got it and she said Hey David come and teach the class.
So I kind of climbed the desk I was so short and I took the chalk and I taught the class at age eight and everyone got it. So I taught a different method and everybody got it. So that's where training started for me. Right so I love to teach I love how to break things down make it a simple. So Excel was like my Swiss army knife right Knowing Excel I'm like wow this is my Swiss army knife to solve anything. And I quickly built a framework because when I was an Anderson people quickly gravitated to look if you have any problem in Excel that's a guy go to tax go to the tax department that is the guy. And I was happy to lend a hand right. So I got a point even clans and they were calling me at the office to help them solve a problem. So on the phone I will visualize what's going on and say Hey go to cell A5 no go to cell A5 and type equals the vlookup and blah blah blah blah blah and on the phone solving problems.
It just became guys solving problems And I was happy to solve problems and spend extra time at work. Actually solving problems for people and yeah that's how I built that database of problem-solving. With the Excel. Yeah.
Host: Paul Barnhurst
I love that and I loved your story eight years old up on the desk teaching everybody. It reminds me I think you'll get a laugh out of this So I was teaching some kids in church primary. They were 11 years old and we had one boy in the class and a bunch of girls and I walk in and the boy was like super smart And he loved math and teaching. And he's drawing on the board math matrix multiplication and trying to explain it to the other 11 year old girls And they're just all looking at him like what in the world are you doing. Like we have zero interest in this. It was pretty pretty funny you teaching reminded me of that moment of a young kid trying to explain that concept. You know cause he loved to teach That's a great story I love that That's fun The teacher called you to teach. So thank you for sharing that and I think there's some great advice there.
Guest: David Brown
And just for people in general, if you like solving problems you know spend some time on each day. That learning is invaluable if you do that every day. Yeah Another time there was this Microsoft sites MrExcel.com this forum at that time so I'm going there and just solve you see people lots of problems just go and try and solve those problems. Your skills will just go way up when you solve people's problems you see things in different perspectives. You just get better. Yeah I agree I think forums are a great way Mr. Excel Yeah I've been to that one and there's you know, a lot of them out there. In today's business world financial modeling skills are more important than ever.
Host: Paul Barnhurst
With Financial Modeling Institutes 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 Institutes community of top financial modelers gain access to extensive learning resources and attain the prestigious Advanced Financial Modeler accreditation. Visit www.FMInstitute.com/podcast.
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Host: Paul Barnhurst
Shifting gears just a little bit here a while back you wrote a piece on LinkedIn called storytelling with ratios. So I'm just kinda curious, can you talk a little bit about that piece and why you wrote it? As far as storytelling without numbers or ratio analysis without numbers really well I teach a course called finance for non-finance managers. When I designed the course cause I'm an instructional designer as well so how various hats. Instructional design our master trainer for the association for talent development.
Guest: David Brown
So I designed a course on finance for non-finance with the premise that the reason it's finance for non-finance is because people don't like numbers. People don't like finance. They're kind of people that have a phobia for numbers. So I thought okay how can I teach ratio analysis without numbers? So I devised this course where I'm teaching detailed analysis of the balance sheet and ratio analysis without a single number, of course first of all to kill the phobia for numbers. So they will do this detailed analysis no numbers and then eventually they will be happy to look at the numbers. So I take the balance sheet and I break it down into five boxes. The left-hand side is assets. The right-hand side is funding. So assets and funding so I start off by saying Hey, every business has assets and they need to be funded. And this two balances, but take assets and split it back into two so stick assets and split into fixed assets and current assets. Now of course your accountants in the house it's not called fixed asset anymore It's called a non-current assets.
I like the old school way Fixed assets. Thanks. Then take the funding side and then split it into three So so the fixed assets and current assets. First of all your long-term assets and then your short term assets, then take the funding side and split it into a long-term and short-term they understand that right? So longterm being yeah Splitting it into equity and debts. Equity and debt so equity long-term debt that is your long side and then the short side is current liabilities. That's what we call it Oh great. So they now understand that so imagine in your head now there are five boxes. So the left two fixed assets and current assets to the right equity, long-term liabilities and current liabilities, then you now say Hey there's the long side and the short side. The long side is fixed assets and to the right of funding equity and long-term debt. That's how you should fund fixed assets and then you just color that and you say can you see there's a mismatch? If the everything is done well then there'll be kind of the same size, right? And then if you check current liabilities and current assets those are the funding for the short side.
And can you see that gap Well guess what that is called working capital. Then you kind of build that out and then play it over time. The nice thing is you played over time so those boxes move over time. And as you played like a simulation on PowerPoint right? So you see the assets, fixed assets the long side and the short side kind of changing over time. And then you pause it and ask them so what do you think. I've told you a rule longside should be equal short side should be equal and you know you are a balanced company right? What's happening here Oh wow It seems the bought more assets. Oh they bought this or current assets and current liabilities the differences quite much. It's like almost like a one to two guess what they are already doing ratio analysis without numbers. So by the time they finish that activity they're like what I understand finance I understand balance sheet. Well, you did it with our numbers and then I can teach them numbers. So that was the whole idea behind designing that.
Host: Paul Barnhurst
I love that I'd never thought of it that way but it made so much sense as you're explaining the boxes.
Guest: David Brown
And just showing how the size of the box moves Right You can kind of see all right That's two to one or three to one or what what happened here. There's a big mismatch why do they have a lot more current versus long-term. So they start thinking about it without seeing a single number and then I would imagine when you introduced the numbers at the end of this. They are like All right this isn't scary. I get it now. That's the point.
Host: Paul Barnhurst
Yeah. I love that way of showing that that's a great way of doing that. I liked when you said instructional design I have a passion for that because my wife's an instructional designer. Oh wow. She studied under one of the founders in the field he created one of the two main frameworks that are used today for instructional design.
Guest: David Brown
Who is that?
Host: Paul Barnhurst
Merrell Is his name?
Guest: David Brown
Oh okay. Very nice.
Host: Paul Barnhurst
He created the framework back in the seventies. And so she studied toward the end of his his career and, talks a lot about it. So I have a passion for that cause she makes sure I do. So that's fun. So I love the ratios example and I really appreciate that and I think that's a great lesson for people that are working with non-finance is to think of ways to display the data without the numbers. You know visually because you can learn so much that way. When it comes to financial models just a question I have for you why do you think they're so critical to making informed business decisions. Why do you think it is that we're so dependent on models in general.
Guest: David Brown
A lot of times right So executives do a lot of decisions with hunches right. They just have hunches and hunches are good like there's experience. There's a lot of experience there where you're going to make a decision to say look I think that's that just doesn't feel right It doesn't feel right. So it doesn't feel right It's a good way to start Right.
But it don't end with it doesn't feel Right. Right you need some numbers you need some numbers to kind of help you say it doesn't feel And I knew it didn't, look at the model The model kind of tells you Yeah it's true It didn't feel right I knew it didn't feel right Okay Fine. That's where the one or two times you got it right. The other eight times you didn't get it the models and yes. So anyway so the key thing is the model. The model needs to help kind of validate those hunches kind of validate those innate things that you have as an executive. Right so in decision-making when you have a model and there are scenarios there so those hunches can be scenarios. So why do you have that one? I think it should be 20% I think it should be. So all those assumptions that your executives have right Feed it into your model as scenarios I run the numbers look at the historicals. So it's just a natural progression that look you need financial models. That'll give you financial outputs that help you make better data-driven decisions. So financial modeling to me is critical, which is why in a business you have the FP&A guys the FP&A guys are the modellers of the business. And many organizations don't have FP&A directly don't have a department FP&A so there's a mishmash of people doing all sorts of stuff. So it's good to kind of aggregate them into one maybe unit and then let them make those data driven modeling decisions by building a solid model structured well that can help execs make decisions., Modeling, is paramount and many executives are realizing that and are constantly wanting people to be able to build models that make sense very simple to understand models. But also help them make better data driven decisions So yeah it's pretty critical. I agree. You've started to see over the last decade a lot more companies listing roles that they want financial modeling specifically as a skill not just Excel or not just data visualization.
And you know that's one of the reasons we have FMI today you know seeing that accreditation that they've done and kind of speaking of Financial Modeling Institute I know you know Ian Schnoor a little bit. How do you think about you know FMI and having an accreditation out there for people to be able to demonstrate that they can build a three-statement model or I understand modeling.
Host: Paul Barnhurst
How do you think that's helped the profession to have an accreditation out there?
Guest: David Brown
Well I'll tell you something. I'm a member of the CFA Institute and have a chance to have a chat with former president Paul Smith and I talked with Paul and I said Paul when it comes to finance experts I mean I love the whole thing around finance and stuff but to make it real, you need to be able to build a model. You need to be able to say hey this project is wonderful but you need to build a model and prove that. Yeah It potentially based on all the scenarios It's great and it works but unfortunately many finance professionals at the time didn't have financial modeling skills. So you had to go look for a top financial model and bring them on your team. And I was like, couldn't there be a way for actually assessing those skills. Yes this person does have financial modeling skills.
And Paul rightly said look at the CFA Institute there's mainly a multiple choice and theory based exams. Modeling is a practical thing It's a practical, it's practiclas. And so glad that look I said look where that's an Institute that's actually doing this right. And they are the Financial Modeling Institute and they're not doing it based on rules. They're saying look these are principles that you should follow and build a model. And let's see if we can validate that you do know how to build a model not the theory of it. And the way the Financial Modeling Institute does it is they give you a four hour exam where you're starting with a blank spreadsheet with some historical data, and you need to generate assumptions. You need to build a detailed model and you submit that detailed Excel based model and they go through it and give you a score and see if you pass To me there are not many exams like that where you are actually building something. And. It's amazing how they've devised this into a program and they're able to validate the skillsets of anyone that really wants to learn learn this stuff So Kudos to Financial Modeling Institute. I think it's a great thing I wish I had this growing up I wouldn't have wasted a lot of years trying to learn the best practices. Doing all sorts of things wrong for 10 20 years and then now I know the right stuff right I mean I wish I had that Yeah Starting out but yeah people now have that. You can start off the right way. And the rest is history.
Host: Paul Barnhurst
It's great. I totally agree with you especially when you said I wish I would have had it early in my career. Right I went into my first job and it's like, well here's Excel and we need this built. You start throwing it together and I look at some of the things I built now and I'm like man if I just had thought about some good design principles used color coding. Done best practice this thing would have been so much easier to use instead of going, wow I just can't wait to rebuild this and then never having time And as I like to say you know whose problem is a broken model it's the next guy's problem, right? You just kind of limp along and then the next guys stuck with it. So I'm really grateful We're seeing so much more being done to help people understand design and best practice because for a long time I think it was a little bit especially corporate finance It felt like a little bit of the wild west where you're just like anything went just get a number out there and just put it together. It led to some real you know real ugly models Like as you mentioned the one you saw right 500 entities off one just makes no sense. Next question here kind of bringing together you mentioned storytelling and data analytics. So how do you see the kind of the intersection between tools like power BI and data analytics and financial modeling? How do you bring those together?
Guest: David Brown
I'm so glad that I love data analytics And before Power BI was born I had been using it. So Power BI Is built into Excel by the way. I mean you have Power Pivot. You have DAX, you have power query. All those technologies with SQL and MDX is what formed Power BI. That's how Power BI was born a big big part of it was built in Excel. If you look at the power BI right now every single new thing in Power BI is like pulling something from Excel. If you want to know what's next in Power BI check what's Excel doing that Power BI is not and Power BI will. At the end of the day this is an excellent tool Power BI is such an excellent tool And since it's born in Excel and since we love Excel for modeling, it's like a natural mix. Now what I say is you need to use both, right?
So for me I take financial modeling as you are building this operational system. This operational system where you're putting inputs and stuff and it's bringing out something at the end of the day, generating outputs with this financial model may have 20 30 scenarios. You need to export those outputs and then import them into power BI and then do reporting with power BI. So to me they work perfectly together and that's how I build models. I build models in Excel. Detailed models then export the outputs of those kind of form the inputs for my data analytics and then that data analytics looks at the past data. Plus my modeling future data projections, to give you some really wonderful analysis right. Eventually I think you could build some simple models directly in power BI. So Power BI could be a source of building models directly but those really complex ones I think Excel still has it, but I think they can work together. They can work together very well.
Host: Paul Barnhurst
And I agree with you I've seen you know some others do that I've seen a number of situations. If you're familiar with Lance Rubin citizen modeling, and I've seen him do a lot of models where he takes the data and puts it into power BI to visualize it. It helps to bring that day together and I think we're definitely seeing more and more of that.
Guest: David Brown
I've seen some programs out there that focus on helping people understand okay you've done the model You've built the Excel now how do you visualize it How do you bring in the Power BI.
Host: Paul Barnhurst
So I agree with you I think it's great to see because right It makes it easier to tell that story to be able to visualize it versus just having an Excel. And yeah you can build graphs you can do a lot of visualization in Excel but I think there's something different of having a tool that you can automatically update and just some of those benefits of, you know bringing it to an analytics tool. I agree. So yeah kind of next question is we talk you know we talked a little about data analytics. The other thing I think we've heard a ton of over the last six months is AI. Right ever since ChatGPT came out it seems like it's all anyone wants to talk about. And then you've had Bard and so how do you see AI disrupting or changing financial modeling. Where do you see that fitting over the you know the short term and maybe a little more of the long-term How do you see that playing out?
Guest: David Brown
I mean AI is great I think for the short term you should just take AI as that take ChatGPT and AI in general as your personal assistant, take it as one really smart personal assistant. And think about when you build models right I'm building a model and One obscure industry, I'm not too sure, Ah let me go to Google no go to ChatGPT first. Hey this stuff around the oil and gas related stuff I mean there's this new law that came out How will that affect my model and my calculation around equity. Type that send that to ChatGPT. ChatGPT gives you a detailed answer and stuff. You can use that personnel assistance ChatGPT to enhance how you build models then kind of speed up how you build models. So in the short-term I see that happening. Just take it as your personal assistant. Actually ask questions like a human being. You get better answers that way. Now the second thing obviously ChatGPT, AI in general will build models for you. They're going to be able to build models in Excel. Again just like a personal assistant like some junior modeler that has built a model you need to review those models and ensure that everything around what the client wants is what that model sees. So before if you are spending 80% building and 20% talking to the client, and understanding details of what the client needs internal clients or external client. You're going to flip that you're going to spend 20% in the model mechanics and 80% when the human mechanics or talking to the client and understanding in detail what they need so that your model can be super super efficient. So AI will help you build some part of that.
But it's still left for you to understand the purpose of this and the entire purpose in general. Be able to do more of that human connection and that telling the story, and I think that's the symbiosis that's going to happen. That's the people are scared of what's going to happen. But to me I think just embrace it it is here. There's nothing you can do about it embrace it and see how you can be far more productive than what you're doing now. And that's how you can enjoy AI.
Host: Paul Barnhurst
I love that answer and agree with everything you said. The way I've heard it put by a lot of people is think of AI as a junior analyst or an intern right A personal assistant. You still need to validate that work and when I train people and show stuff I always like to show, Hey here's some situations where it got it wrong. So you can't just rely on it. You need to be able to make sure does it make sense does it look right? But there's areas where it's incredibly helpful I've been amazed at some of the stuff it can do. So I agree with you and we'll also see it in the future building models for us. And that's great cause it allows us to spend more time with the customer focus more on those assumptions versus you know some of that time building those standard things. So I'm excited for it and couldn't agree more with the last part you said of It's here Just embrace it. There's no point in fighting it. We're not going to change it. The cat's out of the bag so to speak and it's not going back in. So if you're spending brainwaves wasting time how do I fight it Instead of brainwaves spending time saying how do I work with this thing? And how do I enhance how I do my work Right So suspend time doing that. No don't no need to fight it it's a losing battle If you continue fighting Yeah. We've talked a little bit about kind of visualization the data analysis.
You've talked about how you had your storytelling with ratios. What advice would you offer to financial professionals to ensure that they are able to help non-finance professionals understand the models you build? Any advice you'd offer there.
Guest: David Brown
You need to get into their shoes right So you just need to pretend you don't know what you know and there's this thing, This thing called the curse of expertise or the curse of yeah I think that's what it's called. You have this expertise and you feel everyone should know it. How on earth can someone not know vlookup in Excel. No of course you just have to realize that look some people are not you. And so you need to come down to their level understand where they are at. And then ask yourself what would you do in that situation. Right so it's a bit difficult to do that. So bring yourself down there once you're there You're smarts are enough for you to know what to do.
And how to kind of approach getting them more comfortable with numbers. I like that Put yourself in their shoes That's great advice there to start. Just try to think about it from their position because it gives you a different perspective.
Host: Paul Barnhurst
So this next section this is one of my favorite sections It's kind of a fun section. We call it rapid fire questions. So what I'm going to do is I'm going to list seven or eight different things. And I just want you to quickly choose one So you can't say it depends because I know that everybody can give that answer for all of them.
Guest: David Brown
That's a consulting answer. It depends.
Host: Paul Barnhurst
Yeah. Oh I know I've used plenty of them. You pick one that you think should be the case most often, right I know you can always come up with that exclusion but if you had to choose one or the other for models, Which one would you choose. So I'll list all of them and then at the end, I'll give you the opportunity to elaborate on why you answered the way you did on one of them. So you can pick one and kind of elaborate your thinking. So if you're ready we'll get started here.
Host: Paul Barnhurst
Circular references or no circular references for model.
Guest: David Brown
No circular references
Host: Paul Barnhurst
VBA or no VBA.
Guest: David Brown
No VBA
Host: Paul Barnhurst
Horizontal or vertical model.
Guest: David Brown
Vertical models.
Host: Paul Barnhurst
Alright, Excel dynamic arrays in your models Yes or no.
Guest: David Brown
Yes.
Host: Paul Barnhurst
External workbook links Yes or no.
Guest: David Brown
Definitely No never never never.
Host: Paul Barnhurst
Named ranges versus no named ranges.
Guest: David Brown
Another sin, no name ranges No.
Host: Paul Barnhurst
All right. Do you recommend people follow a formal standards like a standards board like smart or others Yes or no?
See this is where the consultant comes in Right It depends but that's a difficult one. Yes and a half or something. There's a half there or no No, I don't.Maybe. Elaborate later. Yeah We'll let you elaborate on that one We'll come back to that one and then the last one here. Is what is your lookup function of choice And I'll give you four options Vlookup index match Xlookup or choose.
Guest: David Brown
Well unfortunately index match use to be very nice and vlookup is nice but Xlookup has killed All of them. But there's a model I've built where Vlookups still worked, trumped Xlookup but Xlookup for now, at least.
Host: Paul Barnhurst
All right. I would choose Xlookup as well but I could see different situations for all those. So why don't we have you elaborate a little bit on formal standards. I could tell you were struggling with that answer.
Guest: David Brown
So I think it's good to have some guidance right For people some people just don't know good practice but a bit about rules I don't like rules being foisted on people. That look in must be this and it must be that I think it's more principles right. It should be like set of principles that kind of guide you in building models. I love the smart model principles there I like FAST, FAST modeling standard. So there are standards right but they should be more guidance. Right so for example the Financial Modeling Institute you could build a model five different ways and VBA and stuff and you'll still pass the exams right?
As long as it is visually appealing As long as for example it's printable Why is the printable.. You build a model like a book. If you build it in a very well-structured way very nicely designed outlines and everything is printing nicely. You can then have your model and you imagine your model will now be a 40 page book I can be like what I built 40 pages. People prefer to review on paper and stuff. So there are some principles that you should have right. Colors how to use color style guide. You have a glossary, all that So yes and no because you could take like smart and build on that.
But don't don't say look I can't do this this way I mean this complex formula that I need to use for example LAMBDA. LAMBDA is amazing I use LAMBDA in a model recently to build automated very complex calculation. It looked complex before I would not have done that but now I've changed my mind that I can use this wonderful new Array functions. to really build complex models and then explain in detail how I did that somewhere else. So again, if I use rules, say Nope you can't do that So it is yes and no, it's not complete no or complete Yes.
Host: Paul Barnhurst
Totally makes sense I can totally understand that so I appreciate that answer. So we have just two questions left we are coming up on the end of our time. The first is we like to ask every guest to kind of give a nugget they've learned during their modeling career that they could share with our audience. So may be one nugget that they think would really help people that are trying to become better modelers.
Guest: David Brown
I did a series or something called the six principles of thinking like a financial modeller. Thee are six principles. If I was to pick one out of those six it would be visualize the model before you build it. You need to sit down and visualize the entire model before you open Excel. And every modeling project is different understand the propers and stuff. So the nugget for me is visualize your model before you build it.
Host: Paul Barnhurst
Thanks great advice there I like that I'll have to keep that one in mind. And last question If our audience wants to learn more about you or get in touch with you what is the best way to do that?
Guest: David Brown
So the best way is maybe check our websites DBrownConsulting.net. And if you go to training there you'll see some training on advanced financial modeler training We have a Financial Modeling Academy that we do is a eight week program which you'll do the Financial Modeling Institute exam at the end of that. We groom you on everything on being a top modeler and that so you could check out DbrownConsulting.net for that or you could check me on Twitter DbrownAnalyst is my Twitter handle. DBrownAnalyst I think is also Instagram and stuff I don't really use that that much. If you go to YouTube and check D Brown Consulting you see a lot of videos I created on modeling Excel. You could check me out on those platforms.
Host: Paul Barnhurst
Great we'll put all those in the show notes so people know where to find you and if there's anything else you want to share feel free to send that but thank you so much for your time today David really enjoyed chatting with you and learning a little bit more about you and I'm excited for our audience to get to learn about you. So thanks again for being on the show.
Guest: David Brown
Thank you Thank you very much. Looking forward to seeing this and also all the wonderful stuff you are doing I'm going to follow you Paul. And I'll be hounding you for stuff too. Sounds good Well thank you David Appreciate it
Host: Paul Barnhurst
What a great episode we just had with David Brown, fascinating guest. So it was really enjoyable to have him on. You know two things that I really liked about the episode that I just want to talk about here for a minute is I loved his story about teaching, having a passion for teaching how he explained how he got up on the table as an eight year old and taught the whole class. And there are two things that stuck out from that clip to me. First we're just going to listen to that clip real quick, and then I'll explain what stuck out to me.
Guest: David Brown
I love to teach right As a kid my my teaching career started at age eight. How do that start? What happened at age eight was my teacher in class was trying to teach some algebra or something I can't remember even the topic and no one was getting it except me. She tried for two days in maths no one got it and she said Hey David come and teach the class. So I kind of climbed the desk I was so short and I took the chalk and I taught the class at age eight and everyone got it. So I tuaght a different method and everybody got it.
Host: Paul Barnhurst
So I love that. At age eight he's up there teaching. So there are two things I took away from that one is find your passion, enjoy what you're doing and two be willing to put yourself out there. He was willing to get up on the desk he was willing to climb up and teach everybody. So I just kind of I love that and it shows in the way he explains things like when he went on later in the episode and explained how he explains the balance sheet and ratios to non-finance people without using a single number. That was brilliant I really love that example. And the second thing from the episode I want to briefly talk about is AI right AI is all the rage ChatGPT, Bard. Generative AI. And the reality is it's going to make our lives a lot easier. It can help us in models can reduce errors. It can provide code for us. And so I want to share, and talk about the clip where David talks about AI and how he sees it playing out in the short-term in the long-term. So I'm going to go ahead and start that clip We'll stop it in a minute and talk a little bit about it.
Guest: David Brown
So I think I mean AI is great. I think for the short term it should just take AI as that ChatGPT and AI in general as your personal assistant, take it as one really smart personal assistant. And think about when you build models right I'm building a model and stuff for an obscure industry. I'm not too sure. Ah let me go to Google no go to ChatGPT first. Take your personal assistant hey this stuff around the oil and gas related stuff I mean there's this new law that came out, How will that affect my model and my calculation around equity. I love that right there of using it as a personal assistant. And giving the example of instead of going to Google go to ChatGPT go to your Generative AI and ask it about that rule. How will help me understand that obscure thing that I don't have a lot of experience in.
Host: Paul Barnhurst
So that's one example Let's go ahead and continue listening to the clip.
Guest: David Brown
Type that send that to ChatGPT. ChatGPT gives you a detailed answer and stuff. You can use that personnel assistant ChatGPT to enhance how you build model then kind of speed up how you build models. So in the short term I see that happening. Just take it as your personal assistant I actually ask questions like a human being You get better answers that way. So I love that there is basically use it as your personal assistant You'll get better answers if you talk to it like a human. So don't be afraid of ChatGPT. Look at it as an ally as a financial modeler don't be concerned It's going to take your job. Now let's go ahead and listen to him as he talks a little bit more about the longterm for ChatGPT. So as you can see it gives you a detailed answer and stuff.
You can use that personnel assistant ChatGPT to enhance how you build models then it kind of speed up how you build models. So in the short term I see that happening. Just take it as your personal assistant I actually ask questions like a human being You get better answers that way. Now the second thing obviously ChatGPT AI in general will build models for you. They're going to be able to build models in Excel. Again just like a personal assistant like some, some junior modeler that has built a model You need to review those models and ensure that everything around what the client wants is what that model sees. So before if you are spending 80% building and 20% talking to the client and understanding details of what the client needs internal clients or external client, You're going to flip that you're going to spend 20% in the model mechanics. And 80% when the human mechanics or talking to the client and understanding in detail what they need. So that your model can be super super efficient. So AI will help you build some part of that. But it's still left for you to understand the purpose of this And the entire proposition in general.
Be able to do more of that human connection and that telling this story and I think that's the symbiosis that's going to happen. Lots of people are scared of what's going to happen. But to me I think just embrace it is here. There's nothing you can do about it. Embrace it and see how it can be far more productive than what you're doing now. And that's how you can enjoy AI.
Host: Paul Barnhurst
So I love that. What I really like is instead of spending 80% of the time on the model spend 80% of the time with the customer. You're going to have to review what ChatGPT does but in time, AI is going to build models for us that will allow us to be a better modeler. So my message when it comes to AI is embrace it.
I think he summed it up so well So I just want to take a few minutes on that and encourage you If you haven't been embracing AI go ahead and check it out spend some time. You might be surprised how it can help you in your models in your job to be more efficient. So as we wrap up this episode first I just want to remind everybody, please submit questions. You know this is only episode two, so go ahead and submit your questions.
You can send them to pbarnhurst@thefpandaguy.com and we'll go ahead and discuss them in a future episode. So we look forward to hearing your questions what you want us to discuss. You could also send a great guest suggestion if you have one. So once again thanks for joining me on this journey. I'm super excited to continue talking about financial modeling, to help bring you the best and brightest people in the world about financial modeling.
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