You can make most financial models, especially complex ones, say whatever you want them to say. It’s usually just an issue of tweaking one or two key variables that drive the model, and you get the results you are looking for. So what does this mean? There are a couple of key points here. First, don’t create an over-reliance on financial models that by their very nature can be made to say whatever you want them to say – in other words, don’t kid yourself. This is not an argument not to build and use financial models; rather it is a suggestion that you should use them very carefully. Second, don’t focus excessively on the results of the model (revenues, profit, etc) without first closely examining and questioning all assumptions, especially the key ones. In most models there are a handful of variables (assumptions), sometimes as few as one or two, that drive well in excess of 50% of the variation in the results. Consume financial models responsibly and you’ll be a lot better off in the long run. They should be used to help you pursue the right path, not to lead you to see a garden of roses where one doesn’t exist..
1 Comment