Mindset of embracing the grey
28 August 2019 Written by Lisa Barham and Lance Rubin
Introduction to the co-author
Lisa is a co-founder of a consulting firm that works with management teams to create confident decisions backed by data. She uses financial modelling as a way to help her clients articulate their vision, bring colour through the numbers and break the strategy down into actionable steps.
Her company name, Effigy Consulting, is based around our belief that a financial model is a representation of the business: The model is a safe space where you can test a business model and assumptions rather than destroying the actual business.
She is also passionate about efficiency, helping people keep the main thing the main thing and giving teams access to the data they need, so they have expanded their consulting business into the finance transformation project space as well as providing outsource capacity to manage the finance function or supplement internal finance teams.
Why did Lisa select the topic and why is she passionate about it
The topic sparked my interest as it’s something that’s taken me a while to master. I thought writing the article would be a good way to bring together my learning to date.
To give an example of where I had to reposition my mindset, I had a CFO Services client who needed to put a budget in place. The CEO keeps herself 100% focussed on what McKinsey describes as the third horizon (a.k.a. Bill George’s True North, Bob Proctor’s C Type goal or Jim Collins’ Big Hairy Audacious Goal). Suggesting to her that she needed a ‘budget’ for the year was totally against her personal philosophy: she didn’t want anything holding her back. Once I explained that a financial model could be used to break down the vision into a series of assumptions, drivers and actionable steps, she was willing to give it a try.
The assumptions are based around her long-term vision, so bringing it back to a shorter timeframe required aggressive growth rates, which would have made my eyes water in the past. But once I let go of my need for “SMART” goals I was able to embrace the grey and build a “Financial Model for Growth” that the client loves. It’s easily my most creative engagement and a really fun team to work with!
Developing a mindset of embracing the grey is the first step in moving from being a spreadsheeter to becoming a financial modeller.
Topic and context in no more than 3 sentences
Getting comfortable with the grey can be challenging for spreadsheeters looking to become financial modellers, particularly those who have come from the black and white of the accounting profession, where we are repeatedly told we aren’t creative and indeed creative accounting could land us in jail!
However, we must and can learn to thrive in the grey, so long as we are open to changing our mindset of thinking in relatives rather than absolutes and some action is better than no action when looking forward.
Mindset has been popularised in recent times and whilst it might be perceived as “airy fairy” in our quant driven finance community, it is in fact based in the science of psychology when it first emerged in the late 19th century.
If you had to teach this topic in a class to school kids what key tips would you give them to focus on
I don’t think kids need to learn this topic, more so adults need to unlearn what they already know. School kids are inherently creative and curious, but the education system, working practices and society reduces this as we age and become more risk averse and fearful of failure.
This is being addressed in early childhood education and emerging pedagogy’s such as the Walker approach encourage creativity through play based learning.
Here is an exercise that might be useful on mindset.
If your life was a movie, what kind of movie is it?
Who are the characters?
What’s the plot line for today, in a month, in a year or in 10 years’ time?
How do you feel about your movie, what would you like to change?
What practical steps can people take now to learn more
The key in developing any skills, especially mindset is to gain knowledge and practice. Read widely and spend time with like-minded individuals (in person courses are a fantastic opportunity to expand your thinking, look for programs that build a community as well as delivering great content)
Spend time outside of the business e.g. immersed in nature or in new cultural environments in order to gain different perspectives on life and thereby breaking down biases.
Maintain a healthy lifestyle, sleep well, exercise regularly, eat a balanced diet
Make time to ‘think’ as well as ‘do’ by reflecting on where you are today and what part of your “movie” you like and don’t like.
Work with a mentor or coach and seek varying opinions of your “movie”.
Where are good places (links) to find out more on the topic
Here is a list of some useful links that might spark a few thoughts on the world around us and hopefully kick us into some action.
2. Emotional intelligence (EQ)
3. Analytical (critical) thinking
4. Active learning with a growth mindset
5. Judgment and decision making
6. Interpersonal communication skills
7. Leadership skills
8. Diversity and cultural intelligence
9. Technology skills
10. Embracing change
How important is this skill in the context of learning FM?
A successfully financial modeller needs to be able to listen to someone’s conceptual vision, extract the important elements and model the relationship between the key drivers and the outcomes they want to achieve.
Often this means working with incomplete data, particularly relevant for SME’s, where data may not be available due to immature data and IT architecture or when entering into new markets where data sets are small or non-existent.
The lack of data causes a lot of grey to emerge requiring the modeller to fill the gaps and make assumptions.
The realisation that even with accurate data no model is 100% accurate and the value is in the relative outcome compared to the absolute. It’s the value on the what-ifs and various scenarios that we can find some tangible benefits.
To get more comfortable with this grey when building a model one should focus on the following key elements:
Structure: Making sure you invest the time to build it in the simplest way possible with assumptions and outputs that allow the user to follow the logic (and spot logic flaws), following the ‘rule of thumb’ and inbuilt error checks. Look out for more on this soon.
Sensitivities: The accuracy around assumptions is always going to be grey given the nature of all models. Sensitivities can highlight which drivers have the biggest impact, allowing the user to devote more time to increasing certainty of those key assumptions. Look out for the upcoming article on this.
Scenarios: Building several different scenarios encourage the mindset that there is never one right answer and the model is merely a fancy tool to calculate the outcomes under a variety of different situations. Make sure you ready the article coming soon.
Sense-checking: Looking at the model’s outputs from 30,000 ft is often very useful, particularly when that 30,000 ft is graphic. It can paint a picture and highlight any issues and whether the overall results make sense. If you cannot simply communicate this picture and tell a story you either need to spend more time understanding it or there might be something wrong with the model.
How does all this disruption, AI and automation talk impact this topic
There is no doubt that technology and innovation is having an impact on our lives and Financial Modelling is no different. With the development of certain add-in technologies inside and around Excel it will allow the modeller to build out the structural elements quickly and accurately with a fraction of the effort it takes manually. Re-usable pieces of models can now be created, shared and replicated within a few clicks.
Machine learning allows a large data sets to be analysed and for trends to be extracted. These data sets were previously too difficult for the human mind to digest but can now be analysed and modelled so that we can gain hindsight, insight and foresight that will enable further clarity.
Both changes mean there will be more time to focus on how changes in the business trading conditions impact the financial and predictive models. These may result in potentially increasing complexity of the driver and outcome relationships.
As a result of these innovations highly sought-after skills will change in favour of problem solving, critical thinking, creativity and the ability to deal with complexity and ambiguity compared to producing the reports, graphs and financial models in a labour-intensive manner.
If you want to find out more and follow the rest of the article series be sure to download the Financial Modelling App
If you want to find more information on financial modelling and content visit the Model Citizn website.
If you want to learn more in 2019 and also understand how you can upskill in FM be sure to reach out to us or stay tuned.
I encourage you to also take a peak at my past articles on financial modelling which is the foundation of business decision making, planning and forecasting.
We have also redesigned our website to help you along your journey of levelling up in this space.
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Here are also some past blogs that might be of interest.
Lance Rubin is the Founder of Model Citizn, partner of theOutperformer, approved training provider to the Financial Modelling Institute and Group CFO for SequelCFO.
I have more than 20 years of combined experience working in model audit, investment banking, corporate finance, finance business partner and Fintech CFO.
Organisations I have worked with include PwC, KPMG, National Australia Bank, Investec Bank and Banjo small business lender.