Financial modeling is a cornerstone skill for any Financial Planning & Analysis (FP&A) professional. Yet too often, the focus is on complex formulas, intricate spreadsheets, and flashy tools. While these elements have their place, they are not the key factors that separate a good financial model from a great one.
The secret ingredient? Thoughtful design. More specifically, designing your model around the outputs, not the inputs.
Flipping the Script: Start with the End in Mind
Many FP&A teams begin their modeling process by collecting data and building out sheets, without first considering the ultimate purpose of the model. This approach can lead to models that are overly complex, difficult to understand, and ultimately not very useful for decision-making.
In contrast, exceptional modelers flip this approach on its head. They start by clearly defining the end goals and work backwards from there. Some key questions they ask include:
- What strategic decisions will this model inform?
- What specific questions does the model need to answer?
- What visualizations will most effectively communicate key insights to leadership?
By beginning with the outputs in mind, the entire modeling process becomes more focused and purposeful. The necessary model structure, relevant data inputs, appropriate level of detail, and opportunities to simplify all become much clearer.
Prioritizing Usefulness Over Impressiveness
A common pitfall in financial modeling is getting caught up in building the most intricate, feature-rich model possible. Modelers can get swept away including every conceivable input, formula, and scenario just because they can.
However, the best models are not necessarily the most impressive ones - they are the most useful ones. A model's value lies in its ability to provide clear answers to critical business questions and guide smart decision-making. Excessive complexity often detracts from this core purpose.
Great modelers deeply understand the business context and audience for their models. They include the features and details that matter for the decisions at hand, while consciously leaving out extraneous elements that create confusion.
The Power of Iterative Feedback
Designing a model around its outputs is not a one-time event, but an ongoing process. Modelers should seek frequent feedback from the end users of their analysis - the executives, operational leaders, and other stakeholders who will rely on the model's insights.
Some helpful questions to regularly ask these audiences include:
- Is this model answering your key questions? What's missing?
- Are the model's outputs clear? How could I better communicate the takeaways?
- Does this level of detail help you make decisions? What could I simplify?
This iterative feedback loop ensures the model remains tightly aligned to its core purpose as new business needs arise. It also helps the modeler enhance their own strategic thinking and communication skills by seeing their work through the eyes of key decision-makers.
Less Can Be More
As FP&A professionals, we often feel pressure to continuously expand our models' capabilities with new features and greater detail. After all, more sophisticated analysis is better analysis, right?
Not necessarily. In many cases, the most powerful financial models are relatively simple ones. Their power lies in how thoughtfully they are structured around key decisions, not in their length or granularity.
Before adding a new tab, input field, or complex formula, exceptional modelers always ask: How does this enhance the model's core purpose? What critical question does it help answer? If there isn't a compelling case, great modelers are comfortable leaving it out.
Empowering More Strategic FP&A
Designing financial models around outputs is ultimately about empowering FP&A to play a more strategic role in the business. When models are focused on answering critical questions, FP&A spends less time lost in complex calculations and more time delivering powerful insights.
The most effective FP&A functions serve as genuine thought partners to the business. Their analysis doesn't just deliver data, but frames decisions, highlights risks and opportunities, and guides strategies. Output-centric modeling is an essential foundation for this strategic impact.
Key Takeaways
In summary, while technical skills are important, it's thoughtful design around outputs that is the hallmark of exceptional financial modeling. To build genuinely useful, insight-rich models:
- Start with the end in mind - define key decisions and questions upfront
- Focus on usefulness over impressiveness - include only details that matter
- Seek regular end user feedback to maintain alignment with business needs
- Remember that less can be more - simplicity often enables greater impact
- Use models as a platform to deliver strategic insights, not just crunch numbers
Transform Your FP&A Modeling, Transform Your FP&A Impact
Is your FP&A team spending more time navigating complex models than driving strategic decisions? Evolving to an output-focused modeling approach can be transformative, but requires a mindset shift across the organization.
At Nexteam, we specialize in connecting companies with elite FP&A professionals from Latin America and Eastern Europe who combine world-class technical skills with strong business acumen. Our comprehensive vetting ensures you get the strategic thought partnership you need, whether for dedicated full-time roles or project-based support.
Contact us to discover how partnering with Nexteam can help you build a world-class, insights-driven FP&A function that takes your financial modeling - and strategic impact - to the next level.