Below is a extract from a LinkedIn discussion we had with why financial models are difficult to construct and why there are issues around financial models.
Hello all, would like to know few of the challenges faced by you during Financial modelling and how did you overcome
The main problem is the client 🙂 If it wasn’t for them all Financial Models would be perfect!
We find that the client not knowing what they want/ need is the major source of problems. This includes the outputs but we are finding that even the inputs, in which they should be the experts, we are sometimes having to guide them on realistic inputs without actually specifying the correct inputs ourselves.
Associated with the above is the clients budget expectations. The general assumption seems to be that a financial model can be thrown together in a few hours and shouldn’t cost much.
The key is to get as much information from the client in the beginning.
Agreed. What I find is that often the financial model starts as a thought process and testing tool. So they try this and that until it makes sense. They use it as their piece of paper and calculator to think through the problem.
The issue with this is that they are then unwilling to pay to build a proper model built from scratch based on the EVENTUAL solution. This is why many financial models have bits and pieces which used to be important but are now redundant to the model (but cause the errors that happen in models).
In the ideal world we would build one model which is used to test logic and illicit answers from the client. Effectively a live specifications document. Then based on the discovery in this process build a financial model. Budgets don’t generally allow for this though.