3 ways Financial Analysts get to answers without modeling
Having a well-thought-through Financial Model is vital to evaluate big decisions. Discounted Cash Flow or Customer Life Time Value models are great for evaluating significant investment decisions.
But sometimes, there is no time for that.
Sometimes, we need to answer a question on the spot. Your CFO or General Manager may have a quick question during a big meeting. Or the deadline for a project is approaching, but your model shows results that don’t seem to make sense. Or a colleague sent you a model she built, and you need to quickly decide whether you can trust the results or if you have to spend a lot of time reviewing it in detail.
Those are all situations when we need o make back-of-the-envelope calculations quickly - in a few minutes or sometimes in seconds.
It almost looks like a magic trick when an experienced Financial Analyst can immediately estimate the result of a significant change to a model or can look at a table and say within 5 seconds, “that number over there, it doesn’t make sense”.
But it’s not a trick, and anyone can learn to do it.
Here is how:
1) Know your numbers.
You need to be intimately familiar with the metrics that are essential to the area of your business.
For example, how much revenue do we have on average per month or per day? How many units of our product do we typically sell? What’s our gross margin or pre-tax profit per SKU? Then, if you know a few numbers by heart, you can use that to estimate other related figures quickly.
2) Have rules of thumb for critical sensitivities.
How does the NPV of my project change if I lose 10% in revenue? How about if COGS are 10% higher or expenses? How much lower can margins be until NPV becomes negative? How much Marketing investment can we have next year until profit margins become unattractive?
3) Trust your intuition (but check afterward)
Once you are familiar with your numbers and know the main sensitivities, trust yourself when a number “doesn’t feel right” or when you “are sure you know the outcome” of a change.
This is because our subconscious mind can run complex calculations much faster than the conscious part of our brain (see the brilliant book "Thinking Fast and Slow” by Nobel laureate Daniel Kahneman).
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