CFO Talk – How CFOs are Using Models to Create Value: An Interview with Lance Rubin and Giles Male

Steve: Welcome to CFO Talk. Joining us today are Lance Rubin and Giles Male partners at Full Stack Modeller. Let’s jump right. What is the most effective way CFOs are using models to create value for their companies.

Giles: We see models used in two areas. One is this sort of reporting, backward looking, number crunching area, still heavily reliant on Excel. I think where it’s used really well is where that process is made as efficient as possible. So turning the wheel month by month is made as automated as possible. That leaves more time for the value adding insight work that a CFO can do.

Then you get into the forward-looking side, the more exciting stuff. When that’s done well, it’s through really robust models, Excel models usually in my world, and that is really good scenario modeling, really good sensitivity analysis, maybe getting into the world of Monte Carlo simulations.

Steve: With Covid-19 and the pandemic, people are moving from monthly models to weekly models. How have you seen that impact in your business’s and with your clients? And, how are those problems getting solved?

Lance : The shift to more forward looking models is accelerating. Backward looking is useful, but we know that one of the biggest challenges CFOs face is forecasting the future. If all you have ever done is growth rate based forecasting – for example, taking last year’s number times a percent, then you very quickly realize that is completely flawed approach in a pandemic. The rules have changed. Business models must change. What happened last year, in fact, even what happened over the last few months is almost irrelevant. Things are changing so quickly management teams have been forced to make big decisions more quickly. The frequency of modeling has become a lot higher and the dependency on modeling to make really big decisions has also increased. These are not just decisions about price changes or tweaking things. These are do we need to furlough half our staff? Or should we invest in going virtual? Or what are we going to do with our lease that’s going to expire? Should we renew it or should we just all work from home for the next year or two years? These are big decisions. They need to have a model. Otherwise it’s sort of ‘back of the fag packet’, shooting in the dark sort of stuff. And you know the results when that happens?

Steve: Are you seeing an expansion in modeling for decision making and the way people are using that tool to make more decisions, not just the forecast and budgets and things like that?

Lance: Yes. The reason for that is that the answer is not in the forecast. The answer is in a tool that helps you to look at many forecasts, many different options of the future. In this world of uncertainty and gray, you need a model to really help you stress test all those different scenarios. There is a great saying by George Box, all models are wrong, some are useful. A main goal of the CFO should be making sure they find the useful ones.

We are currently working on a very large redevelopment of a property asset, which has largely been a retail property asset with cinemas. Of course, who is going to the cinema at the moment? Who is going into food courts? So we’ve been engaged to redesign a two hundred million dollar property site and rearrange it in parallel by looking at the development cash flows and the development Gantt charts and timing. We have to do all the financial modeling on the options for the asset with different investors. You can see how this can become very complex, very quickly. These whacky times have created a lot of urgent phone calls asking for our help. It is a great time for modelers. But also, it’s a great time to really capitalize on this as educators and trainers to help businesses and finance leaders understand what great modeling can do for them.

Giles: To give you a slightly different angle from the small and medium enterprise (SME) world in the UK. We have been working with a brewery in the UK who during lockdown had to completely pivot their business. The modeling was not amazingly complex in terms of debt and equity or using technology to enhance Excel. What they needed a pretty robust and simple cash flow forecasts. The scenarios were so meaningful because they cannot continue to make money with their retail or wholesale contracts. They are going to have to work locally. They are going to have to distribute products in a different way. It was not the standard easy scenario with 10 percent more revenue or 10 percent more costs. It was pivot their entire business and see what their options look like through robust modeling.

Steve: The number of questions we have to ask and answer has been growing through this crisis. The plausible answers frequently require the pivot Giles is referring to. That is where I think you guys and what you do becomes so valuable for CFOs and companies in general.

Lance: The idea with good models is that if you are switching your drivers and your assumptions, you should have that confidence that nothing breaks along the way and the results can be used to aid in decision making. That is the key bit.

Steve: Well said, Lance, and a perfect exclamation point on a great discussion. With that we’ll wrap up today’s CFO talk. Thank you for joining us Lance and Giles. I sure appreciate it.

Lance/Giles Pleasure. Thanks, Steve.

Steve CFO.University is a community of member scholars, companies and trusted advisers committed to the professional development of chief financial officers.

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