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Whitepaper
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The case for Advanced Financial Modeling Software
Summary Advanced financial modeling software (AFMS) offers significant advantages over spreadsheet software and generalized programming languages for certain applications. It boosts programmer productivity and results in durable financial systems. Used for the right type of problems, it delivers immediate and lasting benefits to both developers and users. This white paper takes a look at when you should consider using AFMS, and builds the case for adding this powerful tool to a company's arsenal of financial software. AFMS was first developed for mainframe computers in the mid to late 70's. Some of the early packages include Prophit II, IFPS, and FCS. The software was generally sold as part of a timesharing service, and users paid for "connect charges" and some measure of CPU utilization. A company could spend anywhere from $1,000 a month for a simple application on up to tens of thousands of dollars per month for something more complicated. After a few years of explosive growth from external timesharing services, companies started purchasing the software to run on internal mainframes at prices of $50,000 and up. Around 1980, VisiCalc and RCS appeared on the Apple II computer, and the mainframe based financial modeling software got its first whiff of competition. These were followed by Lotus 123 and DSS/F for the IBM PC in the early 80's. Microsoft toyed with a product called Multi-Plan, but phased it out and put the effort into Excel instead. Several mainframe vendors created PC based versions of their products. Micro FCS appeared in 1985, as did Micro IFPS. But the parent companies just couldn't bring themselves to cannibalize their rich maintenance and timesharing revenue streams, and these and other mainframe AFMS languished. A product called Javelin appeared in 1987 amid much hoopla - and reported sold 100,000+ copies before fizzling out. Lotus came out with a product called Improv in the early 1990's, but they couldn't decide if it was an English based financial modeler, or a sexy data analyzer - and it too fell by the wayside. Today the market is fractured. Most companies are using Lotus 123 or Excel for financial modeling. Some companies are using multi-dimensional databases and OLAP (on line analytical processing) to provide some of the analysis typically performed by AFMS. There are specialized products for consolidation such as Hyperion or WebFact. ENCORE! for Windows is the only Windows based commercial software package that touts itself as Advanced Financial Modeling Software. A financial model is a mathematical representation of a company's business. It may relate to the company in its entirety, or a subset. It is used to:
Some industries benefit more than others from financial modeling. Financial modeling would probably not be part of the arsenal of the manager of the corner gas station. But it might be for the owner of a chain of gas stations. And an absolute necessity for the oil company supplying the corner gas station. A financial model can be simple. For example, a budget for the radiology department for a hospital can be put together with a financial model that forecasts the salary and benefits of the people in the department, plus cost of supplies based on volume of X-rays. Or very complex. An economic analysis of an oil company's exploration and development projects might involve 500 - 1000 variables for each project, and then require special logic to roll up hundreds of projects into an overall strategic plan. Things like Cost Recovery and Taxation may involve drawing "ring fences" around groups of projects. And, of course, there has to be some way to ensure that all projects are using the same premises for oil prices in order to generate comparable results. Accountants, financial analysts, controllers, and other financial workers in corporations spend countless hours crunching numbers and preparing reports. Management reporting and financial reporting are sometimes indistinguishable. On the financial reporting side, especially for public companies, accuracy is key. Financial modeling software has always been useful for developing financial reporting systems because of the model metaphor. The output of the model is a report. The model can be adjusted and tweaked to do any kind of analysis needed in the report. Financial modeling can be applied to historical analysis, not just future projections. What is Avanced Financial Modeling Software?
Here are some characteristics of modern day AFMS: We can say some things about the type of applications that are best handled by AFMS:
It's really part of an overall strategy, not just a go / no go decision on each single application. Perhaps you go with one lead model developer who develops proficiency in AFMS and several lightly trained analysts who rely on him/her for support. Or perhaps a consultant to develop the initial models, with in-house users gradually taking over maintenance and new development. The strategy is to introduce AFMS as a tool, and then defer to the judgement of the well equipped team to decide what tool to use for a specific application. It is almost always better to train a financial person in the system aspects of an AFMS than to train a computer expert in the financial concepts. The computer expert can learn the AFMS quickly - after all, it's just another language. But the business practices and financial concepts take much longer. The financial person will struggle a little bit more learning the AFMS, but be far more effective and productive when developing real live financial models and financial analysis systems. You can also use outside consultants. Nowadays, with electronic exchange of finished models and test data, it is practical to rely on experts geographically dispersed. The key is to find consultants who are responsive, reliable, trustworthy, and cost effective. |