What makes a good financial modelling system?
There are lots of approaches to modelling. Not all of them function well as a system of modelling.
I have found the following to be essential in creating a coherent system of modelling.
Externalisation of knowledge
Models quickly get complicated. There can be thousands of calculations, all interlinked. It becomes difficult to keep track of it all.
Additionally, the calculations themselves can be complex. The structure of the model should help you to understand what’s happening and how the elements interlink.
When models are overly complex and inconsistently built, the knowledge about “how the model works” is only in the head of the modeller. A clear structure will “externalise” that knowledge into the model itself, making it easier for other people to understand.
Atomicity & simplicity
The elements of the system should be as small, separable and simple as they can be. This applies to both the workflow and the structure.
If your model is made up of small, simple units of analysis or calculation, it allows complexity to build up at the content level.
Each small calculation block tackles one calculation step. Blocks be combined in countless ways to deal with any modelling problem. Each step within the structure remains individually understandable.
As you continue to build your model, it's going to become increasingly complex. Building it out of simple "atomic" components will help you to manage that complexity.
The pieces fit together seamlessly.
The pieces must be simple and repeatable for a workflow to become routine. If they are not, the behaviour change will be too difficult.
The elements must fit into a coherent and interlocking process where all the bottlenecks and frustrations are removed.
You can trust the system
The pieces must be simple and repeatable for a workflow to become routine. If they are not, the behaviour change will be too difficult.
The elements must fit into a coherent and interlocking process where all the bottlenecks and frustrations are removed.
Everything is taken care of
If the structure doesn't take care of everything that needs to be taken care of, the neglected bits will irritate us, elements will be neglected, and the missed items will come back to burn us later. This will lead to "out of structure" hacks that degrade the overall system. Software developers call this "technical debt". We'll talk more about this concept later.
One of the biggest objections to adopting a structured modelling system is that it impedes creativity and prevents us from thinking for ourselves. Often repeated by those with an incentive to keep models complex and hard to understand.
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