Financial Modeling In A Company

By Author: Anthony W Bills
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Financial modeling in a Company
Introduction
Financial modeling can be described as a task of building an abstract representation or a model of analyzing a financial decision making process. Financial model is a mathematical model that is designed to represent a simplified version of financial situation of a given company. The financial model is used to represent the performance of the financial performance of a project, company or a portfolio of a business. The modeling helps in understanding the strings and the weakness in the tools that have been used in formulating the model.
Steps followed in building the financial model
There are several steps that the group followed in developing the financial model. The following are the step that we followed:
 Data collection- This is where it all started. There was a need to collect data. The data collection played a vital role in having the information that would help in analyzing the question and knowing the growth, investments and the need for money.
 Calculations- The calculations make it easy to understand how the project ...
... would be funded and whether there would be any benefit to be brought about by the financial modeling. In calculating the benefits that could be brought for the by the model, Microsoft excel was used and the main purpose was to generate the data to aid in distinguishing the benefits of the model.
 Deciding the layout- When putting the model plan on excel, the first step was deciding on the layout of the financial model of which following of the questions that need to be answered was vital and crucial. The questions that needed to be answered were:
1. How much information that was supposed to be entered in the model. This would help in breaking the model into small parts incase the model is big.
2. What are the assumptions that would be made by the model. For better assumptions, the model would include subheadings to aid in distinguishing different parts. (Ryan et al, 2009).
Advantages of the tools used
There are many advantages that are attributed to using spreadsheet compared to other tools of making a financial model. Spreadsheets are easy to use and its easy to distinguish where there are errors that have been made. The reason why spreadsheet was considered best is its availability and easiness in using. Once a small error is made, there are chances of rectifying the errors.
Read & Baston
Read and Baston concentrate on the spreadsheet model. The spreadsheet is a strong and flexible DSS tool. The model is used in most businesses and organizations because every important decision of any organization is backed by the spreadsheet model of the financial projection (Brady and Monk, 2008).
It’s believed that, after the survey that was conducted by the pricewaterhouseCoopers in 1999, it was found that major problems occurs in most companies with large amount of money at stake because the concerned people didn’t have a formal training in good modeling techniques therefore placing the business at a big risk.
For better understanding of the model, is good to first to define the objective of the model and the calculations that are involved and then designing a spreadsheet for easy and better understanding. The spreadsheet modeling Best Practice act as a guide for developing a quality spreadsheet that will be relied on by anyone who uses or relies on the spreadsheet model to make his decisions. For the effectiveness of the model, it has to show clear objectives of the model, define the calculations, show a good design practice, test and understand as well as presenting results from the spread sheet model (Gross et al, 2006).
The spreadsheet model is easy to use, its more better compared to other models as it can be used for analyses as well as getting the results. The model focuses on the important issues only, thus it saves time. The model is easy to understand compared to other models. Due to its openness, its easy to understand and recognize the problem that is affecting the business, on the other hand, the use of models place the business well ahead its competitors. The model is globally accepted tool for calculating the results and also increases the influence in negotiations. The model is software aided and thus is easy to develop and use (Gross et al, 2006).
Solving real life problem
When solving a real life problem in a business that has been failing and ragging behind its competitors, spreadsheet model would be the most appropriate. The spread sheet model would be used to detect the problem, analyze it and also aid in having a concrete decision. The business that seemed doing well in the market but always had less monthly turn over month after month. Through the use of the spreadsheet model, the problem was recognized as the concerned people in the finance department did not calculate all the liabilities and were not analyzing the market reports.
Since the spreadsheet model requires the collecting of data in every corner of the organization, analyzing it and coming up with a clear decision that would be helpful in propelling the business ahead of its competitors. The spreadsheet model gives no chances to make errors as once you understand the model, other functions and the use of the model is as easy.
Decision Support System
The decision support systems consist of a wide class of computer-based information systems that include the knowledge-based systems which are used to support the decision-making activities. On the other hand, the decision support system is also regarded as a way of modeling data and making a quality decisions based upon the system. Making the right decision in business always depend on the quality of data and the ability to sift through and analyzing the data to find the perfect treads in which solutions and strategies can be arrived at. The DSS or decision support system are the computer applications combined with human components that are able to sift through large amount of data and pick between the many different choices (Sprague et al,1993).
Most people think that the purpose of the DSS is a special part of the business; other companies have incorporated the process as their dairy operating activity. Example, some businesses prepare and analyze their sales report constantly, analyze their balance sheets as well as their forecasts and update them as well as their strategies through the evaluating their current results. The DSS has an important role in business but the data and the decisions that are made by the system or through its help keeps on changing and requires update constantly.
The key to the DSS it collecting data, analyzing the data and try making a sound decision from the data that is collected or making strategies from the analyzed data. In the DSS, it does not matter whether the people, computer or the database is involved; however, this is process of taking row data which will aid in the decision making. It’s always significant to have in mind that, though the computers and other artificial knowledge is being used together with data, it’s the human responsibility to execute the strategies to have a useful hypothesis at the end (Sprague et al,1993).
Decision making models
It’s very important to know that in the DSS field, there is no any single universal acceptable model, there are many different theories trying to vie for supremacy in this wide field. Since there are different working theories that in the DSS topic, they are classified in different ways, for example, the DSS model that is with the relationship of the user in mind must possess passive, corporative and active qualities. The DSS model that are involved in collecting data only are regarded as passive models, they don’t suggest any specific decision for they only provide the data. The Active decision support system model gives the data, processes it and also gives the possible solution based on the data collected. Though there are so many different active models, different companies are not able to trust the computer without any human interventions. A corporative DSS is when the computer system collect data, analyze and then present the data to human to aid the system in refining the data. In corporative model, human and the computer component work together to have a conclusive decision as well as the solution (Silver, 1991).
Holsapple model
Holsapple model of decision making process deals with the process of the decision making combining it with knowledge. DSS being the use of the computer system to work on the data, it requires human knowledge for the system to provide précis and better data that will aid in making decision. The purpose of the model is to aid and facilitate the human knowledge in making the right decision through the supplying of adequate information during the knowledge or the intelligence phase.
In Holsapple model, the primary purpose of the DSS model is to help in solving the already known problem. The system will be used to break the problem into sub-problem and this would make it easier to find a solution. In this regard, the user’s knowledge is required first to recognise the problem before it’s presented to the system.
From the knowledge management perspective, the decision making is process of manufacturing knowledge; the purpose of the DSS is to help in managing the knowledge. The system enhances the users’ competence in representing and in knowledge processing.
The Holsapple model shows how the DSS supplements the human knowledge in skill management with the computer based ways of knowledge management. The DSS purpose in this model is to accept the fed data, process it, stores it and present it to the decision that is being made. The system capabilities are defined according to the type of knowledge which it can work with (Clyde et al, 1996).
The Holsapple model is a good model to work with on an already recognised problem. It’s a strong model that will aid the human knowledge in making quick and precise decision as this will represent the available decisions. The model would not be suitable in trying to analyse the problem and detecting where the problem is. If the concerned person is not sure of the problem, it would be wise to consult other models because this could mislead him more (Clyde et al, 1996).
Conclusion
Business process model is a better way to deal with business problems through data collection, processing, analyzing as well as formulating them to have better results. The decision support system aids the human in dealing with life problems and making it easy for business affairs. The DSS requires human input and knowledge for it to have better results. For the DSS to have better results for the business, it has to be incorporated to every day affairs of the business.
There are different DSS models that are used in different business and which require different applications. The Holspple model requires the human first recognize the problem before using the system to solve it. On the other hand, the Spreadsheet model aids the human in recognizing the problem, analyzing and coming up with a clear conclusion or decision.

References
Brady, J. and Monk, E. (2008), “Problem-solving cases in Microsoft Access and Excel”, Thomson.
Clyde W. Holsapple, W. and Andrew, W. (1996) Decision Support Systems - A Knowledge-Based Approach, West Publishing Company.
Gross, D., Akaiwa, F. and Nordquist, K. (2006), “Succeeding in Business with Microsoft Office Excel 2003”, Thomson.
Ryan, K. Stephen, S. Lee, E. (2009) Business Process Management (BPM) Standards: A Survey. In: Business Process Management Journal, Emerald Group Publishing Limited. Accepted 2 Dec 2008. To appear Volume 15 Issue 5.
Silver, M. (1991). Systems that support decision makers: description and analysis. Chichester ; New York, Wiley.
Sprague, R. H. and H. J. Watson (1993). Decision support systems: putting theory into practice. Englewood Clifts, N.J., Prentice Hall

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