SMART

SMART – Best practice financial modelling methodology

SMART is a globally acclaimed financial modelling methodology, developed and based upon the founder’s deep knowledge of the challenges of transaction and strategic decision environments and the rigour required of the associated financial modelling.

Corporate culture has evolved to adopt the power of a widely accessible desktop, spreadsheet powered decision tool – the “financial model”. Unlike other professional practices such as accounting, law or say engineering, financial modelling is not a regulated or licensed service which is surprising given the incredible range of applications and end user requirements. This situation has created fairly low market standards for accuracy, transparency, consistency, flexibility, presentation and computational efficiency – in one word, low “quality”. By adopting an accepted methodology analysts at all levels can benefit from the lessons learned by the wider industry over the last 20+ years.

The current situation is a problem because the decision maker, the CEO, CFO, treasurer, project director needs supreme confidence in the financial model for making the important investment decision. SMART enables the decision maker.

When formulating SMART we chose not to try and solve everything and avoided a quasi-programming protocol – but instead focussed on the three pillars of

• Transparency – architecture and calculations can be easily understood and checked
• Flexibility – the system can be readily updated in a timely and low risk way
• Presentation – structure, results, restrictions and intent are clear with minimal instruction

SMART principles

SMART enables end-users to address the quality issues and powers our consulting team for the delivery of world class financial modelling solutions, any industry, any country, any situation.

There are many benefits of modelling the SMART way, these are primarily

• It facilitates the development of robust and flexible financial models that will achieve the objectives of all users independent of industry sector.
• Reduces the inherent risk introduced to a financial decision by the analytical frameworks own inadequacies
• Increase the confidence in the results of both the user and end decision maker
• Model audits can be performed, more effectively and typically at lower cost
• Model productivity is boosted, meaning more effectively deployed analytical resources, less frustration and happier modelling!

SMART stands out as being a practical methodology that focuses on the benefits to end user rather than speed of programming. As an example, a SMART model contains no formula which could be deemed complex, formula structure encourages the liberal use of rows and first principles calculations and discourages condensed formulae and complexity to save spreadsheet depth.

A SMART model is easy to navigate through clear and concise worksheet architecture, generously laid-out and titled rows. To analyse a specific section the user does not need easily out-dated hyperlink sections but more to naturally ‘read’ the model in front of them.

A SMART model can be readily adapted as the transaction specifics or the strategic options change, being able to implement the changes without the sinking feeling that you are about to perform open heart surgery on a tangled mess. The philosophy of calculations broken down into their fundamental building blocks and generous error checks mean that it is clear what to change and straightforward to check and present. Scenario flexibility and management is a key consideration when building or altering a SMART model, if it would be useful and is practical to keep new information as an option then we integrate it into the Scenario Manager. This approach allows retrospective assessment of different options as well as the ability to easily switch between scenarios for testing purposes.

• 
  Presentation: consistent sheet structure
• 
  Flexibility: powerful scenario manager
• 
  Presentation: improve navigation through well-defined hierarchy of headings
• 
  Transparency: break up long formulae
• 
  Flexibility: using conditionally formatted binary flags
• 
  Transparency: no hard coding

SMART is not the only financial modelling methodology, there are several others which prioritise different aspects but are also very valid in their own right. We have chosen SMART, it works fantastically well in our corporate and transaction environments.