What Can Albert Einstein Teach You About Financial Modelling?

“Everything should be made as simple as possible, but not simpler”

Albert Einstein
Albert Einstein

This famous quote gives us a clue to the method behind Einstein’s genius. Simplicity.

And when it comes to financial modelling and reporting, keeping things simple is a lesson that all organisations can learn from.

Einstein was a man who practiced what he preached. His iconic formula e = mc² describes the very nature of the relationship between energy and matter. Yet look how simple it is. It’s the epitome of simplicity, the ultimate in elegant thinking.

So your business may be complex, but it does not mean your financial models and management reports need to be complex too.

So why is complexity in financial modelling an issue? And what benefit do you gain from applying the principle of simplicity?

The benefits of simplicity

The goal of any financial model or management report is to communicate information to improve decision making. Keeping the message simple has many benefits to your organisation:

  • More accurate information – the bigger and more complex a spreadsheet the more likely it will contain errors.
  • Easy and more pleasant to use – simple is pleasant, complex can be frustrating.
  • Clarity of key messages – no ambiguity or information overload.
  • Better decision making – more accurate information means better informed decisions.

So what is the problem with complexity?

Problem: important information gets buried

When the meaningful information is buried beneath an avalanche of unimportant (or unintentionally misleading) information, you run the risk that your audience misses the key message. And not only that, you’re making your reader have to work harder to get it. You will have received those mammoth reports yourself. The ones that take an age to digest and where it turns out it could have all been said in two simple, crisp pages.

So shine a light on the useful information

Strip out all non-essential data. If it’s not important to the message and your future decisions, why does it need to be in the report or recorded in the model? What exactly is it that you’re trying to communicate?

If you’re unable to physically strip data from the spreadsheets, use the hide function in Excel to make information more digestible (as well as rows and columns, you can hide entire tabs). The raw data is there for those that need it, and hidden for those that don’t.

Not only will your reports become more readable, your audience will be grateful that you have directed their attention to the most important information – saving them time and frustration.

Problem: Spreadsheet models try to do too much

There is a natural tendency to make financial models large and all encompassing – a desire to create the one spreadsheet to rule them all. Resist this urge. The larger a spreadsheet gets, the more likely it is to contain mistakes, the more confusing it becomes and the more frustrated the end user gets. All the things that hamper great decision making.

Keep the end user in mind:

  • Overcome the temptation to include information ‘just-in-case’ or because you’re just ‘covering your back’.
  • With the information you have to include, create an orderly structure with tabs to display the information in a logical order. Always aim to make the data as accessible as possible.
  • For large spreadsheet models, include an executive summary or a visual dashboard of the key information. This means those that only have time to glance through the data can do so effectively.
  • Visualise data to aid understanding and speed up information absorption. But don’t make things more complicated with visuals. Be sparing with colour and avoid loud tones at all costs. Go for simple diagrams that aid understanding and keep these visuals consistent across tabs.
  • However, diagrams are not always the best option, sometimes a sentence or two can describe the important relationship in a complex diagram. So why not keep it simple and just use words?

So a spreadsheet that follows the principle of simplicity gives the end user what they want, when they want it. As opposed to everything they could ever want, even when they don’t need it.

If you can’t explain it simply, you don’t understand it well enough

Simplicity is not just about the design and creation of your spreadsheet models, but also its concept. Never start a spreadsheet without first being able to define in no more than two sentences why you’re creating the model. What is its purpose? Now define that purpose simply.

However, a financial model or management report should explain itself. Yes, you should be including documentation to ensure that your audience understands. But you’ll know when you’re applying the principle of simplicity when the message is clear and requires little or no explanation. The reason for the model’s existence should be self-evident.

In Summary: smart minds are simple minds

There is beauty in simplicity. In business this means information is clear, accurate and easy to use. So review your spreadsheet models and reports, always looking for ways to simplify. You can stop not when you have nothing more to add, but when you have nothing more to take away.

Going through this exercise will help you keep the final report or model lean and focused. You will cut out the superfluous information because you can more easily see how it does not contribute to your original goal.

Besides, if Einstein can describe the way the universe works with a few letters. Surely you can make your financial models simpler and easier to understand?

Jeff is also the expert training instructor for these upcoming Financial Modelling Courses.