Seven years ago, when I joined a private investment firm, I was tasked with developing a financial model for an undeveloped project. The financial results of the model would be presented to the company’s executives and shareholders. It was the first time I had to perform something similar to that.
Coming from an audit background, I wrote a thorough summary page that includes all the assumptions, complete P&L and balance sheet and cash flow charts, graphs for every line item of the financial statements, and a myriad of explanations. When I presented it to management, I could feel their disbelief. They tried to determine the reasoning for each item on the overview page. This process proved to be extremely slow and time-consuming for all.
The next day, I realized that a solid financial model is similar to an excellent piece of furniture. Even while the carpenter invests many hours in making every aspect perfect, The customer only gets to experience and appreciate the finished product. Very few customers want to know the process in full. Customers also seek out and study the information themselves. This is also true for the financial model. Although a consultant may spend long hours constructing the model and conducting analysis and analyzing it, we must restrain the urge to display all the work we have invested in our work. Instead, we should highlight the most critical aspects of recent performance and future forecasts to facilitate the decision-making process for users.
Through my experience of making mistakes and figuring out solutions, I have discovered various ways to utilize financial data visualization to help create more understandable models.
Understanding the Purpose of the Model
The initial step in constructing solid financial models is recognizing its goal with the help of these inquiries:
Who will benefit from the model for financials? Who will be the target audience? What is the level of their knowledge in the field of Excel and the subject and so on. ?
What are the user’s expectations when using or relying upon this financial model?
What will the model do to help the user make the best choice? What kind of result or KPI is the user aiming for (e.g., IRR or NPV, sales volume, etc. )?
The kinds and the complexity of financial models differ significantly between “back of the envelope” calculations to sophisticated economic models that can precisely calculate future results, synergy effects, and economies of scale. The kind of economic model users may also differ from the Excel expert who analyzes an economic model and presents results to their superiors and colleagues from other departments with no finance background. Mihelcic Bazzana offers tips and specific guidance for building Financial models within his article on advanced models for financial analysis. He also describes the various types of models. The ultimate objective is to know who the intended user of the model will assist in making the model more user-friendly.
Financial models help make decisions about providing either investment or financing products, removing or adding effects, entering market opportunities, or, even more simply, valuing assets and investments by using this DCF method. In most cases, the models are employed to make a strategic or financial decision; however, they are sometimes used to devise short-term and tactical actions or comprehend the working capital volume under various situations or circumstances. The person who creates the financial model needs to remember the goal the decision-maker wants to accomplish with the model. Therefore, visualization of economic data is essential.
It is now clear who will use the model and what the user hopes to accomplish; the consultant needs to know how the model will assist. It is essential to understand the critical assumptions or results impacting decisions. Is there a particular KPI that is crucial to make a decision? Are there any essential assumptions that will affect the final result? This will enable the consultant to bring the user’s attention to specific model elements. This, in turn, reduces “search time” and allows for a thorough evaluation of the work.
Drawing the User’s Attention to the How Part of the Model
To summarize your financial plan in a manner that lets the user concentrate on the key conclusions and assumptions. The best way to do this is to create a distinct summaries page (or dashboard). Summary pages should present an organized sequence. However, it is not an actual report or memo but an explanation in paragraphs and sentences. Other strategies should be employed to help the reader follow along and understand the consequences and causes.
In the book Storytelling Using Information, Cole Knaflic provides a detailed explanation of how to draw your audience’s attention through the help of visual clues. Alongside other strategies, Knaflic suggests using Gestalt Principles of Visual Perception “when it comes to identifying which elements in our visuals are signal (the information we want to communicate) and which might be noise (clutter).” It was established in the 20th century and based in the early 20th century when the Gestalt School of Psychology first proposed “the principles of grouping,” which suggests that the brain of humans tends to make it easier for itself to perceive the world around it. The external stimulus/object is viewed as a whole instead of an amalgamation of its constituents. The concepts of grouping that follow can be considered when designing the overview page. They include proximity, closeness, similarity, common fate, and continuity. Cameron Chapman explains these concepts in her blog article outlining how to apply the Gestalt fundamentals of designing.
This article will illustrate these ideas using a couple of examples (the information used in the tables and graphs is only for demonstration purposes):
Proximity and Similarity
The graph compares the sales of the company with those of its competitors. The deals are classified according to different categories of products. Proximity and similarity were utilized to make the chart easier to comprehend and read.
Proximity: “The law of proximity suggests that objects near each other tend to be viewed as a group.” Since the sales of similar products are displayed near each other, the reader can see that they are connected.
Similarity law states that people are inclined to “group similar items together.” Since the sales for the company of interest are displayed in the same color for various goods, they are linked and form part of a whole.
Continuity and Common Fate
The ability to illustrate the relation between the actual and forecasted numbers can be an effective tool for decision-makers. Common fate and continuity can be Gestalt principles that could help to demonstrate this relationship. The Gestalt theory of continuity states that “points that are connected by straight or curving lines are seen in a way that follows the smoothest path.”