Can Financial Modeling Be Automated? Find Out Here (2024)

The most often asked question when discussing financial modeling is “can financial modeling be automated?” These tasks necessitate a considerable amount of effort from analysts, who fill financial models using past and future financial data. Financial models also involve a thorough valuation study that determines a price objective for the underlying firm based on projected cash flows and trading multiples. It takes time for analysts to construct a tool for the rating technique and compile the necessary data, which also applies to the creation of shadow and credit evaluation models. The main concern about the future of financial modeling is “Can Financial Modeling Be Automated” because we have been using spreadsheets to create financial models for decades. This article addresses the same topic, “Can financial modeling be automated?”

Do you wish your company had greater financial planning capabilities? Perhaps you desire a more effective approach to financial planning that cuts out unnecessary labor and frees up your staff to focus on more crucial projects. Do you have any doubts over whether “can financial modelling be automated?”

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Acuity Comprehension Partners offers the Automated Financial Model Builder, something that automatically extracts financial statement data from corporate filings and reproduces pertinent data points in conventional MS Excel custom functions, to assist analysts in significantly reducing turnaround time and addressing the aforementioned operational challenges. Additionally, it simplifies the tedious and time-consuming task of looking up financial data from several business filings and modifying Excel models with information.

The requirement to establish Finance and Operational procedures that seem to be appropriate for the purpose and maintain their effectiveness as the firm expands is one of the biggest problems a fast-paced expanding start-up has. This is very important for creating financial models and budgets. The question “can financial modeling be automated?”

When there are more than ten employees, an excel sheet won’t be as effective as it was when there are just ten. To create a framework for any business, both planning and forecasting are crucial components. It means avoiding excessive risks and maintaining focus during months with higher volatility, which start-ups and sized businesses know can occur at any time.

You specifically cannot afford to make mistakes in any of these two aspects. One example of their usage is:

Giving a firm foundation for a business’s financial identity
Enabling more informed decisions for the company, both financially and operationally.
Being a crucial source of information used to portray a company’s financial situation to potential investors or lenders‍.

So how can companies improve these procedures? Automation is the key.

Many businesses continue to use Excel or Google Sheets as their go-to spreadsheet programs. We can see why they were first picked because they are well-known, easily accessible, and reasonably priced. However, software solutions for financial models have greatly improved. The program is user-friendly, lowers the possibility of human mistakes, and automates several procedures because it was created solely for this reason. They can also offer resources and information that your typical spreadsheet is unable to.

One of the most important tools available to financial analysts is probably financial modeling. It is a method for clearly illustrating the anticipated financial success of a corporation. Its ability to help businesses make better financial decisions underpins its significance. Important financial and operational data that may be utilized to assess how firms should respond to certain economic situations are mathematically represented.

It is organized around the three primary financial statements of accounting—the financial statements, balance sheet, and cash flows including the numerous diverse facets of financial accounting. These spreadsheets provide information on the company’s historical financial data, project its financial position, and calculate its return on investment.

Let’s first explore the question of can financial modeling be automated before getting into the specifics.

Can Financial Modeling Be Automated?

Some modelers believe that automation will someday get to the point where it can create fully complete financial models and offer guidance and assessment based on them. Others hold a less positive perspective of technology’s capabilities, questioning how a device will be capable of reading and comprehending a business plan, asking for more clarification, and translating this information into a financial model which quickly and precisely captures the dependent variable and their relationships, then generate scenarios and insightful analysis.

Whenever there is a substantial quantity of previous data available to train and develop the models on, current automation approaches have been fairly effective in developing highly sophisticated prediction models. AI has also been effective in creating prescriptive models, which examine a wide range of possible outcomes to choose the best course of action.

Which Software is Utilized in Financial Modeling?

Let’s first examine how software is utilized to create financial models before we compare Excel to automation in financial modeling. Making an abstract depiction of a current or future financial occurrence is known as financial modeling. To construct the abstract model, a financial model is a computational tool that may be utilized in programs like Microsoft Excel.

Businesses should employ financial modeling since it may be used to forecast a company’s future financial performance. A financial modeler uses the company’s previous achievements while building projections about the future to forecast financial success. Financial modeling may be done in one of two ways. The conventional approach calls for the use of Excel spreadsheets. However, businesses are beginning to accept the idea of automating the financial modeling process.

Excel vs Automation – Developing and Creating Financial Models

One must carefully weigh the pros and cons of utilizing Excel as well as other software which automates the majority of labour while creating financial models. The issue of which is superior is still being discussed by financial analysts and many other consumers of financial data. Let’s compare them with one another to see how they vary considerably:

Customization

Excel has a lot of customization options since a human modeler manages it. Excel’s ability to create models from scratch gives users a great deal of freedom to organize their models any way they see fit. Additionally, they can structure the model according to the requirements of the company they are modeling for.

For instance, if the model needs to handle some asset-specific properties, Excel might be the only way to do it. By contrast, utilizing particular financial modeling software, that has already been pre-programmed, may limit the degree of customization.

Structured Result

When working with a particular model structure, financial modeling software is most useful. By using tools that are mostly intended to prevent mistakes, the human modeler can lessen the possibility that they will occur.

However, employing an Excel model as opposed to an automated method increases the chance of making mistakes. So, using financial modeling software is a superior strategy if uniformity and accuracy are important.

Improvement of Analytical Abilities

However, an Excel model is superior if a modeler is more concerned with comprehending a business. This is because using Excel necessitates a rigorous calculation procedure for almost everything. Although tiresome, compiling various financial documents may substantially improve one’s understanding of the company.

Imagine for a moment that the modeler had been using a computer program. Using the business’s financial statements, working capital, and outlook, the computer would automatically disclose a net current value (or another desired outcome). Although it saves time, the modeler would not learn much about the industry itself.

Risk Assessment

While specialist modeling software may not always teach a modeler about something like an enterprise, it is often more effective than Excel at managing risks. Excel can be used to perform a sensitivity analysis, but since the entire procedure is manual, there is a higher chance of making mistakes or getting the wrong findings. Financial modeling software, which gives more precision, makes it easier to carry out risk analysis techniques including sensitivity analysis.

Rational Interpretation

A financial modeler has to use a certain logic to identify a result to anticipate effectively, which may only be achievable in Excel. Using an Excel spreadsheet, the analyst may look at the data for a firm, make certain assumptions, investigate how the financial statements relate to one another and eventually compute the formula.

Applying logic necessitates evaluating the link between the dependent variables, which may be quite challenging to do when utilizing the software. It’s not always feasible to study the sequence of individual processes since some financial modeling software employs built-in logical tools.

Visual Illustration

Financial modeling includes a significant amount of visual representation. Excel is excellent at displaying data in a graphical format, although there could be other, outside tools that are even more effective.

Complicated Data Handling

Excel has so far been a successful tool, but there are several areas where it lacks, especially when dealing with big data sets. However, massive and multidimensional sets of data may easily be computed using financial modeling software. The majority of tools let modelers design and alter the rows and columns arrangement of the model depending on the circ*mstances.

Automated Financial Modeling Advantages

The development and maintenance of a firm depend on sound financial models. More firms are benefiting from automation as AI is becoming increasingly standardized in Corporate Performance Management (CPM) systems. Today, we can automate difficult processes like the collection and processing of huge data

A financial model can be automated for the following reasons:

Eliminates busywork and enables staff to concentrate on higher-order activities.
Greatly enhances the standard of resource planning techniques.
Improves decision-making by offering precise and quick calculations.
allows businesses to make financial choices more quickly and with greater information.
Streamlining the tasks performed by corporate executives and financial analysts

Automating your company’s financial model offers several advantages that far surpass the time and effort needed. Automating business financial models will therefore produce successful outcomes and long-term profitability if done correctly.

Tips to Automate Financial Modeling

The majority of financial analysts still may choose Excel for their financial modeling platforms, but with the advent of financial modeling software, analysts are faced with the decision of whether to stick with Excel or go on to a more sophisticated financial modeling software. Excel has an advantage when it comes to adaptations since it can be created from start, organized, and formatted by the needs of the company. It is, nevertheless, prone to mistakes.

On the contrary side, financial modeling software performs well in terms of accuracy, uniformity, and mistake avoidance. In terms of risk and sensitivity analysis, it is also superior. Financial modeling software also has the advantage of being able to manage complicated and varied data sets, whereas Excel has certain limits in this area.

Here are some guidelines for effectively automating your financial models for individuals who are still debating whether to do so or remain with the classic Excel.

Reevaluate Your Financial Model’s Purpose

Your financial models should be automated depending on several considerations, including the pricing of the software, the size of the market in your industry, the observations you want to obtain from it, and—most importantly—the financial model’s intended use. Instead of using Excel, it is suggested to utilize financial modeling software if your company deals with a variety of complicated data and your primary objective is to analyze risk.

Investigate New Trends

The current state of many business intelligence solutions and financial modeling software makes it simple to confess their shortcomings. They outperform Excel in certain aspects while falling short in others. However, because we are discussing the present situation, these tools may grow further and gain new functionality. We can follow fintech sites to stay up to speed on the most recent developments.

Choose the Software Which Perfectly Serves Your Company’s Requirements

Numerous financial modeling programs with varied degrees of functionality are offered on the market. For risk assessment and sensitivity analysis, software with a high level of accuracy is essential, while other software can scale a variety of complicated data sets. Select the program that will help you solve all of your problems with financial understanding and will enable you to make wiser financial decisions.

The conventional approach to financial modeling may be in the lead right now, but with technology appearing to have the solution to virtually everything these days, it won’t be long until these financial modeling programs and business intelligence tools catch up and greatly simplify the analyst’s job. Let’s get by with what technology has to offer up until then.

How Would a Model Powered by Automation Look?

A financial modeling system powered by Automation need not be limited to spreadsheets. It might employ a completely another approach that is more suited to modeling and is produced more simply by the expert system. Of course, because almost many financial modelers presently use spreadsheets, implementing it on another framework is likely to encounter strong pushback from existing modelers.

One of the most important aspects of a business’s success is its financial planning. No matter the size of the company, whether it is a tiny startup or a large corporation, it is critical that we understand the direction the company is taking and what feasible financial activities are required to achieve financial success.

No matter the platform, the concept developed would still require to be visible and auditable so that it could be checked for errors and the reasoning was sound. A “black box” strategy is unlikely to be effective since the user would want to know how the findings were arrived at.

Now we have understood the question “can financial modeling be automated” but do organizations need to automate financial modeling?

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Do Organizations Need to Automate Financial Modeling?

The demands of each organization will determine whether or not financial modeling should be automated. For instance, small firms should utilize Excel since it offers the management insight into how their operations are doing while dealing with tiny data sets and producing results that aren’t very organized.

However, automating financial modeling is the ideal choice if a corporation is working with numerous and sizable huge datasets or is more concerned with accuracy and risk management.

FAQs

Q1. Can financial modeling be automated?

Automation of the financial modeling process is currently available to help financial modelers create their models considerably more quickly. The software does the majority of this work instead of the modeler creating all the many formulae needed for a financial model.

Q2. Is Python suitable for financial modeling?

Excel spreadsheets may be modified, analyzed, and some repetitive operations can be automated using this language. Given how frequently spreadsheets are used in financial models, Python has emerged as one of the industry’s most widely used programming languages.

Q3. Do people need financial modeling?

Because businesses use financial modeling techniques to expand and forecast their profits, financial modeling has wide use. In the modern world, it has emerged as one of the most sought-after abilities. Every day, there is more need for financial modeling analysts.

Q4. How challenging is financial modeling?

It might be complicated to comprehend how various financial factors combine to produce financial statements. Even in the realm of finance, financial modeling is thought to be among the most difficult undertakings.

Conclusion

Here we conclude the discussion on “can financial modeling be automated”. Financial modeling is a blend of science and art. So, can financial modeling be automated? Yes, gradually we are likely still some distance from creating a language that is appropriately organized for representing financial modeling issues, and we are even farther from creating an Automation financial modeling expertise system that uses this language.

However, financial models are probably going to change dramatically if (or when?) they are created and used widely. These might be constructed using existing financial modeling workflow automation systems. Future financial modelers will likely be less expected to have a thorough understanding of Excel formulae, but they will still need to have even higher abilities in business analysis and consulting.

Today’s financial modelers should embrace automation because it can increase their productivity and the quality, value, and structure of the financial models they generate.

I hope the following post provides some insight into the issue of “can financial modeling be automated”