A model is a simplified representation of
a system, created to analyze or predict its
behavior under various conditions. It uses
structured logic to describe the
relationships between variables, thereby
providing insights that can be used for
decision-making or problem-solving.
Educational Use-Only Financial Modeling by Pedro C. Souto Version 3.0
FINANCIAL
MODELING
MASTERS COURSE 2023-2024
Modeling
“A representation of a thing,
system, or theory such that
characteristics of the original
can be examined or changed”
Generic definition
▪ A representation of a thing, system, or theory such that
characteristics of the original can be examined or
Model changed
Overview Business definition
▪ A computer program using structured logic to show the
interactive relationships between dynamic variables,
resulting in output to answer the questions of
management
Models are different from analysis
▪ Models are different than “ad hoc” analysis, where you
must follow detailed preparatory steps to see output
▪ With a model, whenever you change the input and
assumptions, your output will change automatically
Until 2000’s Bureaucracy
Humans doing all type of tasks. Business had a
Business fully process line mindset, where everyone knew
its place in the firm.
Modeling 2010’s Process Reengineer
History The first steps into digitalization and technological
transformation. Processes were re-designed and
optimized based on value added.
2020’s Data Analytics
Data-Driven decision making process. All firm
decision are based on key performance metrics
and most repetitive tasks were automated and
outsourced.
2025’s Robot Advisory Machines
Humans are key at developing new business lines,
whereas all the operative business work is
developed by RPA, machine learning algorithms or
simple outsystems application development.
Until 2000’s Bureaucracy
Humans doing all type of tasks. Business had a
Business fully process line mindset, where everyone knew
its place in the firm.
Modeling 2010’s Process Reengineer
History The first steps into digitalization and technological
transformation. Processes were re-designed and
optimized based on value added.
2020’s Data Analytics
Data-Driven decision making process. All firm
decision are based on key performance metrics
and most repetitive tasks were automated and
outsourced.
2025’s Robot Advisory Machines
Humans are key at developing new business lines,
whereas all the operative business work is
developed by RPA, machine learning algorithms or
simple outsystems application development.
Accuracy/precision
▪ If an idea can be described in the English (or any other)
language, it can be modeled
▪ Nothing is too conceptually complex or excessively
Why detailed to be modeled
Use a Efficiency
▪ Saves time on repetitive calculations
▪ Simplifies a business problem by breaking it into its
Model? component parts
▪ Documents the sources of data, assumptions, and
methodologies in one place – leaves no questions
unanswered
Interactivity
▪ Produces “what if” analyses to check the sensitivity of
solutions to business changes – can be updated in real
time
▪ Serves as a presentation tool, or directly produces
content for presentations
Structuring and design Construction Use and care
How to
build a ▪ Determine the model’s
purpose
▪ Establish assumptions ▪ Test logic and limits
model
▪ Input required data ▪ Update and modify the
▪ Define the output model as needed
▪ Format model for easiest
▪ Identify the required data use based on established ▪ Memorialize the model
structure
–Document it
▪ Define flow and content of
major sections ▪ Test for errors
▪ Map the physical layout
▪ This step has high ROI ▪ With the proper structure
and design, the model will
–Over 10 times return write itself
on time spent
▪ This step can be a
deliverable itself
Variable
User interface (UI)
Model assumptions Output
Overview
Fixed
assumptions Engine
DATA
Models may have complex calculations, but they always have simple user interfaces
Educational Use-Only Financial Modeling by Pedro C. Souto Version 3.0
CASE-STUDY 02
Modeling at Work
GENDER
AGE
Educational Use-Only Financial Modeling by Pedro C. Souto Version 3.0
FINANCIAL
MODELING
MASTERS COURSE 2023-2024
