How Financial Modelers Can Align Assumptions with Strategy for Better Decisions with Tim Vipond

How does a modeler get comfortable discussing strategy, you know, making sure the model makes strategic sense? Because I think sometimes the modeler feels like I'm just here to build the model.

Right.

And put in the assumptions. But they'll see things that they can tell, like, this doesn't make sense or this does no line. How do you get comfortable having those conversations?

You know, I think a great place to get started, whether you're at a public or private company, is to look at the public companies because there's so much out there on their strategies. So if you're at the public company, you look at that. If, if it's private, look for the comparable. That's public. Okay. Go to the IR section of their site, look at the quarterly earnings calls. Like, listen to those calls. Look at the slide decks that they put together. They're going to talk a lot about strategy in there. Listen to the equity research analysts ask their questions. They're going to ask, you know, great questions related to strategy. And then you can also even get like the, the proxy statement or some other filings that'll have the CEO's objectives. Right. So if you're thinking all the way back up to the CEO's objectives, like, you can't get much higher level than that of like, are these decisions and things we're talking about down here, do they map, like, back up to some corporate objective that, that we've publicly stated? Right. So I think that's a good way to get comfortable because first you're, you're reading about it, you're seeing questions or listening to questions that are being asked, and then you can start to like, bounce those off people at your company. Just talk about the industry and the strategy with people. I think that that is a great way to get started.

I really like how you talked about just the importance of reading the company's financials, the statements, the strategy. Right. Public companies, they're going to state all that right there in their 10Ks, 10Qs, their investor relations, those calls. They're going to let the public know how they're thinking about things and what the risks are. And so much that you can bring into strategy. And listening to some of those, you get to see the questions that analysts ask often around strategy, and that may inform some of the questions you're going to ask. And then also just knowing the company's goals, you know, what's the CEO trying to accomplish and, you know, what we're building in this model, does that align with that or is it totally different?

Exactly, exactly. And paying attention to the industry. Right. Like what are other companies doing in the industry? Because that, that leads to great discussion. Right. Just bringing it up with colleagues of like, hey, did you notice that one of our competitors is doing this or doing that? Okay, what does that mean vis a vis our strategy? You know, you build the muscle, let's say, of reading about and talking about strategy and then I think it'll naturally make its way into the, into the financial modeling, at least, hopefully.

Yeah, I agree. And the second thing you talked about, you know, there's strategy and then there's execution. You mentioned the logistics earlier.

Yeah.

And when you're building a model, how do you think about that? Because I mean most of that happens after the model. But is there things you should be thinking about, like is it possible to execute this or these realistic assumptions? Is that what the modeler should be looking at? Kind of from that execution standpoint is more the validation to say is this possible? And pushing back if things don't seem achievable?

Yeah, I think that's right. I think maybe there's a bunch of places we could jump off from that question. You know, one is about assumptions, right? Like are the assumptions that are required to, to hit this realistic or doable? You know, that that's one place. Like I, I like to think about the assumptions above what I, what I would say is like above the revenue line. So it's like what are the activities and the things you need to do that ultimately lead down to revenue? To me that's, that's a guide to some degree, you know, like, like let me just give you a really simple example. It's like, I mean, if you were building a financial model for Chipotle and you were thinking about their revenue, I just happened to recently see this example. That's why I bring it up. Their CEO has an objective. One of his like three objectives is the number of restaurant locations that the company reviews each year. And, and then you sort of realized like, okay, they're reviewing three or four hundred new restaurant locations every year if they want to double revenue, like realistically, how many restaurant locations can they review in a year? What does that mean for the team? Like you think of then because this will connect to say like fixed costs or not, right? Like do you, a lot of times companies think they have a fixed cost structure so they have operating leverage, but the reality is like actually if you want to weigh scale up revenue, you're going to actually some of these so called fixed costs are actually going to behave more like variable costs, you're gonna have to expand your team and so on. So, you know, there's this kind of a circular exercise, if you will, of going through assumptions and then numbers in the model, strategic objectives, and just like working your way through all of them. So I don't know if that made any, if that was coherent or not.

But that was helpful. I get what you're saying. There's a circular in the sense of you go through the strategy, you put in the assumptions, you gotta look at the outputs and say, hey, based on these assumptions, does this pass a certain level of a sniff test? Does this even seem achievable? Because we've all been there. I'm sure you've done it. You look at a model, you get all done, you look at the number and go, either there's a formula messed up or an assumption doesn't make sense, because that's not possible.

Yeah, exactly.

Yeah, I, I've definitely done a few of those. I still remember somebody giving me a number of like, you know, $10 billion. I'm like, you didn't question this. You know, the industry is only.

Exactly. And, and, yeah, and then that this will connect to scenarios as well. Right, because scenario sort of, sort of interplays between variables that are unlikely to actually happen. I think you want to be very thoughtful on your scenarios and your sensitivity analysis and understanding, like correlations between, between things in the business. Right. That might move together or move or move separately from each other.

Fully agree with you on scenario. I think sometimes we confuse sensitivity and scenario and kind of mix them in a way that's not good versus, you know, a good example. Use. Let's take Tesla. You know, if Tesla is building a case, one case would be all right. If we end credits has been Talked about on EVs, what does that look like? Then all your assumptions are based on a case. And you could also decide what are the management decisions we're going to make. If the scenario happens, which I think is the more important part than just having the numbers right, is how does that impact the decisions we're going to make? Like for recession, if I build a business case that says the recession is coming next year, what's the trigger to let me know I should start following that case and what are the things I should be doing differently because of that? Not just, well, I got base high and low, which we've all done, you know, and then we walk away and go, okay, I feel good, I've done my scenarios. Now we stick in one number and we just go forward?

Yeah, I like what you've said because you're not connecting it to like, KPIs and sort of a. More of a reporting lens. Right on. What are, what are Those metrics and KPIs you want to be tracking that are connected to the model but are part of like monthly, quarterly, whatever frequency meeting and reporting you're doing.