How Simplicity in Financial Modeling Enhances Decision Making With Scott Rostan

Foreign welcome to Financial Modeler's Corner where we discuss the art and science of financial modeling with your host, Paul Barnhurst. Financial Modelers Corner is sponsored by Financial Modeling Institute. Welcome to Financial Modeler's Corner. I am your host, Paul Barnhurst. This is a brand new podcast where we talk all about the art and science of financial modeling with distinguished financial modelers from around the globe. The Financial Modelers Corner podcast is brought to you by the Financial Modeling Institute. FMI offers the most respected accreditations in financial modeling. I am excited to welcome on the show Scott Roston Shop. Scott, welcome to the show.

Thanks. Glad to be here.

Excited to have you. So we're going to start with this is a question we ask everybody. One of our favorites. Tell me that horror story. I'm sure you have it. What's the worst financial model you've ever seen?

I've seen quite a few bad ones. But like one in particular stands out in my mind. Where you want to change the revenue growth assumption, you traced it to another cell, which traced to another cell, to yet another cell, to another cell. I, I can't. It was five, seven. There was a certain number of links. You finally got to the hard code driver and you're like, aha. But the, the sad thing is that you're my colleagues. It was kind of like a rite of passage. When you got staffed on this model with this certain managing director, you had to find all these special little Easter eggs and find out where they are. No one told you because they're like, I learned it the hard way. You learned the hard way. I guess that I don't know. So that was this kind of brutal being. Like, this is so inefficient. Very, very inefficient.

Yeah. Six or seven levels deep to find a hard code that's painful.

That, that's really, that's very painful. Very painful.

So, so what was the outside of a rite of passage? What did you learn from that experience?

For I, I, the one thing I learned and, and a different one of my bosses, you know, used love to use this phrase of kiss. So keep it simple. I'm going to say this. Don't be offensive. Keep it simple. Stupid is, is obviously the acronym for that of keeping things easy to understand. I, I, I like to tell people in class at Train the Street that like, look, a spreadsheet, a financial model, it's just a calculator that you as an artist, you mentioned art and science during your intro. The science part is the math, but the art side is you can format it and present it however you want. The presentation in many situations is more important than the analytics you do. And I think for a lot of people they're like, well wait a minute, I do all this analytical work. Yeah, but you have to be an artist and present it well and communicate it well and format it well or the story is going to get lost. And, and so this was a perfect example of that. Everybody just got so frustrated of trying to find where the assumption is. If you just set it up the right way, it's easy to use, it's easy to understand, it's simple and then you can get to the story.

Yeah, I love the KISS principle. You know, one of my favorite sayings, I use it all the time in my training is I will say complex is easy, simple is hard. It takes extra work to design something that's simple, whether that be adding a helper column or really spending time to lay out your assumptions properly. It's really easy to start throwing stuff together and writing a nasty old nested if formula or whatever it might be, but doesn't always mean it's clean or effective or you know, meets those requirements. We talk about. So I'm with you.

Great, great point. And using cell comments now and then and leaving your paper trails to someone else can understand. I mean there's so many simple things you can do. And I to me, I like to tell people in a similar way as you like, the true side of intelligence for me is be able to tell something in a very simple and easy manner so that someone else can understand.

Yep. And I'm still working on that one. So next question here. Can you tell our audience about yourself? Just let us know your background and how you ended up where you're at today.

Yeah, so I was raised in North Carolina. I went to Princeton undergrad as an econ major and, and also in the their teachers preparation program. We'll come back to that later when we're talking about the founding of Training the Street. And I had a summer internship with Merrill lynch and the Mergers and Acquisitions Group. And that kind of exposed me to not only to Wall street and corporate finance, but also to financial modeling and the technical analyses that parlayed into my full time role with with Merrill lynch down in New York City at the World Financial center as it was called then Brookfield Place. And then I got involved with their training program, doing their investment banking training program. And then I went and taught high school for a couple years at a day school in Washington D.C. called the Field School. Taught algebra 1 and 10th grade history and so coach soccer and basketball and tennis and kind of had. It was great after being behind a computer inside for 100 plus hours a week to being outside as much as I'm inside was kind of, it was wonderful. But it was, it was very exciting. But, but because I was the teacher preparation program, I knew I wanted to be a teacher. And so my summer jobs were to run Merrill Lynch's training program and teach a lot of the core technical financial modeling type topics. So that's what gave me the idea to start turning the street in 1999. And so here we are in our 25th year and now we have 100 full time professionals around the world and with a truly global footprint. So it's been a kind of a wild ride. But, but you know, that, that education of finance and bringing that, you know, teacher together is what you brought me to where I am today. I say on personal note, I'm, I'm married to my lovely wife and I have two kids, a college first year in college and a 10th grader.

Got it. How fun. That's exciting. And you know, I love that you've grown that into what it is today. You mentioned 25 years having done both the teaching and the finance, bringing those loves together. And so I'm curious, you mentioned you started your career as an M and a analyst for Merrill Lynch. Maybe talk about that experience and what were some of the key projects you worked on? Maybe share a little bit about that.

Yeah, I spent. And if people have gone through my training programs, they'll hear me say this, that I weigh. No, I weigh. I know, excuse me. Way more about the US and North American freight railroad industry than I care to know. My first staffing, and this was the Friday before Labor Day in 1995, was for Norfolk Southern Corporation. And then I, my last thing I did on June 30, 1997 was something for Norfolk Southern Corporation. So I spent about half my time, which is a very high percentage for a junior professional and investment banking role with railroads. Norfolk as the client, they acquire Conrail, which is this huge, large hostile transaction. But what that did from a modeling perspective gave me a great experience because we effectively custom built a M and a model where we had every major North American freight railroad that they can then merge into, buy each other and merge in and do it. So you're looking at possible combinations and what if analysis and, and how, how this, this would impact there and that and filling in with a hostile bidding process with CSX Corporation and You know, CSX selling, Sealand, I mean so there's divestitures flowing in. So I crash course in financial modeling and building that model from scratch, but also about valuation and some accounting topics that, you know, it's just trial by fire if you will, learning through that.

Yeah, I could imagine being involved in what you said. Divestiture, Multiple M&As watching, hostile and then you know, one industry with all those different companies. So I'm curious, what, what advice would you offer for anyone out there that's doing any kind of freight modeling? What were maybe some of the key takeaways on the industry?

Well, I understand the nuance of every industry is important. So for example, railroads are very capital intensive. So there's a lot of capex spending to maintain and grow their rail network and even just maintain it. Right. They're not necessarily, but they're spending hundreds of millions of dollars per year. So and the deferred tax implication, that is extremely important because for financial reporting purposes you're going to expense the depreciation on typically a straight line method. It can be very long or you think about rail tiles but, but for tax purposes you get accelerated depreciation for, on your tax return. So that's going to generate a lot of deferred tax liabilities which is a big source of cash flow. So what? Learning how to model that properly was a huge benefit because the company's looking at that way because they're effective. Like we're getting a, basically the tax break. I mean it is a, it's a tax law advantage where we can finance a lot of our capital or capex spending through, through this deferred tax advantages. So we had to be very, very exact on modeling to defer taxes. We got the inputs from the tax department of the company because they knew their tax schedules and they knew their, their CapEx spendings. But we made sure it's flowing through the model correctly so that the, you know, the cash flow analysis we're doing was properly capturing that for. So therefore there's cash available for dividends, there's cash available for buybacks. It's all integrated in that, in that manner. So the, the detail like that can be very, very specific and again that's industry specific. But every sector has got its nuance that you want to make sure that you really understand whether it is the revenue growth, if you're talking about a software company and how to layer in on a waterfall of, you know, retention rates and the like or the deferred tax for a capital Intensive industry, whatever the case may be, find out what those, some of those value adds can be and then the financial model can be that much better when you can elevate it up.

Yeah, you know, two things stuck out me to me for me saying that one is just the importance of knowing the industry. You're modeling, knowing about it, taking time to get educated so you can catch the nuances. You don't have to be an expert, you're not going to spend your career in it, but you need to know it well enough to not get caught in those pitfalls. And then the second one is just, you know, tax, talking about tax. It's amazing how little things can have such a huge difference. And I mean little is often people think of tax as an afterthought in many businesses. Right. I just apply a rate and I move forward here it's really funding the growth, it's funding the capex that deferred tax is huge to the cash flow. And so it's just amazing to see how you know, even sometimes things that in some models might be an afterthought are so critical in others.

Well, and that's exactly right. I totally agree with you. And then one other nuance that I tell people is like that deferred tax doesn't impact the income statement. Earnings aren't impacted here. It's the cash flow statement. So a lot of people, especially if you're just looking at like hey, what's the EPS estimate or my EPS forecast for this business or my EBITDA forecast, they don't have to worry about the tax that much. They can supply the rate. As you said before, what's the effective tax rate? Bing bang, done. But if you're trying to do a full three statement analysis, get to the actual cash flow, then it becomes very, very important. In this case it was a very significant number given the level of their CapEx spending.

Yeah, exactly. Like, you know, most of my career has been large FP and A where I'm supporting a business unit. Don't even worry about tax rate. I'm not forecasting that. I'm just doing the P and L. And so just the, the difference depending on what kind of transaction, what kind of model you're building, what you're doing really guides where you get deep and what you have to learn. You know, like some who do leverage buyouts, it's huge on debt. I others if you're working on the P and L, you're probably not doing much on the debt side at all outside of maybe an interest number.

Exactly. And knowing where to go down that, you know, grab that detail and pull it out, that's relevant. I think a lot of people try to do everything and you can't, you need to be focused. Right. Because there's a limited amount of time, there's a limited amount of attention. You want to keep it simple, as we said before, but like understanding, like, okay, this is what's really going to matter. This is what's really going to drive things. That's, that comes a lot of experience and understanding the companies and what they do and their sectors and with the nuance in this sector.

Well, I'm going to kind of shift gears here a little bit. I'm curious what led to you deciding to be a teacher after two years at Merrill Lynch? I know you've always liked teaching, but maybe talk a little bit about that transition from a great proving ground where you're involved in some major transactions, it sounds like, and learning about railroad to high school teaching in sports. What led to the transition?

Yeah, so as I mentioned earlier in my intro, I was in the teacher preparation program. And so I, I was actually, I completed the teacher preparation program except I didn't do my practice teaching. So I knew I was always interested in doing it. My roommate in college, his father was, actually worked at Merrill H. And was giving me some, you know, career advice with this. And I was saying to him, like, you know, I want to be a teacher, you know, should I go know, take this job with Mary Lynch. And his advice was, I, I remember when he told me this over dinner, he's like, my advice to you is go work on Wall street, have the experience while you're young and make a lot of money and then you can go to teaching later. Now I didn't actually, and this is easy for me to say, but, but I didn't do the job at, as a banker for the money. I knew I was doing it for the experience and, but the, the pay is good, don't get me wrong. But, but then that allowed me to then think as I'm doing this, Mike. I like what I do. I'm just doing way too much of it and there's got to be something better that's going to be more fulfilling to me and that's why I went the teaching route. You know, of my colleagues in a similar situation who are thinking about their, you know, as they leave. It's typically a two year investment banking analyst program. Many people go on to private equity. Many people do a third year in a in a different role, like maybe global markets or in a different office to the London office or the Hong Kong office. So there's a lot of internal opportunities, but private equity is a very popular one. I was one who was like, I want to go be a teacher. And everybody kind of thought I was a little bit nuts because I took a significant pay cut. But it was, it was very rewarding. It actually made me a much better professional today. Because if you think teaching financial modeling or Excel can be tricky to people, imagine teaching a eighth grader an algebra topic in May when it's 75 degrees outside and they start class, like, any questions and they raise their hand back, can we have class outside today? No. So here we are.

Got it. No, I. I could imagine, yes. Teaching an 8th grader is very different than, as you said, doing the model or teaching an adult. And so I could see that's kind of fascinating. As you mentioned, you know, I'm sure the hours, the work life balance was probably quite a bit better than those first two years of ib. I know how intense those can be.

It was now, but I will. And I'm defending all the teachers out there and the people who know teachers very well. Like, they work hard during those 9, 10. Everybody's like, oh, they have the summers off. They work hard for those other nine, 10 months. They need that summer off to recharge, recruit, and the children need it also. So it was a different level of intense because, you know, you're making the connections with the students, you're impacting their lives. You're being a mentor, you're being a coach, you're being a teacher. But it was extremely rewarding. And then I was, look, I was fortunate that I then, you know, almost kind of stumbled into, you know, Merrill Lynch. And it was actually, it was actually the 1990. It was about, about this time of year, right before Easter 1997, where Merrill lynch said to me, if, like, hey, we like you to, you know, come back this summer do and run the analyst program like you did. I was like, sure, no problem. And we also want you to come back and do the associates, the mba recent graduate training with which was in September and October. And I remember saying to them, preseason soccer starts in August and school starts, you know, around Labor Day for me is like, I can't do September, October. And by the way, you want me to train the MBAs, I don't have an MBA. And the, you know, the, the business manager at the time at Merrill Lynch, Pop really said to me, she's like, you know what they need to know. We're, you're a great teacher and you know what they need to know. So we'd love to have you do that. And that's what got me thinking. And so I spent that Easter weekend, you're talking with my girlfriend at the time now wife, and my, and her brother who went from teaching to business school about the idea of like, maybe I could turn this into a job, like a profession of actually training people on Wall Street. And that's what kind of gave me the idea for Train the Street was, you know, it's almost this kind of like, I thought it was a summer engagement. And they were like, we'd like it to be more and more. Here we are, you know, 25 years later. I'm sorry, it was a 1999, 997. 1999. It was spring 1999.

Makes a lot of sense and you know, totally agree with you about teachers. They, they work hard, they deserve to have a break. And I'm with you on that. I think that it's kind of, that's a great path, it sounds like. So you did the, you did the teaching, you did the summer program. You started training the street in 1999. So I'm assuming a lot of that came out of Merrill Lynch. But what made you decide to make that jump from hey, training some of their people to starting your own company? What was the kind of impetus that led you to go down that route?

Yeah, so my, my, my brother in law, when I was meeting with him that, that Easter weekend in spring of 1999, talking about this idea of like starting a training business. And he was a, a first year MBA at Duke's business school at Fuqua. And he said to me, he's like, you know what actually would be helpful? I was like, what? Doing a interview prep workshop for interview for MBAs who are interested in going to Wall Street. I've been helping him like, like with interview prep, you know, just at home over the phone. And I was like, I'm sorry, What? He's like, MBAs would love to have a practitioner's view of Wall street and you know, valuation topics and modeling topics and the like. And that kind of was like, huh, wait a minute, maybe there's something much more here. So that kind of gave me an idea of starting the academic offerings Attorney street has right now of our on campus stuff. And then with, with Merrill lynch, my idea, I quickly saw like the Merrill lynch and in the L and D and HR world at large, Corporations. I'm sure you've seen this, Paul. Like there's a lot of turnover and people will leave and people will move. And so a couple of the people who are at Merrill lynch went to bank of America and they contacted me like, hey, we heard you're starting off doing this here. Would you like to come to bank of America and do training here? Ironic how the world works that Merrill lynch was my first client and then bank of America was my second client. And then later they're combined and then I networked and I, you know, one of my former co workers was, had moved to ubs and I contacted him and he's like, we'd love to bring you in. One of my old friends from college was, you know, working at, you know, with predecessor to Wells Fargo First Union, now Wells Fargo. And it just kind of started rolling through word of mouth and through networking and, and so I leveraged a lot off that Merrill lynch network and that was very, very valuable to it. But, you know, quickly I had more business than I knew what to do with. And so I was looking to bring on others and I've, you know, brought on some wonderfully talented people to, to you help us get us to where we are today.

Always a good problem. Have to have more work than you can manage. Right. It's what we all want, want to have in the sense of being able to have our choice of business and growing if we want to grow and all those type of things. So talk a little bit. What are the primary services your firm offers? You know, the training, what, what is it you're doing today? Primarily, yeah, so training.

The street specializes in the getting people desk ready and getting people ready for their, you know, the lack of better term like the technical aspects of the job, whether it's an accounting, financial statement analysis. Number two, corporate valuation. So how to value a business, you know, especially in an M and A type context. Number three, financial modeling. And I put Excel into that too of thinking about how to be efficient with spreadsheets and do analyses. Whether you're a consultant doing a lot of data sorting, cleaning and manipulation or a, you know, a research analyst or a private equity professional looking at a leverage buyout or you know, someone who's analyzing companies forecast models. And then number four, we the, our fourth pillar would be a lot of capital markets. So teaching you the equity capital markets and debt capital markets. We also have a data science practice. So everything from computer coding from a finance perspective, such as Python and vba. We've got a new copilot for finance class that we're rolling out now that's getting a lot of great feedback from our clients. Data board, storytelling, type analysis too is all in that data science area. And then we have a bunch of sector specific classes too, but it kind of those weave in themes. So for example, our software as a service modeling and valuation, it's valuation modeling but for sas, you know, very specific from that. Or energy, oil and gas, it's valuation modeling and accounting, but for energy company.

And the like, definitely a lot of value to have industry specific. I appreciate that you mentioned a co pilot for finance and I'd love to get your take on, you know, how do you see AI changing modeling, even just right now and in the future? What do you, what do you think about that and how do you see it kind of playing out? What's your thoughts?

It's real exciting and I think first thing I tell people is like put perspective. Because when the spreadsheet first came out and the, you know, really kind of took hold in the late 80s, early 90s, people like the accounting industry is dead. There's still plenty of accountants around. So it just makes them much more productive. So I personally think that AI is going to be much more of a productivity tool as opposed to a replacement tool for a lot of this financial analysis and financial modeling. Sure it can get you started, but you still need to, as we said before, understand the sector and the nuance and the, you know, whether the drivers and how this is going to work. And the AI is going to get constantly get better. But it's good the human brain for stuff like that, it's still going to be better because it's going to be able to be more creative and more nuanced into the details. But using it for your preliminary research and using it to get started and when you get good with the prompt engineering type question and answer, you can get a lot more productive and faster. But you're still going to ultimately have to do the analysis and put it together. So I think it's going to be a fantastic productivity tool, but not necessarily a replacement tool yet. Let's see how the technology evolves over time. But as you said before, it's a lot more art. It's art and science and, and I think it's a lot more. The art side is the harder side. The science you can learn, you can learn accounting, you can learn spreadsheets, you can lose formulas. But the art side is where the human is needed because the AI is not going to be able to do that type of creative communication yet.

Yeah, and I totally tend to agree with you. We'll see what the future holds, but especially today. And what we're seeing is. I agree it's a productivity tool. That's how I look at it. It makes me more productive. I use it almost every day in one way or another. Help write an email, help summarize something, give me some ideas for a course I'm training on, something I'm not as familiar as I normally am. Right. Well, let's just see what it has to say. In many ways it replaces things you used to Google or search on the web.

Much, much better.

Yeah. And you still may use the web, but summarizes things well and then you might go out to the web and kind of validated or go to your own resources. And that's the key that I always tell everybody, validate, validate, validate. You would never take an intern's work, give it to your CEO without looking at it first. Don't do the same with, you know.

Generative AI or, or another example that your audience may, may resonate. Well, it's like databases like you just blindly downloading something from a database can be a perfect example. Like for example, there's a very popular database that does not put in long term investments as cash and cash equivalents in their net debt or you know, enterprise value type analyses. Now that may be fine because it's long term, so it's more than a year. But in the case of Apple where They've got over $100 billion in long term investments in mostly corporates and US treasuries, that is a cash equivalent equivalent. It is a liquid financial asset even though they're holding it. It's, it's, it's like it's a 10 year bond. Let's say it's a US 10 year gets classified for accounting as long term but from a valuation perspective it's cash equivalent. And so just understanding those nuance, if you just blindly took the information from this database, it could be off by a big factor. So again, understanding what's going on, understanding the nuance, understanding the limitations is going to be much, much more value add.

In today's business world, financial modeling skills are more important than ever. With Financial Modeling Institute's Advanced Financial Modeler accreditation program, you can become recognized as an expert in the field by validating your financial modeling skills. Join the Financial Modeling Institute's community of top financial modelers, gain access to extensive learning resources and attain the prestigious Advanced Financial Modeler accreditation. Visit www.fminstitute.com podcast and use code podcast to save 15% when you register. Yeah. And any advice to people of how you go about understanding that, you know, kind of learning those nuances. Any thoughts as people are trying to be more productive?

Honestly, I think a lot of this is experience and I think that's where you need to be a student of. Insert whatever topic you want to learn with. I mean, you know, you mentioned, you know, I mean so you can read about the company, you can validate information. You're looking at their financial reports, you're looking at research reports, checking if you have access to the, you know, a database. Let's just, you know, capital IQ or FactSet or you know, Bloomberg of like pouring their information to compare with the actual SEC filings. If you're talking about a US company, what are the differences? Why are they different? Like being a student, getting into that level can really help now also, and this is again why I, I, my, my formative years of working at Merrill Lynch M and A. I got that by fire, right, because that was a effectively a corporate finance degree, you know, you know, a capital markets degree if you will, but by working. So a lot of people are attracted to that learning experience in the financial services field because you can expose so much stuff information so fast.

So I'm going to step back to the training for a minute and I'd love to ask you, do you have a favorite experience, maybe a funny story or something you can share from your career and training? I'm sure you've seen a little bit of everything.

I have seen a little bit of everything. One story that always sticks out mine is that it's not directly in class, but it was going to a class, flew to LA to do workshop at a financial modeling workshop at UCLA and Anderson School of Business and was checking into the hotel on is the W Hotel on Hill Guard, which is right by, by the campus there for those who know the LA area. And as I'm getting onto the elevator with my co worker Billy, there's dmx, the rap star, okay. And his, and his, his group, his posse, yeah, his entourage. Billy and I get on. So here we are with our wheelie bags and our computer bags and we get onto the elevator and then they get on too. And which causes us to split opposite sides of the elevator like two, two guys there to do a financial modeling workshop at a business school with a rap star, his bodyguards and his entourage. And they were having a good time. They were kind of teasing us a little Bit about how, what are you here for what you're doing? So that was a good experience. And then the next morning, Billy and I went to the Denny's down the street to eat breakfast before we went up to the campus. And there was dmx. He's still been out for the night before. He was coming into Denny's end his evening. We had woken up and we're starting our day with Denny. So it's kind of. It was good to see him again. So. So RIP dmx. But yeah, so I love that. That was like, you know, financial modeling in la. I jokingly told some people, like, I'm doing modeling in la and people like, look at me like, what I'm like, financial modeling to MBAs. But I happen to not meet DMX. But, you know, we became acquaintances.

So that's a fun one. I appreciate that. And that kind of makes me laugh. Yes. You're getting started. He's just finishing the day, so to speak, so. Or the night, whatever you want to call it. All right, love that story. So next one here. When you and I chatted, you mentioned that many people fail to realize kind of the diverse skill set needed to be a great modeler. So what are those skills in your mind that a great modeler needs?

Yeah, look, I. And this is a standard intro that train of street instructors will say as we embark in the financial modeling. I think model is blend of four important skills. Number one, we've been talking about understanding the company's operations. What's their business plan, how do they make money? You know, what is their, you know, understanding? You should be able to explain in two, three quick bullet points. How does this company make money? Number two, or their business model, for that matter. Number two, accounting. You don't have to be an accounting, a master's in accounting, or a PhD in accounting or accountant per se, but understanding the nuance of, you know, how assets and liabilities and equity and how funds flow through the business. A financial statement analysis, basically. Number three, corporate finance. You got to understand which growth rates are going to be important, the interest rate, that's going to be relevant and important. Understanding this interest rate environment we are now and what that means for, you know, for the cost of debt, potentially for the company and how it can be financed. And, you know, what dividend payout ratio makes relative sense for this company, or dividend growth rate, whatever the case may be. And then the fourth skill is Excel. And you don't have to be a master Excel. I personally say, Paul, I think I told you this, when we're, you know, get to know each other is like, I don't consider myself Excel master, but the Excel I know I'm really fast. And so for us at Training street, we're really teaching people about how can you be more productive, how can you be faster? A lot of that is shortcut keys and just, you know, just using the keyboards with repetition, repetition, repetition, be able to take a, a 10 minute formatting task and get it down to 60 seconds as our, you know, kind of our famous formatting exercise that we love to do. But it's just getting that repetition so that you can, you don't think about the Excel. You can focus your energies on what is the company doing, what's the accounting treatment for this deferred tax for example, and how is that going to work with because that's what's going to slow you down is these like these bigger issues with the company that require some accounting knowledge and a deeper dive. Get the Excel knocked out. So you're not even thinking about Excel.

Appreciate that. I can understand those four areas, but it leads to a follow up question. Where does you know communication skills and the storytelling and many other things that to me are critical for modelers. Come in. You talk about those four core, but where does that fit in the picture for you?

Great point. So when it's all said and done, what does it mean? Mean, right. What's your advice to the client? If you're a research professional, is this what, what are you going to say to your investment committee or shareholders? If you're a research analyst, you got to be able to articulate the story. What's the value proposition? You know, for example, like, you know, Chipotle just announced. For the Chipotle fans out there, sorry if I've made someone hunker for a burrito, but you know, they're announcing a 50 to 1 stack split. That's a very high number. I can't ever, I'm not a stock split expert, but I can't tell you I ever heard of someone greater than 10 to 1. I'm sure there are a few, but that's a very high number. But then understanding like what is the signal, what does this mean that Chipotle is signaling to the investment community and what does it mean from liquidity perspective? And so getting into that nuance and that discussion to be able to articulate it. Let me summarize by saying, put it this way, my bosses at Merrill in particular and the, and the people I meet, you know, over the years. The really good ones are storytellers, the modeling skills. And I'm not trying to, I'm just bringing it down a little bit that can be learned. You can have someone else do it. That's somewhat of a, hey, where, you know, there's, there's better and good modelers. But once you get above a certain level, like going from being a really good modeler to an excellent modeler, that the, the marginal return is not going to be that huge. But the storytelling of the analysis to a client in the case of an investment banker, or to your investment committee for a private equity professional, or to your CEO in the case of an FPA analysis, that's going to be priceless, right, because they're going to trust you and value you to distill what's important and then present it in an easy to digest way so that they can understand in simple terms what is happening. The analysis comes from the model, but the story is, is going to come from you.

I like what you said there. And if I heard it right, the way I look at that is you got the four core skills you need to hit a certain level. You need to be good, you need to be able to be fast in Excel, understand the basic accounting, build your model. But after you hit a certain point, it really comes about learning to be great at storytelling, communicating, influencing. That's what's going to take you from maybe average or mid level roles kind of more toward management, more toward responsibility, greater trust. So get the basics down and then really learn how to manage relationships, tell stories, communicate those type of things, collaborate.

Within people, how to be an inclusive member of your team so that you can build bridges between different people with different opinions. How can you get consensus from five different opinionated people? Those are very important life skills to keep moving up your career. And look, unless you're going to be like a financial modeling whiz at a hedge fund and all you're going to do is build models to, to analyze things. If you're going to be interacting with other people, those skills are going to be extremely important. So yes, and I should have caveat when starting out at that entry level. Get the technical foundation down as you said, like get that solid technical foundation you want to be a go to. So if someone has a modeling assignment, you want to go like, huh, I'm a little nervous about giving this to Scott. Maybe it's in over his head. You want to be like, I know Paul can do this. And then you, Paul want to even do it better than they Anticipated like do it quicker, do it more accurately, add another level that they didn't anticipate so that you build that trust and then you could start to learn the next levels of the storytelling, the interaction with the client, the, you know, taking the client information, how we're going to digest it into the financial analysis.

Yeah, I agreed. You know, I often say technical skills get you the first job. Soft skills or human skills as I like to call them are typically what get you promoted.

That's exactly right. That's right. There's your career projection. It's going to be with the human soft skills.

Yep. So you know, you talked about how, you know, a lot of things in modeling are simple. When you and I touched base, we talked about, you know, a lot of it is adding mass, some divisions, multiplication. So in your mind to build a typical three statement model, how many formulas do you think someone needs to, to use in Excel?

Not many. I mean a min function for your cash sweep on a revolver. And I was thinking about this, I'm like, I can build a three statement model that is just addition, subtraction, multiplication, division. As you said, a min statement on the cash sweep. That's it. Now maybe a max or two to max out the revolver and then. Okay, what about a DCF output page? Okay, if you're going to do a DCF valuation, to me that's an extension of a three statement model that's getting your evaluation. Fine. Then you're going to have an npv, probably a PV type function. You're going to do some sort of discounting back. But you can really keep it simple just by doing simple, simple references and math that is addition, structure, multiplication, division. Like many people are shocked how easy you can make it. And, and that's one thing we really take pride in train street of like let's build a three statement, a pretty robust three statement model with working capital depreciation, amortization and equity schedule with a buyback and dividends and a, a debt schedule with, you know, long term debt repayments and, and, and a cash sweep on a revolver. And people are like, at the end of it, they're like, that was pretty easy. I'm like, they're all easy references but you got to put them all together in the right way or the whole thing falls apart.

Totally agree. I think, you know, it is amazing how simple it can be. Yeah, you have your, potentially your lookups, you might do a little lookup from the schedule to that you have your basic math and you have some places you might Need a min or max, maybe one if statement. But often you can, you know, do min max for a basic model that you can do that can be pretty complex. It's really amazing. If you learn how to lay out your schedule and link everything and build it right, you can keep it really simple.

And two, two thoughts. Think of number one, the formatting is critical, right? To make it tell its own story. It's easy to understand. You know, blues are inputs and blacks are formulas. We at Train street like to teach people to use green from a link from another sheet or schedule. You know, stuff like that. Keeping the formatting consistent with, you know, aligning decimals, little things like that matter. And then you also for scenarios like, you know, often you're going to have like different cases, like an upside case, a downside case, a consensus case, our management case. You might be using, you know, a lookup, as you said before, or a choose function or an index match or something like that. But again, I would keep it simple. Like if you need, if you only have two, use an if. If you have three, four, five, use choose, you have more than that. Now you can get a little more sophisticated with index matches and the like. But like it's, you know, you oftentimes don't need that level of sophistication just to keep it simple.

Yeah, no, it's, it's a great point. And I know you and I talked a fair amount about that and we talk about the basics, the building blocks. I'm going to throw a question at you that doesn't come from kind of what we talked about before, but what do you think of what the Financial Modeling Institute has done with AFM as a way to validate, you know, people's training and their skills and they build a model really focusing on that speed three statement design and keeping it simple. What are your thoughts of that program?

Yeah, and, and you know, and accuracy ultimately. Right. You know, to prepare that way. Look, I think what Ian and the FMI are doing is great. I mean, because it gives, it's, it gives a way to validate these skills. And it's, to me, it's just like a, a logical extension if you're, if you're, serious about it. We've always at Train street thought of like, look, ultimately if you can do it, you're going to be doing it on the job and it's going to be going into the pitchbooks, it's going for the clients and you know, you're going to be proven it that way. But the FMI gives a way of like here's a certification route to validate that you are competent in those areas. So again, I think it's a wonderful idea and wonderful program.

So we're coming up close to the rapid fire questions, which is my favorite section. We just have one or two more questions for you. Okay, so the first thing I want to ask as you look back over your career here, what is maybe one thing that you've learned that's helped you the most when building financial models? Something you could share with our audience? Speed.

It's the most important thing. And I just being fast. If you. And the reason this is important is I I. This reminds me of a story where I was putting together a data table analysis for this railroad model where we're comparing like, you know, different percents of cash and stock offers at different offer prices and sensitizing the amount of synergy realization and just seeing how that's going to impact the accretion dilution in our M and A analysis, let's say. And one of my deal team members was like, you know, can you do that what if analysis for us? Now that was his phrase for a data table. But he didn't know how easy a data table was once you set the data down. Now this is back, you know, 26, 27 years ago. So process was fast. It would take this model about 10, 15 seconds to calculate. Fine. Now it'll be instant with the faster processes. But he. So therefore once I set up the data table, I could just hit F9, I could wait for a few seconds and then I've got the data table done. Literally what he was asked me to do, I had to change a few things. I could get done less than an hour, but he thought it was going to take me multiple hours. Now I didn't lie to him, but when he said can you get it? For example, I'm a little before 2 o' clock right now on east coast time, he's like, can you get it back to me by say 7 tonight? Sure, no problem. Knowing I could probably get it done in 30 minutes, 45 minutes. So when I then get it to him in two hours, I look like a rock star, right? I got it before he wanted. He's like, wow, this is great. You know, hope this wasn't too much. No problem at all. It's this super simple and I bought myself time and I remember I went to the gym and actually worked out for a little bit and broke a sweat, took a shower, came back, reviewed it one more time. Printed it out, took it to him two hours in advance. He's happy. I'm happy. I, you know, feel good now. So understanding how to do things quickly and accurately, confidently, you can then control time. And especially at that junior professional level, that's really important. You know, if people are asking for something, hey, we need this by tomorrow, we need this. And you're like, oh, my gosh, it's going to take me 12 hours. If you can get faster, instead of 12 hours, it takes you four hours. You're creating time. That's huge. So speed is extremely important so that you can be much more control of your workflow and your staffing levels. I will say as a caveat, I always tell people, I was like, be careful. If, you know, let's say there's 10 people in your class who are doing the modeling stuff, you probably don't want to be the first. And they always look at me like, really, I don't want to be first. Want to be like second or third. Because you'll probably get paid the same as the first because you'll be a tier together and you're second in line. The first in line is always going to get called up, right? Whenever there's a fire drill, they're going to get called up. The second line, you miss a couple fire. Anyway, I kind of jokingly tell people, it's like, yes, you want to be in the top, but look, at some point, you know, just do what works for you, but be as quick as you can so that you can get it done accurately, on time and be in control.

I like the strategic thinking there. So one last question before rapid fire. What's your favorite Excel shortcut?

I'm waiting for this. I've been thinking a lot about this one. It's my favorite because I think it's underutilized and I'm going to give two because they're together. It's the fill, right? And fill down. So control R and control D, I don't think get utilized nearly enough. It's easier than copy and pasting if you want to keep the formatting the same. Don't copy cell comments like you do with copy and paste. It's one keystroke. You can be more flexible in terms of your starting point because it just copies the, you know, leftmost cell through the. Through the highlighted area. So I was actually teaching this on Monday at my UNC class that just kicked off my teaching modeling class and investment banking class at. At. @ UNC in the spring. I'm a huge Control R, Control D fan. I don't think it gets nearly enough attention or utilization. I should say.

I use those two quite a bit. They can become very helpful. Big fans of them. So you and I are on the same page. Those are two great ones. Not ones I necessarily mentioned as favorite, but ones I really like. So I agree with you. All right, here we go. Rapid fire. I'm sure you know how this works. You get 10 seconds, you know, to give me an answer on each of those. We're looking for you to kind of take a position here and then at the end we'll give you the opportunity to elaborate on one or two. Because I realize you could say it depends for every single one of these.

Fair enough. So you want me to elaborate at the end?

Yeah, we'll let you elaborate on the end. If you want to add a couple seconds to one, that's fine. You got 10, 15 seconds, but no long answers. We want to kind of pound through all of them and then let you expand. So circular or no circular references?

Circular three statement model. You need that average debt balance, the average cost balance for accuracy. But I totally understand the non circular world. It makes things a lot messier.

All right. VBA or no vba?

VBA productivity tool. It can help you do automate tasks.

All right, great. Horizontal or vertical model?

Honestly, I'm indifferent on this one. I know a lot of people. I. I prefer to teach on horizontal models. I think it's for someone easy to lear. But the vertical model is nice. Think about that. M and a model. Put the acquirer in one tab, the target on one tab and everything lines up. It makes a lot easier when you then get to the third sheet and.

Do the pro forma combined Excel dynamic arrays. Yes or no?

Personally no. In my three statement model experience, this doesn't add value to me. However, I understand the value. But that's just a kind of a different level of modeling. A different modeling corner. How about that?

That works. We'll take that. External workbook links yes or no?

Absolutely not.

You know, there's a lot who have strong opinions like you. It's. It's a firm. No named ranges versus no name ranges in your model.

And by ranges cannot be one cell.

It can be yes.

I personally use cell references like for example, here's a tip. Cell A1 is the name of the sheet and that's with it with a horizontal multiple sheets. That way you can quickly jump between sheets and by just hitting is for income statement F5 go to. You can jump to the Depreciation schedule real fast. So for navigating purposes like that, I love named ranges. I personally don't like it for building formulas, but that's a personal preference.

Got it. And I hadn't thought of that. That's a great tip on using IF to navigate the sheets. I have to remember that one. So do you use a formal standards board like FAST and some of the others when modeling? Yes or no?

No, but I've been told by smart people that we effectively are doing those things.

Sure. That. Not, not surprised. You're often teaching many of those things, but not exactly following one. This is always a controversial one. Will Excel ever die?

Not in the foreseeable future.

Yeah. Basically not in our lifetime is what it feels.

And not with Copilot helping us out here.

Good point. All right. Will AI build the models for us.

In the future as a first working draft?

Yes.

In the. I can't put a time frame on that, but it's not going to be. It's not going to be a fully complete thing unless you're using can templates which existed far before AI.

Good, Good point. So sheet cell protection, should you be using that in your models, yes or no?

I would personally say no. Unless your audience. You need to control access. Again, we're teaching people, we're teaching them skills. They can go and model their own. So we want them to have unfettered access. But if you are in control and the audience is not a sophisticated user, there's a time and place for this.

Got it. Fair enough. Do you believe financial models are the number one corporate decision making tool?

No.

What is that?

Storytelling. If you can't convince someone on that story, don't care what the spreadsheet tells you.

Lot of validity to that. We'll take that one. So what is your lookup for function of choice? You would choose person, Vlookup index match, xlookup or something else I didn't mention.

I would say. I'm. I am a big offset fan. I love offsets, though. They're really. They're really hard to audit. But I love the flexibility with offsets. I would say xlookup in your, in your list in there.

Okay. Yeah. And offset is another great one. I, I agree. We just. You can only list so many. I've had a few people go, I would challenge if that's the only four. And I'm like, yes, I realized I.

Actually, I love to use offsets for summing ranges. So that way your. Your ranges are. A lot of people say, you know, one and equals plus one equals previous year plus one previous row plus one. I do an offset there instead. So when I'm copying it, when you insert or delete rows, the offset's dynamic and always do it. So I will sometimes build offsets into sums also. So it's always going to start summing one row below a certain level and then stop summing one row above the sum of the row I'm in. So that way, the offset allows you to have an accordion. Right. You can always constantly grow and stuff. So again, it's a little more trouble putting in. But once you do that, like, offsets can be very, very helpful. Like, really hard to audit because you work with relative references.

Makes sense. So we're coming up on our concluding section here, and I'd like to ask what is one piece of advice you would share with our audience if they want to become a better financial modeler? And I think I may know what that answer is based on our conversations. But what's that one piece of advice you'd give?

I would tell people, like, take control of what you can learn. Like Excel. You can get faster in Excel. It is learning. Like the types showing a student recently in a class, and they were standing over the computer, like, just when I was saying things like, for example, control R, just watching their brain. Well, not watching their brain, but how they're processing it. They're like, control R. Like, their hands were crossing. And I'm like, whoa. No, like, control R. Like, you know, so getting quick with the Excel is a skill you can learn. You can learn the fundamentals of accounting. You can learn about a company and how the business model works. You can learn the basics of corporate finance. But you have to experience that storytelling, right? And that comes with a lot of, you know, a lot of. A lot of wounds, a lot of paper cuts, a lot of, you know, working on projects, a lot of mistakes. Listening to other people, you know, watching TED talks, watching your podcast, you know, and gather that they be, you know, be a sponge so you can learn that way. So, you know, take control right now of the technicals that you can learn so that you can then focus on the big picture, focus on the storytelling to accelerate your future career.

Got it. Appreciate that advice. So if our audience wants to learn more about you, what would be the best way for them to get in touch with you or learn more about you?

Yeah, so through our website, there's. Our emails are up there and on. On our team. So my email is scott.raston. so s c o t t.braston r o s t a n@trainingthestreet.com so all one word. Training the street. You can, you can email me, you can also connect with me on LinkedIn and then we can, we can message that way. But yeah, training street. We're doing a lot from a, you know, marketing perspective. You know, we do a lot with the corporate clients and for academic clients. So, you know, if there's something you're looking for, whether, you know, we do public courses that are open enrollment for individuals. We have self studies we do on site. So whatever. If you're an individual, we have options for you. If you have a group inside your company, we have options for you. But we'd love to hear from you and how we could meet your needs.

All right, great. Appreciate that, Scott, and thanks for joining me today. I enjoyed getting to chat with you.

My pleasure. This was fun. Enjoy March Madness.

Yes, it is that time of year. I will be enjoying it. Financial Modelers Corner was brought to you by Financial modeling institute. Visit fmi@www.fminstitute.com podcast and use code podcast to save 15% when you enroll in one of their accreditations today.