Financial Modeling for Finance Pros to Fix Real-World Mistakes Using Balance Sheets - Scott Strachan

In this episode of Financial Modeler’s Corner, host Paul Barnhurst speaks with financial modeling expert Scott Strachan about the role of financial models in business planning and decision-making. Scott shares lessons from over 30 years of experience in accounting, consulting, private equity, and corporate finance. The discussion covers the importance of modeling for startups, the problems with annual models, the risks of overrelying on EBITDA, and how the FMI certification has helped him stay sharp in a changing industry.

 
Scott Strachan is a Chartered Accountant and Chartered Financial Modeler who has worked across the UK, the Arabian Gulf and now serves clients in Qatar and London. He has built and reviewed complex financial models for deals worth hundreds of millions of dollars, and now contributes to the Financial Modeling Institute as a content developer and exam writer. Scott is known for applying practical thinking to modeling and helping bridge the gap between theory and real-world execution.

Expect to Learn

• Why annual models are often inappropriate for startups and small businesses

• The difference between one-time-use models and those built for regular updates

• How poor modeling leads to funding gaps and business failure
  Why EBITDA can be misleading in deal evaluation

• How preparing for the CFM exam can improve your modeling skills

Here are a few quotes from the episode:

• “A model is just an appendix to a business plan. If you don’t understand your market or product, no model will save you.” - Scott Strachan

• “EBITDA is a fantasy land metric. It ignores reality and tells you what you want to hear, not what you need to know.” - Scott Strachan

• “Every business fails because of bad management, and that often starts with not modeling your cash needs properly.” - Scott Strachan

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In today’s episode:

[01:20] - Scott’s Background & Career in Modeling

[06:26] - Why Annual Models Often Fall Short

[09:11] - Why Startups Need Monthly Models

[13:54] - Working Capital Mistakes in Startups

[17:59] - Disposable vs. Ongoing Models

[26:37] - Thoughts on EBITDA and Adjusted EBITDA

[33:31] - Why Models Don’t Replace Business Fundamentals

[40:25] - Excel Shortcuts and Modeling Habits

[42:43] - Rapid Fire: Modeling Preferences

[45:58] - Final Advice & How to Reach Scott

Full Show Transcript

[00:00:37] Host: Paul Barnhurst: Welcome to Financial Modeler's Corner. I am your host, Paul Barnhurst, aka The FP&A Guy. In this podcast, we talk all about the art and science of financial modeling with distinguished financial modelers from all over the world. The Financial Modeler’s Corner podcast is brought to you by the Financial Modeling Institute. FMI offers the most respected accreditations in financial modeling, and that's why I completed the Advanced Financial Modeler and encourage you to do the same. This week, I'm thrilled to be joined on the show by Scott Strachan. Scott, welcome to Financial Modeler's Corner.

[00:01:17] Guest: Scott Strachan: Thanks for having me, Paul.

[00:01:18] Host: Paul Barnhurst: Yeah, really excited to have you. So Scott's joining us from France. It's evening for him, and we're thrilled to have him a little bit about his background. He's a chartered accountant and a chartered financial modeler with over 30 years of experience in finance, consulting and private equity. He worked with the Big Four and corporate finance and recovery before moving to the Arabian Gulf, where he held senior roles at Unicorn Investment Bank and Qatar First Bank. Over his career, Scott has led and managed multi-million dollar transactions across sectors including real estate, Retail and energy, and he has built and reviewed complex models for billion dollar deals. He now works as a consultant for clients in Qatar and London, also contributing to the Financial Model Institute. Financial Modeling Institute as a content creator and CFM exam question writer. He is passionate about bridging the gap between exam room theory and real world application. Again, Scott, thank you so much for joining me. I'm really excited for our conversation.

[00:02:33] Guest: Scott Strachan: And great to be here.

[00:02:35] Host: Paul Barnhurst: Yeah. So let's start. We always start off with this. Everybody has their own horror story. I'm sure you do as well. Tell me about that worst financial model you ever had to work with or seen. What's your story?

[00:02:47] Guest: Scott Strachan: Ever had to do? And it wasn't necessarily just the model, but the experience of the model was a project I was doing for a world leading rental car business. I was based in Amsterdam and the company, as rental businesses often do, was facing problems and they brought in an American hotshot guy to try to turn it around. And at the time I was working with PwC in the UK and I had got a reputation within the coverage team for being quite good at financial modeling, even though there was not a lot of modeling in that role. And I was sent to Amsterdam for almost two weeks to produce a Europe wide financial model for the whole of this rental car business, and it was incredibly detailed. I would say the guy wanted it to a granular level.

[00:03:36] Host: Paul Barnhurst: I could imagine, especially, as you mentioned, a really detailed model, you're in a location, you don't want to be eating food you don't want. Yeah. That I could see where that would be the horror story.

[00:03:44] Guest: Scott Strachan: I managed eventually to get into the cabin crew. The crew restaurant in the hotel. They had a celebratory menu, but even then, that wasn't the experience.

[00:03:53] Host: Paul Barnhurst: Thank you for sharing that. So I know your background is in accounting. So how is having a background in accounting started as an accountant. How has that helped you as a modeler?

[00:04:03] Guest: Scott Strachan: Well, as an accountant, obviously you have to understand the three statements that end a relationship between profit and cash and balance sheet and how they interact. And people who come to three statement modeling. You don't have that background. I think of someone sometimes at a disadvantage, because even accountants sometimes struggle with reconciling profit and cash and balance sheets. In fact, in accounting, a trial balance, which is the record of a company's accounts, is really just your balance sheet and profit loss account or income statement, as it's now called and tabulated. The cash flow statement is actually just a construct. It's a reconciliation. And what you do after the event, it's not part of the account. It's only since IFRS one came out in the early 90s was cash flow statement, you know, properly done. And all the cash flow statements then were all done using the indirect method. So you're effectively just comparing one balance sheet with another and summarizing the differences. Whereas in financial modeling you might approach it differently. So having that intimate relationship and understanding the three statements really helped. And I trained in a small firm for the first six months or so. All the accounts I did were all for small companies who didn't have computers. This was back in the early 90s. The records were all handwritten, and it's kind of like if you take your car to the garage and it's not working nowadays to just plug it into a diagnosis, a problem, and it fixes it itself. Whereas an older car, you take it to a garage and it has to be basically deconstructed. It's like these car shows where you watch classic cars go into a garage and somebody takes it apart and makes it better than you. When you're doing accounts from incomplete records, you've really gone about the beat of the point of a business and understand it. And having that attention to detail, I think is really good for me. When it came to modeling.

[00:05:56] Host: Paul Barnhurst: The attention to detail, you know, critical, like you said, understanding those three statements and having that accounting background really helps to understand how they work together. And so I think those are two great points. And I could see where that would really help a lot. You know one other thing that I want to, you know, kind of touch on as we move forward is the whole idea of annual models. I know you see some real key issues with building those. We see them as very common sometimes versus quarterly or monthly. So what do you see as some of the kind of key issues or challenges when people are building annual models?

[00:06:31] Guest: Scott Strachan: I know models really only seen either in modeling exams or in LBO or pedals for long term validation for established businesses. But no use if you're doing cash flow management or debt raising, or you're doing something like modeling the impact of adding a business or starting a new business. And when I started my modeling career, virtually every model I did was either for a startup or for a new business. And so really, you're lucky if you can project accurately for your first 2 to 3 years. Anything beyond that was just a guess. When you look at LBO models or PE deals, they tend to be very detailed, but they tend to just be on an annual basis and sometimes for five, ten, 15 years even longer. And they don't always even have balance sheets. I was analyzing a $1 billion deal a year or so ago. The Excel model was five megabytes. So even when you opened it, you had to disable the automatic calculation. So detailed 55 horizontal sheets on this model. Some of the sheets are hundreds of rows and there was no balance sheet. And this is the problem for me as well as annual models are models without a boundary. And this is because a lot of people who work in investment banking are cfas and chartered accountants. And I've got huge respect for Cfas because it's an incredibly tough exam. But they don't always realize the importance of the balance sheet. The balance sheet is there to check everything else works. If I see a detailed profit loss account statement and a detailed, you know, attempt at a cash flow, but there's no boundary. How do I know everything's been included? So I know models and models with their boundaries are very difficult. But monthly or quarterly models are far better for startups or for smaller businesses which are looking to raise debt or equity.

[00:08:28] Host: Paul Barnhurst: Funny enough, for me, most of my career was monthly models. I worked in FP&A and so you had to do that because you were comparing it to the actuals every month and figuring out what the forecasts were. And so it was very much a rolling process. But the one thing we rarely did, I didn't do in my career because I worked for large companies is the balance sheet. You know, American Express, you're not having each person build an individual balance sheet. That's always interesting to me. I love talking to different modelers because you see, depending on background, the type of work you do, what becomes so important. And I agree, the balance sheet is critical. But you know, in some situations you may not be doing it now. Billion dollar deal and not having a balance sheet. I'd have a real hard time with that. I'm with you. That doesn't make any sense to me. But you know, as we get into kind of, you know, monthly models, you know, startups, why is this so important to have a monthly? Why not quarterly or periodically? Is it the changes, seasonality? What kind of drives do you need? Is it the cash flow for startups to have to have that monthly model?

[00:09:29] Guest: Scott Strachan: I believe that every business fails because of bad management. If any excuse, you can ultimately trace it back to bad management. But one of the main failures of management is the failure to properly model how much money you're going to need. And to be realistic about your startup and your potential. 30% of new businesses fail because they run out of money, and a lot of those run out of money because they didn't start with enough money to begin with, and they didn't model how much money they were going to need until they actually got to a bit of a positive cash flow. And if you're starting a new business, you can't do an annual model. You have to do it monthly. The models I used to do when I worked in, I started modeling in 1996 and I qualified as an accountant. I moved to a bigger firm. It was more entrepreneurial. And one of the partners was really good at bringing in new clients. And his clients were always expanding and he always needed models. And everyone was a three year model, monthly statements. And we used to do these models using the direct method. So in fact you would start by modeling the income statement and then you would model the cash flow using the direct method. So you would look at your revenues and you could forecast them and actually construct for January. In January I'm going to get paid maybe half in March and half in April, February then likewise. And you build up the schedules for the balance sheet items using the corkscrew method. And the reason that's important is that when you look at monthly models, expenses don't fall evenly over the year. And no business has even got revenue, especially if you're starting up if you're an existing business.

[00:11:11] Guest: Scott Strachan: Every business has seasonality, not just your extreme examples like the retail business. Um, and if you're not modeling monthly, you're not modeling seasonal seasonality. You know, if you consider a retailer, they go through the whole year losing money. And then suddenly by the last quarter, you know, they move from the red into the black. That's why it's called Black Friday. It's not called Black Friday because of death. It's called Black Friday because you move from the red into the black. And so if you look at a business and its balance sheet, let's say in August or September, you're going to see a business that's got masses of inventory. Masses of creditors. You know, debtors might not be too bad. Your bank balance is going to be low. You probably are fully maxed out. Revolver. And then you've got the final quarter. Maybe then you've got a January sale. So most retailers have a year end of December and January because at the end of the year or in January, you've had your sale, you've had your quarter, your inventory should be doubled, your revenues maxed out in that quarter, the creditors available. So your working capital and your bank position is going to work better than any other month in the year. And monthly modeling allows you to see that movement through the year and identify where your stress points are. When am I going to run out of money? When are there any dividends payable? When's the tax payable? When it's not raining, it's not payable maybe every month. Maybe it's paid quarterly in advance. Or some things are paid six monthly. And you can only capture that if you're doing monthly or quarterly models.

[00:12:41] Host: Paul Barnhurst: Yeah, you don't really capture it. I mean, maybe you get a little bit in quarterly, you get a little obviously you get a little more than annual, but you don't get that granularity. And you could miss some stress points for sure without going into more detail. And as you were talking about this, I couldn't help but think you know my own business how often I'm looking and going, okay, when's my seasonality? Okay, I'm coming toward the end of the year. I know I've been doing this for three and a half years now. I know November and December are going to be lower revenue. Am I in good shape for that? What do I need to make sure I do? What's, you know, January and February? It's like, okay, I need extra cash right now. Exactly like you said, more cash on the balance sheet. Later they'll be less and try to manage all that. And you, you know, if you're looking at it annually, you get surprised is the bottom line.

[00:13:30] Guest: Scott Strachan: Exactly. And for a new business, it goes without saying. You have to go monthly or you might not even last till the end of the year. Here. One of the problems that new businesses face is that they fail to estimate or to account for the cash flow outflow of working capital for growth. If you're a regular business, then you're going to have working capital. Positive working capital. So if your revenue doubles here or here, you've got to fund that additional working capital. Or again you run out of cash and businesses start up. They might think, okay, I need money for the first quarter or the first year's rent or startup costs or this or that, but they don't understand that as you go on to year two and year three and you continue to grow, if you've not got, you know, resources to fund that growth capital in working capital, then you'll run out of money.

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That's just it. Many businesses that on paper are successful, that are growing very fast can run out of money, right? The biggest problem with the fast-growing company is cash burn. It's managing that working capital, because very few companies have the luxury of getting all the money up front and paying the bills later. Sass. Sometimes, if you have an annual, you know, approach, you can get some of that. But, you know, usually you're getting the cash later and funding all these expenses upfront. Hence working capital.

[00:15:11] Guest: Scott Strachan: Exactly. And a lot of businesses we used to model back in those days where we're using invoice discounting. So that's where obviously you effectively sell your revenues to a bank and they will pay you. And actually, I thought that would be a CFM question one day. And to do a monthly model with invoice discounting, because it gets pretty complicated, because invoice discounting will give you an advance based on your revenues. But if your clients don't pay you within the agreed period, effectively they take it back and are charging interest the whole time. So it can get quite complicated to model that. Um, but yes, another problem with new businesses is you won't have any credit history, so you won't even get credit. So if you're not modeling your monthly outgoings for the first 2 to 3 years, and if you're not realistic, then you'll face a cash crisis. And you know, the rates of business failure for new businesses is really high.

[00:16:04] Host: Paul Barnhurst: Last year I had the opportunity here. I don't know if you know Daymond John, if you've ever seen the show Shark Tank, but he's one of the guys on Shark Tank and Entrepreneurial Show, and he started a clothing line and he tells when he first started he was like 18 or 19, and they also had a ton of sales going on. And he's like, all of a sudden I realized, I thought I'd have a ton of money coming in, and I needed all this money. I didn't understand working capital at all. He's like, I had to go, you know, Max out the credit card and borrow from my mom on the house and all these things to survive. And he ended up building a multi billion dollar business when he was done. But it was really funny as he tells the story of, you know, being this 18 year old and having no clue that, oh, there's a lot of stuff I gotta fund up front. And this isn't so simple. And you know, that's really what you're trying to help them understand. Like you said, even year two, year three is where are those stress points?

[00:16:51] Guest: Scott Strachan: When I used to work in corporate insolvency, the busiest time of the year, if you work in either corporate insolvency or you're a divorce lawyer, the busiest time of the year is January, because what has to happen is that businesses which have been teetering all year, the banks will let you go into December to hopefully have a busy period and maybe January. And then when the bill comes in in January, you can't pay it and they've got you in the best position. Then that's when the sender and the receiver or the liquidators and I used to do liquidations and receiverships for 2 or 3 years. And it's a difficult business to be in and it is very cyclical, which is why I get out of it. But, you know, January is a very difficult month, especially for retailers just now. So yeah, monthly models, quarterly models for me, for real life businesses. If you're looking to raise your debt, the banks want to see your covenants tested every quarter. You need to give a certificate of your covenant compliance every quarter. But you can't just look at it on an annual basis. So that's my experience of modeling. It's been mostly, if not monthly, probably quarterly. But if I'm doing a startup, definitely monthly.

[00:17:57] Host: Paul Barnhurst: Makes sense to me. So another subject I want to discuss that you and I chatted about a little bit before we jumped on the show is this whole idea of the purpose of models. You hear a lot of, hey, keep it really simple so everybody can use it. You know, some models maybe disposable, others need to be updated monthly. So maybe talk a little bit, you know, kind of in your work and your experience, kind of purpose of models and how you see it.

[00:18:23] Guest: Scott Strachan: Yeah. So the models I have done in the past are all for, you know, corporate transactions, and they fall into two categories. The first category is models that you do for a particular purpose. Maybe you want to model a startup, you want to model a new bank debt, and you need to convince the bank you can fund that debt, you can repay the debt, or you want to raise some equity. So those are the models which basically when you do the model and you get the debt or you get the equity or you've done the startup, really, you know, the model is kind of used and then twist effectively. It's not one that you go back and update every month or every quarter. It's there for a particular purpose. So that's the idea that you're handing over to somebody. It just doesn't happen. The model is used really as an appendix to your business plan, and it's vital you get it as accurate as possible. But it doesn't always have to be very, very detailed. Sometimes you get businesses which are ongoing where you have to raise money for an expansion plan, and the models for those are a bit more difficult because you may be starting midway through the year, so you have to take the balance sheet and effectively unwind that balance sheet and unwind the cash impact and the balance sheet, as well as modeling from the future, which is more difficult than modeling for a complete startup.

[00:19:42] Guest: Scott Strachan: So the first category of modules are those which are done for a purpose, for debt raising or for a business plan, and then they're done and pretty much not really seen again. You might do a newborn every year or two, but they're not updated because that's the second type of models, and less of the models that tend to work on much more now are models that you do for things with project finance or things like real estate funds. One of my clients is a real estate fund, and they've got, let's say, ten properties. Each property has got tenants all paying rent at different times. And this all feeds into a model, which I update for them every quarter, as well as for the actual performance in the quarter. But then periodically we amend the projection like a fixed budget, so that at any time we can see forward for the next 2 to 3 years on a quarterly basis, what the forecast exit value is going to be, what the IRR is going to be, what the carried interest is going to be. So models for project financing for construction projects tend to actually have them and update them regularly. Another one I did was for the construction of a shopping mall we built in Jordan, and that mall took four years to build. And again, the model was done originally by the people who did the feasibility study, and it came into the bank and we then played with it.

[00:21:06] Guest: Scott Strachan: A little bit of the team played with it and to add some bells and whistles and some, you know, capital structure, etc. but in the process of doing that, the rent that that team particularly experienced, because they're a young team in financial modeling and they managed to unbalance the balance sheet and they they'd spent some time apart trying to fix this. And I just joined the bank at this point in time, and they asked me to look at it because it was a panic. The balance sheet doesn't balance. How can you fix it? And they spent some time looking at it. And I just sat down at one of the cubicles and within ten minutes had screwed up the boundary and fixed it. And they kind of looked at me as if I'd just invented fire. Because again, it goes back to the point of, are you an accountant? Do you really understand if a model doesn't balance? And that's why the model checking questions for the CFM are such great tests. Because it's one thing to build a model from scratch and follow your Ian's excellent course and learn it and do it. But if you then are presented with the model that has been all screwed up for some reason and a deliberate error, then you've really got to understand how that model works in order to be able to fix the mistakes in it.

[00:22:18] Host: Paul Barnhurst: I spent many an hour trying to figure out mistakes and models, and you don't understand him well. It's just painful. Painful either way, but much more painful when you really don't know the intricacies of the model.

[00:22:30] Guest: Scott Strachan: Yes, that's why it's a great test and you will talk about it later. But in last year's exam, there were three questions. And one of the questions was a model checker, and I just looked at it and jumped straight into it. I thought, I've got this. And within an hour and a half that was done. And that then meant I had more time to focus on the more difficult questions. So model checkers really test. Do you really understand it? There are some clever Excel functions you can use that will identify some of the errors in a model checking question, but others are well hidden and will not be easily found just by looking for values or for doing checks or things like that.

[00:23:08] Host: Paul Barnhurst: There's the common ones. Check for values. Did someone put a white text or hide something? Or they're very easy and there are others that can be much more difficult to find, that is for sure, you know? So one thing I'd love to know is if you've done some modeling where you're updating the models, but it sounds like you're often updating them for the clients. You've done a lot of hay, kind of purpose fit models, right? You're building it for a certain purpose. It may not be used after that. How does that change the way you think about complexity when these are models that you know, there may not be a lot of people working in them or that have to be updated every month. Do you find yourself building a little differently?

[00:23:45] Guest: Scott Strachan: Yes. If you're doing a model for a particular purpose, especially a startup or a business plan, the models can be relatively simple and you can actually do it with a template. We got to a stage back in the day when I was starting modeling, because this partner who was bringing all these clients to us, all these business plans, he tended to always use invoice discounting, and he tended to give his information in a similar format. So we actually ended up doing a model template, and we got to offer such a tee that we could basically give him a, you know, a piece of paper to fill in and then take it and put it into your template and it spat out a model in minutes, and the client was getting a brand new model done from scratch. And we were really just feeding it into the template and making minor changes where required. Whereas if you're doing a model for project finance or for a real estate fund, or for any business where you're updating it regularly, it can get very, very detailed and much more bespoke and complicated. And this is where you need to have the hands CFM level of skill in order to to build these kinds of models because they grow and grow and grow. Whereas disposable models, as I call them, for startups or for just a database, you know, they don't need to be that detailed actually. So it makes sense if you've got the time and, you know, you've been working on this model every quarter for the next 3 or 4 years, you can afford to build a bit more science into it, a bit more complexity.

[00:25:14] Host: Paul Barnhurst: Yeah, definitely my experience. You know, if I was doing an investment case where it's one time we're going to decide or not, and then it's just going to roll into the financials.

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I'm spending a lot less time on that than the one I'm building that I know I'm going to be updating every month. I'm doing forecasts off regularly, and it's going to live for three to four years and continue to grow. And I wish I had CFM level when I built some of the first few of those, they were awful. You know, over time they got better as I learned more and more. But it takes a lot of thought to build a good model that you have to update regularly. That has a high level of complexity or moving parts. At least that's definitely been my experience.

[00:26:36] Guest: Scott Strachan: Yes, I agree.

[00:26:37] Host: Paul Barnhurst: So before we talk about the AFM and CFM, I want to spend a little bit of time there because I know you do some test exams and you've done cases on that. One other thing I want to talk about and everybody has an opinion on this. We see it on LinkedIn. It's almost like Vlookup and Xlookup in some ways where people sit and argue about EBITDA, adjusted EBITDA. I know you have some strong opinions here. So what's your thoughts on these metrics?

[00:27:01] Guest: Scott Strachan: Ebitda is not an accounting metric. Okay. I've never heard of EBITDA really. I mean I've heard of Ebit but EBITDA is not used in financial reporting. It really is used by investment bankers to justify valuations. And I've seen billion dollar models that just stop at EBITDA. And to me EBITDA is a false figure. It's a fantasy land, really. Um, because you can't ignore it unless you're going to move the company to a different jurisdiction. You can't ignore tax. I mean, you can make an argument tax on any interest, but you can't ignore tax on the fundamental business. As for interest ignoring that, well, if you've got a revolver and that revolver is drawn on your throughout the year, which will be, are you really saying that you're going to replace that revolver with your fixed hard core debt? You're not. So the interest in that revolver really is part of the cost of doing business. And if you've got assets which are funded by secured debt, so you've got fixed assets, tangible assets, are you really saying you're going to refinance those assets at materially different rates? So if you're using those assets to generate revenues, then you have to therefore account for the cost of those assets and the debt you've taken on those assets. Um, depreciation again.

[00:28:17] Guest: Scott Strachan: Depreciation is a proxy for me for maintenance capital. You can't pretend you're never going to spend any money maintaining or replacing assets. Yes. If you've got a heavy CapEx program, you may want to look at that as a potential adjustment. But just ignoring all interest, all tax, all depreciation. For me, it's just a fantasy. And if you see, you know, a report and I see them a lot I think the quality of the earnings report. This is where they take EBITDA and then they seek to adjust even more. I've seen versions where you've got reported EBITDA, adjusted EBITDA sales, adjusted EBITDA by adjusted EBITDA, you know, all trying to outdo each other with the imagination, searching for things that they could try to justify. Our nonrecurring work should be adjusted. Check your wallet is my advice. I've seen things like people tried to remove because they'll do it for the last three years. They'll do a quality of earnings report for three years, and they'll look back and find anything like, well, I paid somebody a bonus or that's non-recurring. You take that out. I fired somebody, so there's a payoff. Well, that gets taken out as well. Even though businesses hire and fire all the time, they launched a new product and that product didn't take off.

[00:29:33] Guest: Scott Strachan: So we're taking the cost of that product launch really well. Don't you try that quite often. Well, we had an FX that was exceptional. Fx was. Well, sorry. If you're not hedging FX losses happen. Well, we had a very bad, bad debt. Well, bad debts are part of doing business. Oh, we had production downtime from new CapEx, and so let's pretend we had that all there all the time and adjust for no cost savings. Let's analyze the cost savings. No, it really is, to me, nonsense. I mean, Charlie Munger called EBITDA earnings adjusted EBITDA is bullshit up with gold leaf or sprinkles. It's meaningless and it's just used by PE guys to make a company sound cheaper. It's easy to say, oh, it's only six times EBITDA or it's four times adjusted EBITDA. And then you look into the details. You dig into the model because it's never an investment memorandum. You've got to look for it in the model after you've even gotten their income. And you find certainly the PE is actually like 40 and they don't present that. So I think it's something you've got to watch for as an LP. When assessing LBO deals and peddle's EBITDA, it's dangerous and it can be misleading. So if you see it, treat it with caution.

[00:30:50] Host: Paul Barnhurst: I think that last part is the bottom line if you see it. Because if you're dealing with PE in certain areas, you're going to see it. But treat it with caution. Don't just rely on it. There's a lot of other metrics you should be looking at, regardless of what you think about it. I'm not a huge fan of EBITDA like you, I've never really loved it. I started my career in American Express and Warren Buffett was the biggest shareholder, and Warren and Charlie shared the same opinion of EBITDA. You know, neither of them were fans. So that was my background. And so I've always kind of had that. Yeah, I don't really like that metric. So I, I'm with you. I get a lot of what you're saying. What are the metrics you like to look at if you're looking at a deal? You know, you mentioned net income, but are there other things you should really be paying close attention to?

[00:31:36] Guest: Scott Strachan: I tend to be more traditional and just look at normalized earnings. Net earnings that it's easier to adjust that and to adjust EBITDA. You know look at the cash flow generation as well and standard stuff on ratios and income generation, asset turnover, working capital ratios. Be careful with working capital because, you know the balance sheet can be misleading depending on what one's balance sheet you look at for businesses that are seasonal. So to me though, using metrics is great, but the numbers are great, but it's not a substitute for actually understanding the business and the business model. You know, I love doing financial modeling, but I'm not going to pretend that modeling is the answer to every question. If your business model is failing, if you don't understand your market, if your market is changing, if you lose your competitive advantage, the model is not going to help you. It's rubbish and rubbish out. You know, if you went back to 20, 30 years ago with a model really valued Google or Amazon or with a bottle that told you that Kodak and Nokia were going to just keep going and we're worth $1 billion. And then they were dead within five years. You know, these companies, they died or these companies thrived because they had, you know, a great business model, strong management, competitive advantage, great products. You know, they displaced other companies in the market. And so for me, modeling and valuation sometimes can be overrelied upon. It's not a substitute for understanding the business model as an appendix to a business plan. You have to think about the actual soft part of the business, its products, its marketing strategy. I see. You'll look at all these recent huge failures, Kodak, blockbuster, all these businesses that you thought were going to go forever but didn't adapt with the times and and failed. And a model would not have saved them.

[00:33:30] Host: Paul Barnhurst: Great point. Right. A model is one piece of the process. It doesn't save a business. You shouldn't buy a business just off a model. You really need to understand it. What's the strategy behind it? What's the operation? What's the management team like or the team you're going to bring in? How are you going to do things? What's the long term outlook? So many things. I think that's a great point. I really appreciate you adding that. So thank you. Next, I want to talk a little bit about FMI because I know you've been a big supporter of FMI. I know you've submitted video write ups kind of test questions. So what's your experience been like working with FMI? Maybe talk a little bit about that experience.

[00:34:10] Guest: Scott Strachan: Yeah. So about two years ago I reckon I saw a piece on LinkedIn about the FMI. I think the English Institute of Accountancy has done a deal with them and I'd never heard of them. I have to admit before then and I thought, oh, great, you know, I'm ordering from an Institute who are as nerdy about models as I am. I looked into their website and looked at their various courses, and if I'm honest, I didn't sign up for the FMI to do the FM. I've been modeling for 30 years. I can do a three statement model in my sleep. I was never going to just imagine my stage in my career. I didn't need that qualification, but I wanted the CFM. And the AFM is the entry ticket to the CFM because the CFM looked like it was much more challenging. I thought about, well, some things from the CFM course, which I really did learn a lot on the course, but you don't really get access to the course materials until you pass the FM and then sign up for the FM, and then you get all the past papers and and that's when it became clear just how challenging it was. And I really enjoyed doing the course. I started it in August 2024, and I wasn't sure whether I would finish it in time, or I'd be comfortable enough to do the exam in October.

[00:35:25] Guest: Scott Strachan: I've raced through it in a month or two, then all the questions and I thought, right, I think I can do this. And so I went for the exam and passed the first time, which I was really pleased about. In doing the course I was on the FM chat, you know, sharing my experience with some of the questions. And there are a couple of questions that I found a few issues with which were corrected. And then there were some differences of opinion on some of the solutions, and a few questions which tackled areas that I had never really dealt with before, such as your data management, because it's just not a thing I do in my career. I had to learn new skills and I've watched some videos on YouTube by Dermot Earley and others. Um, so I enjoyed doing the course. I was delighted to pass it. And then I was, I was asked if I'd like to, you know, to join them, to help them, um, either write questions, test questions and do videos because they don't have videos for every single pass paper. And there's only about, I think, a dozen, ten videos. So earlier this year, I recorded two videos for two of my favorite questions. And I hope that they've been of use to to candidates in the future.

[00:36:34] Host: Paul Barnhurst:I'm the FP&A guy and a passionate financial modeler. When I wanted to improve my modeling skills, I turned to the Financial Modeling Institute. Save 15% on FMI's program with code podcast at http://www.fminstitute.com/podcast.

[00:37:07] Guest: Scott Strachan: Oh come on, just you checking out. You should be doing it this year.

[00:37:11] Host: Paul Barnhurst: I had some family stuff this summer, so I put it off. And some health issues. So I just didn't have time. But I need to spend more time studying. I'm nowhere near ready, so I gotta devote some real time in 2026. But kind of speaking of CFM, you know, when you and I chatted, you had mentioned how, look, the CFM is the tip of the iceberg, right? It's not. It doesn't mean you've arrived as a modeler. Why do you say that? Why is that kind of your take on the test?

[00:37:37] Guest: Scott Strachan: The CFM exam is for others. And you have to do two questions from three. So roughly two hours per question. So really, because of the level of detail of each question, you can only do one part of a model. But you know, in real life, exams in any subject are really just the entry point to a career or the starting point. Just because you can do AFM or CFM even, doesn't mean that you can build a super complicated model for a huge business. Real models take days to do or weeks, and exams can only ever last 2 or 3 four hours. So it is conceivable that you might have a model that you might need to go into levels of detail on revenue and on costs, and on working capital and on debt and on inventory, a whole four or 5 or 6 of the subjects which are examined in CFM. But you couldn't possibly have an exam question as big as that. It's like being an accountant or anything else. If you qualify as a doctor, that doesn't mean you're doing transplants the next day. You have to build up your experience. Um, but having those skills, proving you've got those skills, the skills that you've learned from doing the course will definitely make you a better modeler. And it made me a lot better and better in the time that I've done it. I've learned a lot in the course and, you know, even going back now, when I did the videos for Fashion Boutique and United Landlords, even though I did them a year ago, I redid them again and I found better ways of doing the solution that I did before.

[00:39:07] Guest: Scott Strachan: So, you know, it's true. The more you practice, the better you get and the quicker you get as well. Um, and I did both those videos with me giving explanations for them and about 90-100 minutes. And these are two year old exams. So it proves that you can do it in time if you know what you're doing and you know your work, you know your functions, you know the tips I would give for people setting the CFM this year or any other year, you know, learn, do all the questions. First of all, learn and understand all the template questions. There are questions on some subjects like model checking like CapEx, like consolidation or why for Fifo working capital, which have come up repeatedly and will probably continue to come up, you know, you need to master all those subjects. So if one of those questions comes up in the exam, you know you've got it and you can jump straight into it. Then there may be 1 or 2 other questions which are much more difficult. But if you can tick off one of the easy questions first and maybe an hour and a half, two hours max, then you've got time to attempt the second question, which of course would be usually much tougher.

[00:40:15] Host: Paul Barnhurst: Great advice there. I appreciate all that. I want to move into the section of our show where we have some standard questions, a couple standard, then we'll go into rapid fire. So the first one is do you have a favorite Excel shortcut and if so, what is it?

[00:40:30] Guest: Scott Strachan: I'm not good with shortcuts. I'm a nice person. And Ian and our talks all the time about shortcuts. I just use the basic shortcuts. My favorite ones are probably just cut and paste. That's like copy and paste and cut and paste. Um, but others I'll use f2, f4 control one. But I also like my mouse button. I can't do all these other fancy shortcuts on one of the videos. I tried to do a paste special, which I usually do, but because I was doing a video, I fluffed it and ended up having to actually use my mouse. So these people who can just use the keyboard exclusively, you know, I'm impressed. Um, but I'm just too old to learn all those tricks now, so I wait for my mouse. But I use the standard shortcuts.

[00:41:11] Host: Paul Barnhurst: You know, I see a lot of people going on and on about, hey, you'll be so much more efficient with the mouse. I mean, with keyboard shortcuts. And I'm like, you know, as long as you know what you're doing, in most cases, it's not about saving time. It's about, you know, thinking through it and doing it right. And so I've always said, look, yeah. Is it good to learn shortcuts, at least the basic ones that you use a lot? I've gone beyond that now. I'm not one of those that doesn't use my mouse, but I've always kind of been a little more on your side. Most of my career, I use my mouse. I totally get it. I've now become or I mostly do keyboard shortcuts, but I'll still do things with the mouse and I'm like, you know, it's good enough. I get the job done. Nobody grades me on whether I use keyboard shortcuts or a mouse. I've definitely learned a lot more. I've become better over time, but I totally get it. All right, so one last question before we move to rapid fire. Most the kind of unique or fun model of anything you've done that's really unique with Excel in your personal life that you can share with us.

[00:42:07] Guest: Scott Strachan: I probably use Excel more than most people do just for my own, you know, personal financial reporting and recording. I'm a bit because of when it came to perhaps overuse it and over keep records too detailed.

[00:42:19] Host: Paul Barnhurst: Got it. So you use it. Use it quite a bit if you want to watch a fun video that just came out. You know who Giles Mel is. You've probably seen him on LinkedIn before. He did one where?

[00:42:28] Guest: Scott Strachan: Uh, yeah, I've heard of him. Yeah.

[00:42:30] Host: Paul Barnhurst: It's, uh, the video. He calls it Pete. From accounting and to every single solution they mentioned, like some people. Hey, we could build a spreadsheet for that. He was. I can build a macro for that, you know, to every single problem in life. And it's just kind of funny, so. All right, rapid fire here's how it's going to work if I have about 12 questions. You can't say it depends, even though I realize their nuance in all of these. You pick a side and then at the end, you can elaborate on a couple of them that you're most passionate about because I recognize their nuance. Are you ready?

[00:43:00] Guest: Scott Strachan: Okay.

[00:43:01] Host: Paul Barnhurst: Circular references. Yes or no?

[00:43:03] Guest: Scott Strachan: Yes. For date.

[00:43:05] Host: Paul Barnhurst: Yes or no?

[00:43:06] Guest: Scott Strachan: Not for me.

[00:43:07] Host: Paul Barnhurst: Do you prefer horizontal? Lots of tabs or vertical model where everything is mostly in one sheet?

[00:43:13] Guest: Scott Strachan: Historically, always horizontal. But I'll now do some modeling vertically.

[00:43:16] Host: Paul Barnhurst: Dynamic arrays and models. Yes or no?

[00:43:20] Guest: Scott Strachan: I haven't learned that yet, but I'd like to.

[00:43:22] Host: Paul Barnhurst: How about external workbook links? Yes or no?

[00:43:25] Guest: Scott Strachan: I've done it before for consolidation, but I try to avoid it.

[00:43:28] Host: Paul Barnhurst: I've done it a few times for consolidation as well, but try to avoid it. Named ranges. Yes or no.

[00:43:33] Guest: Scott Strachan: Named cells only.

[00:43:34] Host: Paul Barnhurst: Okay. Name cells. Do you follow formal standards? When you model you'll use fast or smart or any of those?

[00:43:42] Guest: Scott Strachan: I tend to do so now, but I didn't when I started because I was self-taught. But yes, And I try to use modeling standards like the CFA ones are quite good as well.

[00:43:50] Host: Paul Barnhurst: Do you think financial modelers should learn Python in Excel?

[00:43:54] Guest: Scott Strachan: Probably. I haven't learned it. Or Power Query or Power BI. The things I might do in future, but I haven't done any of those yet.

[00:44:01] Host: Paul Barnhurst: Of the three I would recommend if you're having to update. If you're having to clean data, Power Query is the one I would learn, but that's me.

[00:44:08] Guest: Scott Strachan: Okay.

[00:44:09] Host: Paul Barnhurst: Will Excel ever die?

[00:44:11] Guest: Scott Strachan: No.

[00:44:11] Host: Paul Barnhurst: Do you think AI will build the models for us in the future?

[00:44:15] Guest: Scott Strachan: Possibly, yeah. It can do a lot of it. But they're not foolproof yet. But it's coming. I'm glad I'm at the end of my career. Not at the beginning.

[00:44:22] Host: Paul Barnhurst: Definitely coming. Yeah, there's some interesting stuff there. Do you believe financial models are the number one corporate decision making tool?

[00:44:30] Guest: Scott Strachan: No.

[00:44:31] Host: Paul Barnhurst: What do you think?

[00:44:33] Guest: Scott Strachan: A business plan? It's like I said earlier, if you don't know the market you're in and understand your business, then the model is not going to save you. You really need to understand that the model is a backup, the business plan, a proper business plan and market study. Competitive advantage. All of these soft things and narrative model, theory and projections are just an appendix to a business plan. If you haven't got your business model right, you don't know your customers. You don't know your product, you don't innovate. Then it doesn't matter how good your model is.

[00:45:02] Host: Paul Barnhurst: Good point. And then last one, do you have a favorite lookup function?

[00:45:06] Guest: Scott Strachan: Index. Match. Although I try to use some refs if I can, others are, you know, occasional but index matches my go to one.

[00:45:13] Host: Paul Barnhurst: And then do you want to elaborate on any of your answers? Is there anyone you want to share a little bit more with?

[00:45:18] Guest: Scott Strachan: No, I think we spoke already about importance of a business plan and our models, you know, as a part of that business plan, but wouldn't have saved businesses are going bust, wouldn't have valued Google and Netflix correctly at the start of, you know, when they started out. So a business plan is much more important than a model. If you think, you know, Zuckerberg had a huge financial model when he started Facebook, probably not. But he had a great idea. Likewise, with Jeff Bezos. So they're useful as part of a business plan, but you have to get the business model correct first.

[00:45:50] Host: Paul Barnhurst: Great advice on getting the business model right. First, you can have the best financial model in the world, but if you don't have a good business model, you're not going to succeed.

[00:45:57] Guest: Scott Strachan: Exactly.

[00:45:58] Host: Paul Barnhurst: Any final advice you'd offer our audience about, you know, just being better at financial modeling or modeling in general? Any final thoughts?

[00:46:05] Guest: Scott Strachan: I think just another tip for the CFM exam. As I mentioned, to do the easy question first and then turn around the model. Don't panic. And here's your second question. And commit to it. You can't get halfway through and then abandon it and try another question. If you're doing the model and you get stuck, then fudge it. You know, model what you can model and then continue to try to finish the question. Don't spend 15 minutes trying to work out some fancy framework or something you just can't get right. Model what you can, stick to your assumptions and then try to finish the question, and then you can go back to it later on. Don't worry too much about formatting. You don't need to print it out and don't add functionality that you don't need for the answer, and also hide the columns you're not using. It's much quicker and pierced across than to navigate the model. So those are some other CFM tips as well as running the template. Questions.

[00:46:53] Host: Paul Barnhurst: Great tips. Thanks for sharing those. Last question: if our audience would like to learn more about you or potentially get in touch, what's the best way for them to do that?

[00:47:02] Guest: Scott Strachan: Probably on FMI you can get me there much easier. You know, I don't ordinarily, you know, get invitations from people on LinkedIn who I don't know. Generally I'm not somebody who collects, you know, connections for fun. So some people have asked in the past and I've just, you know, declined politely because, you know, I just don't know. I like to just keep my community close. But on modeling, I'm on fMRI and you can contact me that way.

[00:47:28] Host: Paul Barnhurst: Perfect. So yeah, definitely, we'll let people know they can contact you and FMI. Well, Scott, thank you for joining me today. I've really enjoyed chatting. You enjoy the rest of your evening. And thanks again for coming on the show.

[00:47:38] Guest: Scott Strachan: Thanks for having me. You're welcome.

Financial Modeler's Corner was brought to you by the Financial Modeling Institute. This year, I completed the Advanced Financial Modeler certification, and it made me a better financial modeler. What are you waiting for? Visit FMI at www.FMInstitute.com/podcast and use Code Podcast to save 15% when you enroll in one of the accreditations today.