Conceptual modelling using SmartArt

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CONCEPTUAL

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ABOUT THE FINANCIAL MODELLING HANDBOOK Financial modelling should be collaborative. Collaboration reduces error, speeds up development time and lowers cost. The Financial Modelling Handbook is a collaborative, crowd-sourced guide to building better financial models using the FAST Standard.

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Vishal Rander is an Associate Director in Grant Thornton's Infrastructure Advisory team.

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It is tempting to dive straight into the spreadsheet when faced with a strict deadline. However, taking the time to plan and create the model structure visually can be effective in ensuring the logic of the model is clear to the model developer and to anyone that uses the model later. This guide concentrates on producing a conceptual model using tools that are readily available in Microsoft Office.

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APPROACH

Formulating a conceptual model works best starting from an output and working through the calculations to the underlying assumptions. Once the conceptual model is formulated, engineering the spreadsheet typically works in reverse, starting from assumptions and calculations through to the outputs.

Outputs Calculations Inputs

Conceptual Model

Financial Model

Outputs Calculations Inputs

FORMULATE THE CONCEPT

ENGINEER THE SPREADSHEET


SMARTART TOOLS

This guide focuses on the use of the Microsoft Office illustration tool known as ‘Horizontal Hierarchy’ which is found under SmartArt tools. The SmartArt tools were introduced in Office 2007 and dynamically create diagrams based on user inputs in the form of bullet lists. The Horizontal Hierarchy illustration lends itself to conceptual modelling due to its decision tree structure, and can be created in Word, Excel or PowerPoint.

Output

Calculation 1

Assumption 1

Assumption 2

Calculation 2

Assumption 3

Assumption 4


EXAMPLE

Take the example of a solid waste facility which charges a gate fee for accepting waste. Here, you start at the top level revenue, identify the different types of revenue with the client and discussing how these components are calculated. Eventually the discussion will lead you and the client to a list of assumptions that will feed the financial model.

FORMULATE THE CONCEPT

ENGINEER THE SPREADSHEET

Let's start with

revenue

How is it broken down?


GUIDELINES

The conceptual model for ‘Revenue’ highlights a number of guidelines that can be followed: 1. Start with the result and end each "branch" at an assumption (user input).

2. Except. where for transparency and ease of reading, it is necessary to continue the

conceptual model on a separate diagram, i.e. Indexation (factor).

3. Use clear labels and include units as this will help in spreadsheet engineering and also indicates how the components are linked (USD/tonne multiplied by tonnes gives USD)

4. Consider excluding timing assumptions and calculations to focus on clearly communicating how the amounts are built up rather than when they occur.

The resulting conceptual model, built using SmartArt and within Microsoft Office, can be an integral part of the model databook or guide. The conceptual model can also be an effective tool for communicating with the "spreadsheet engineer".


STRENGTHS & WEAKNESSES In following the approach suggested in this guide, it is important to recognise the strengths and weaknesses. Strengths: 1. Flexibility – The bullet list structure can be used to dynamically adjust the diagram,

without the pain of having to manually create links between shapes.

2. Structured – The decision tree based structure can be transferred easily into calculation blocks. Each time a set of branches meet would indicate the need for a calculation block.

3. Transparency – Without the numerical or algebraic complexity that comes with spreadsheets, the model can be visualised in a manner which allows the logic to be clearly followed.


STRENGTHS & WEAKNESSES (Continued) Weaknesses: 1. Lack of clarity of "when" these calculations should occur – The approach focuses on

the "how much", yet the labels could be expanded to clarify timing considerations such as, when assumptions are fixed/constant/non-time dependent.

2. Inability to show relationships between branches – Using a decision tree based diagram does not allow for branch interrelationships to be shown easily, nonetheless a reference system could be used to show where an input or calculation is used multiple times.


OTHER USES This guide has emphasised formulating the conceptual model in order for the model to be translated into a spreadsheet model. Yet creating a conceptual model can be a powerful tool when reviewing or rebuilding spreadsheet models. Developing a conceptual model from a spreadsheet model extracts the logic and presents it visually for any inconsistencies to be queried or confirmed.


OTHER TOOLS There are many tools that can be used to visually represent a conceptual model, apart from Microsoft Office's SmartArt. 1. Influence diagrams: The conceptual model described in this guide is a simplified

version of an influence diagram. Tools such as PrecisionTree can be used to create influence diagrams, which have a specific methodology in terms of representing results and variables. This approach involves a learning curve in understanding the purpose of the different shapes and colours and the use of proprietary software.

2. Flowchart shapes: Another option is to use flowchart shapes and link the shapes to show relationships. However, this is a manually intensive process, without proprietary software, especially if the conceptual model is likely to change as discussions and clarifications are communicated with the modeller.

Conceptual modelling using SmartArt

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