Financial Modeling Blog

Planning for Fixed-Asset Investment Requires the Right Tool, Not Just a Spreadsheet | Big Fat Finance Blog

Robert Kugel makes a great deal of sense in his blog article "Planning for Fixed-Asset Investment Requires the Right Tool, Not Just a Spreadsheet | Big Fat Finance Blog." Spreadsheets are clearly the default application for anything financial, but endless interconnected cells have significant limitations.

Whitebirch advocates a more structured approach to modeling repetitive items such as fixed assets, loans, employees, to name a few. Object based modeling, where an object type (e.g. fixed assets) can have any number of "instances" that share the formulas/logic rather than copying them, is ideal for solving the problems Mr. Kugel identifies. A change to the object type flows automatically to all the instances. No intervention required. Adding another asset requires no new formulas. The resulting calculations of depreciation and accumulated depreciation can be summarized for inclusion in a larger financial model or completely integrated in their entirety.

Objects vs. Cells

Whitebirch represents a revolution in financial modeling. Rather than working with an ever-increasing number of individual cells, and maintaining all of the formulas that tie them together, Whitebirch Enterprise Planning introduces Financial Objects.

An easy way to think about financial objects is as a group of related line items, like units sold, selling price per unit and revenue that work together to perform a task, such as calculate revenue from selling price and units sold.

Other examples include the multiple line items that make up a loan, with current and long term portion, and interest; Or an asset with a balance, depreciation and accumulated depreciation; Or an employee with salaries, benefits, and taxes.

Objects are made up of two parts, a financial object type, and its instances. The object type is the blueprint, including the formulas that are common to all of its instances. The great part is that all of the constants and line items in an object type, collectively called its parameters, and the formulas that tie them together, are SHARED with all of its instances. A change to the object type is automatically applied to every instance.

Independent, Concurrent Scenarios

Not all scenario/"what if" capabilities are created equal. Most people think of "what if" analysis as taking a variable and changing it to different values to see how the output, such as Net Income or Cash Balance, changes. One might also want to change multiple variables and compare the results. Each set of values results in a new "scenario". Excel has a feature called "Scenario Manager" that allows cells to have different values for different scenarios, and will create a summary of the results or a pivot table. However, a maximum of 32 cells can be changed as part of a scenario. Only constants can be used (no formulas allowed), and the scenario can only apply to a single worksheet.