The Consulting

The Consultancy for an Economic and Financial investment or business model is extremely important because it contributes to making your project successful.

You rely on Consultancy to be able to predict how your investment will go, advise your clients, anticipate any critical situation and finally to make the correct decisions.

Have you ever wondered how to do this?

Everyone talks about doing it without telling you how to do it because their approximation is not reliable, therefore they cannot give you an accurate explanation of their result.

However, the answer to this question is fundamental because it gives you the reliability which you can handle your investments or Business Models with.

The answer depends on the technology that is used in the process, regardless of the expert skills.

THE IMPORTANCE OF TECHNOLOGY: THE METAPHOR OF A DRAFTING MACHINE

About 30 years ago, companies were full of drafting boards which the designers did the projects manually with. It was time-consuming and inaccurate. The companies received the precarious analysis that caused serious consequences. Fortunately, technology progressed and CAD programs entered the market. It allowed for people to carry out the same activity in a more precise and reliable way. Initially the technology was met with resistance but soon after it won and is winning till this day. Nowadays who likes to use outdated methods?

Would you like to work with companies that still use this ineffective drafting machine and not follow better solutions?

CONSEQUENCES ARISING THE CONSULTANCY CARRIED OUT WITH PLATFORMS USING EXCEL SHEETS

A Consultancy, based on an inadequate technology, does not provide reliable information about your investments or Business models. The Consultancy reflects all the Limits of the used Technology:

LIMITED RELIABILITY:

  • Financial Default Risk
  • Loss of Credibility
  • Loss of Personal Assets

LIMITED OPPORTUNITIES:

  • Loss of competitiveness;
  • Loss of Negotiating Power;
  • Loss of possibilities to find new investors;

LIMITED PROFITABILITY:

  • Lower Equity and higher Bank Debt Lines up to 30-50% more.
  • Low Profitability;
  • Low optimization of the Tax Profile

 

The following parts are also included in the section “ The Platform”

APPROXIMATION of PREDICTIVE E / F Models BASED ON EXCEL SHEET

The Economic and Financial Predictive Analysis of Investment and Corporate Models (Financial and Economic Plan, Business Plan) as it’s been carried out so far, using the classic methodology of Excel sheets, is completely inadequate.

Example

If the result has an approximation of the 20%, the Reliability will be low and it will have a margin of error equal to 80%.This implies, for example, that a Cash Flow value of 1,000,000 can fluctuate from a value of 1,000,000 +/- 800,000, i.e. from € 200,000 to € 1,800,000.

 

This type of approximation highlights the problem of reliability, social and economic responsibility, your great impact as an Investor, Entrepreneur, Consultant, Stakeholder, Public Administration, and finally as a community, which you should take into consideration.

THE CAUSES OF APPROXIMATION

The Reliability of a Predictive Financial Economic Analysis is influenced by two causes:

  • The approximation of input data;
  • The approximation of the Mathematical Model which processes it; 

THE APPROXIMATION OF THE INPUT DATA:

By being a Predictive Model, the Input value cannot be accurate but had to be performed in a probabilistic concept, having a range of values ​​between the Best and the Worst therefore determining the Best, the Medium, and the Worst Scenario.

A variable operates on a range of values.This range will expand by a variation (V%), which is influenced by the variable risk and the probability P% of this risk occurrence. Therefore, the definition of the interval ensures the reliability of the established data.

This formality also explains the uselessness of looking for the value, used by those who work with Excel sheet technology. We are predicting, so it makes sense to define an interval because we cannot know exact values.

IMPORTANCE OF APPROXIMATION OF THE MATHEMATICAL MODEL:

The mathematical model processes the range of values (e.g. the range of revenues)  (PEF, Business Plan) and other variables (e.g. payment/income days, VAT associated, method of return, etc.) and determines the reliability of the result.

If we insert a range of values ​​in a mathematical model with an approximation of 15%, what reliability can the result have?

Example

For example, we have compared two scenarios with the same economic conditions, same investments, the same revenues and operating costs but:

 1 ° Scenario was made by analysis on an annual basis. Self-financing, methods of payment and income were not considered, VAT was considered in an economic way only, meanwhile the other taxes were not considered. 

° Scenario was made by a monthly analysis. The self-financing, the real mode of payment, income for each item and taxes were considered.

Thus the results of the ° Scenario were: (Only some values are shown):  

Always positive annual cash flows with apparently no criticality, Equity of 16,819,000, a Net Profit of 6,431,000, Shareholder after tax of 2,548,000, and a Shareholder IRR of 27.74% with the Equity cost of 10.00.   

Meanwhile, the results of the 2nd Scenario were: 

Negative cash flows for the first 8 months, and Equity of 6,842,000 for activation of the self-financing, a Net profit of 2,338,000, Shareholder after taxes of 284,000, and a Shareholder IRR of 8,249 (82.49%) with Equity cost of 10.00.  

These results show the importance of assumptions and the importance of the mathematical model that processes them.

THE LIMITS OF EXCEL SHEET TECHNOLOGY

The reasons that Excel sheet technology lead to unreliable representations of the Financial Economic Reality, regardless of the skill of the Financial Analysts who develop it, are essentially these:

LACK OF A SYSTEMIC APPROACH:

Due to the inability of Excel sheet technology to take into consideration all the variables in a given context, which require approximations as well (for example, the precise VAT associated with each variable in the model, the exact days of payment/income, the tax rates, risk variables, etc).

ANNUAL TIME SCALE PROBLEM:

Excel sheet technology can only be used on an annual basis or at best monthly for the first few years. This assumption implies, for example, that you can view cash on an annual basis that is always positive, when in reality it is negative for most months. It makes the project unsustainable, with profitability issues, unreliable bankability, and sources necessary for the inadequate debt coverage. Another example, which implies the need to have a cash flow monthly is the need to see the payment of taxes, dividends, etc.

STRUCTURE PROBLEM:

It is difficult to break down the Project (an investment, a Business Model) into its fundamental economic components with the Excel sheet technology (Business Unit and operating periods, investments, operating costs and revenues, seasonality, etc.). It doesn’t identify the important components that can impact the business and therefore engage the possibility of the activation of a Business Unit or postponing it;

PROBLEM OF LIMITED USE OF MATHEMATICAL FUNCTIONS:

In fact, with the technology of Excel sheets it is difficult or even impossible to use all the functions allowed in finance, such as recourses calculations, reimbursements, the calculation of the commission fee, self-financing, the different methods of VAT compensation, the use of variational principles to optimize system variables;

PROBLEM OF LACK OF TRANSPARENCY:

Due to the extreme subjectivity of the Excel sheet, the only person who can understand and read the sheet is the person who did it. Summary statements can be different from each other.

PROBLEM OF LACK OF CERTIFICATION OF THE ALGORITHMS USED:

Without referring to sources, that affirm that the algorithm used is correct and the authentication is not checked.

COMPLEXITY-RELATED ERROR PROBLEM:

That is the hypothesis of being able to represent all the above functionalities, the Excel sheet would become so complicated and complex that it would proportionally increase the probability of Excel error, making the simulations unreliable anyway.

THE FIRST RISK IS THE EXCEL SHEET:  with an average 80-85% 

THUS, WHAT IS THE RIGHT QUESTION TO ASK TO HAVE A CORRECT CONSULTANCY?

The question worth asking to receive reliable and confirmed analysis and advice on your investments or business model

 

What technology do you use?

Because you know if the answer is Excel Technology, regardless of the skill and diligence of the Financial Analysts, the reliability of this financial and economic reality is at best 15-20%

It means that your decisions cannot be sure and effective.

 

Call us to find solutions.

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