N° 4 - How three businesses benefited from better financial models

We’ve been solving financial modelling problems, as well as building complex models from scratch, since the late 1990s. As a result, we’ve seen nearly every error under the sun. This blog talks through a small sample of previous clients—projects that we’ve worked on and solutions we’ve provided.

 If you’d like to discuss your financial modelling problems, give us a call on +44 20 3151 4799.

 1. Rosemont Pharmaceuticals

Based in Leeds, Rosemont Pharmaceuticals has been at the forefront of manufacturing and supplying liquid medicine for the last 40 years, reaching out to Lazuli for help in 2013.

 WHAT PROBLEM DID THE BUSINESS FACE?

Due to an imminent management buyout, Rosemont Pharmaceuticals approached Lazuli to assess the accuracy (and usability) of a series of spreadsheet models that Rosemont was using for its monthly financial reporting.

 The main problem Rosemont Pharmaceuticals faced was that while the spreadsheets were accessible, they weren’t functioning properly. This problem needed to be fixed before the management buyout could move forward, meaning there was a high-pressure deadline.

 WHAT WAS LAZULI’S SOLUTION?

Lazuli recommended its Excel Check service, to review the usability of the existing spreadsheet models.

All of Rosemont’s models went through a rigorous checking process. To do this a duplicate model was created by the Lazuli team, which was tested for logical and arithmetical integrity, to see whether its performance matched the business’ overall objectives.

This approach enabled Rosemont Pharmaceuticals to test the accuracy of its current spreadsheet models against an objective third party model built to achieve the same outputs.

The Lazuli model allowed Rosemont to streamline the number of models it was using, reducing around 100MB of logic to just 7MB.

Commenting on the result of the project, CEO and founder Dominic Robertson stated: “This was one of our most successful monthly reporting models. As well as being used for the valuation and subsequent buyout of the company, this model was a foundation for monthly reporting. As opposed to having a one and done spreadsheet—created for one purpose—Rosemont Pharmaceuticals could use the model for ongoing monthly reporting.”

2. High Speed 1 (HS1)

In 2012, Lazuli was approached to create the financial models for the UK’s first high-speed rail service, HS1. The project required a suite of operating models to report to both shareholders AND run the company’s financials on a daily basis (until 2040).

WHAT PROBLEM DID THE BUSINESS FACE?

There were a few challenges specific to this project. For one, standard financial models are based on a 12-month period per year. However, the HS1 project had to be based on a 13-month financial year, meaning that the standard 12-month base couldn’t be used.

Alongside this, a project as detailed as high-speed rail meant that mixing a long-term time frame with a short-term operating horizon simply wasn’t going to work.

Having one model fit two moulds would be too convoluted and ultimately inadequate, as it would result in either a messy model that would be a minefield to operate, or a simpler model that wouldn’t be as effective as it needed to be.

WHAT WAS LAZULI’S SOLUTION?

The solution was to build two separate models with a shared interface. The interface was a statutory financial statement fed by one model which accommodated a longer time-frame, and another with a shorter time-frame:

•    The short-term model would produce a three-year forecast, seeded by two years of management accounting actuals.

•    The long-term model used the short-term model five-year base to forecast 25 years, carrying on from where the short-term model left off.

Commenting on the result of the project, Dominic stated: “The benefit of having two models was that each could meet the different requirements set by company directors and each model could perform its individual tasks to the best of its ability. The shared interface ensured that no human error occurred due to a lack of interface understanding and usability, and both models could be used interchangeably when needed.”

“The shareholders were extremely pleased with the result and recommended Lazuli for an upcoming project with Caruna Oy”

3. Caruna Oy

Finnish power grid company, Caruna Oy, has an electricity network nearly 79,000km long and is the largest supplier of energy in Finland. In 2014, Caruna Oy changed ownership from Fortum (who had been running it since 1912) to an array of investors: Keva (12.5%) and Elo (7.5%), as well as international infrastructure investors, First State Investments (40%) and Borealis Infrastructure (40%).

This transition meant that the newly established Caruna Oy had to start reporting their finances to shareholders and lenders.

WHAT PROBLEM DID THE BUSINESS FACE?

As Caruna Oy was a new company previously under the umbrella of a much larger corporation, they had no financial model base.

Lazuli needed to create a strategic model that could be used by a firm that had to deal with multi-company group consolidations and adjustments—which are very specific, complex requirements.

WHAT SOLUTION DID LAZULI PUT IN PLACE?

To meet these requirements, Lazuli Solutions built a long-term strategic operating model in Excel. 

In order to easily and effectively run company financials, the model included a multi-company structure, extensive financing and inter-company loans and obligatory complex regulatory revenue calculations.

Commenting on the result of the project, Dominic stated: “Caruna Oy were particularly happy with the result. As this project required specific expertise that usually can’t be found in-house, it would have been impossible for them to build this model themselves.

“Also, as Caruna Oy was a new company that had to start dealing with both shareholders and company directors, our model helped build a bridge between the two groups—allowing shareholders to see company returns, while also forecasting the future of the company for the directors.”

Now it’s time for your solution…

Collectively, the Lazuli team has a breadth and depth of knowledge and experience in financial modelling that is rare in today’s age.

Our background enables us to both support the financial health of companies as a whole as well as identify improvements to the financial models of specific silos within.

We work closely with investors, financial directors, controllers and managers to offer three core services:

•   Model build … for firms looking to gain a deeper understanding of their business.

•   Model review … for finance directors and managers who wish to eliminate errors in their spreadsheet model and gain reassurance without an expensive assurance policy.

•   Training … to learn about financial modelling and unlock potential.

If your firm is struggling with any of the above, let us find the right solution for you. Drop me an email, and we’ll arrange a time to chat through the service that your business needs.