In 2022, the market size of industrial automation was valued at $207 billion worldwide. Due to the increased adoption of automation, the value is expected to increase to $265 billion in the next three years.

When automation is such a hit in every other sphere, it’s about time financial modeling adopted it too. Automation in financial modeling can streamline a company’s financial processes by utilizing software and other tools to reduce manual labor.

It reduces time, effort, and cost in creating and updating financial models. Automating financial modeling also eliminates the chances of human error in the process, thus increasing efficiency and accuracy. Below, we discuss the benefits of automation in financial modeling.

Role of Automation in Financial Modeling

There are several ways that automation can be used in financial modeling, including:

• Data Management: Automation can quickly and accurately import, clean, and manipulate financial data from various sources. These can include data on financial statements, market data, and economic indicators.
• Model Building: Automated tools can also build financial models more efficiently. They may use pre-built model templates or create custom models using programming languages such as Python or R. However, this only works for simple models.
• Sensitivity Analysis: Some automated tools can perform sensitivity analysis, which involves varying assumptions in a financial model to understand how changes in these assumptions impact the model’s outputs. It can help identify key drivers of financial performance and inform decision-making.

In some instances, you can also use automation for risk analysis. Suppose you wanted to understand the impact of a change in interest rates on your investment portfolio. 

Automation can help you quickly simulate scenarios and analyze the results. You can quickly get the results for different percentages of interest rates without any manual calculations.

How Does Automation Help in Financial Modeling

There are plenty of benefits to using automation in financial modeling. Here are some notable ones.

Increased Efficiency

Creating a financial model involves a lot of numbers, figures, and calculations. Automation can help reduce the time and effort it takes to finish a model. You can handle large data volumes without manually entering figures and calculations.

Reduced Error Rate

Manually entering data increases the chances of creating an error. That’s probably why 88% of Excel sheets have errors in them. The University of Hawaii professor who conducted this research said that creating spreadsheets is somewhat similar to writing programming codes.

But the latter goes through extensive review and debugging to reduce errors. Meanwhile, most spreadsheets are used right after the first draft.

Fortunately, automation helps you reduce errors in your financial model by doing away with manual data entry. It eliminates the human element, so there’s less chance of making mistakes in spreadsheets.

Improves Operational Efficiency

As a startup, you must perform a lot of tasks in a limited amount of time. Automation helps you minimize the effort and maximize results.

It can also handle complex calculations that your in-house team might struggle with. Instead of depending on manual labor, you can now rely on a machine’s precision and accuracy.

In addition, automation helps improve the speed of your finance operations. You can now crunch numbers quickly and get results in real-time.

Gain Deeper Insights

Automation helps you gain deeper insights into your financials. It can quickly sift through large amounts of data, so you can make better decisions backed by reliable data points.

You can also discover data patterns and trends that you may have missed before. It helps you prepare for potential scenarios and forecast more accurately. 

Cost-Savings

Since automation helps you reduce labor costs, you can use the money saved to invest in other areas of growth. You can also use automation to decrease your operational costs.

For example, some accounting software can automate repetitive tasks such as invoice creation and data entry. That means you don’t have to hire more people or pay for manual labor.

What Can You Automate in Financial Modeling?

There are quite a few things you can automate in financial modeling. The level of automation you leverage depends on access to tools and affordability.

Data Input

You no longer have to copy and paste data into a spreadsheet. Automation helps you quickly pull the necessary data and feed it to your financial model.

Calculation

You can automate complex calculations such as depreciation, amortization, and capitalization. Likewise, you can generate on-demand reports for financial analysis.

Scenario Analysis

Financial modeling involves analyzing the relationship between internal and external factors, such as market dynamics, competitive landscape, and customer spending. 

Automation can help you identify potential scenarios and model the outcomes. For instance, what happens if the interest rate increases or decreases?

How do your outputs differ if the customer base decreases or market dynamics change? Automation can helps answer these questions.

Limitations of Automation for Financial Modeling

While there are many advantages to using automated tools for financial modeling, there are also some drawbacks. Here’s what you should know.

Generic Assumptions

Since automation tools are built on underlying assumptions, they may not provide the most accurate results. For example, some tools assume that all variables are linear and do not take into account non-linear relationships between variables. It results in misleading conclusions.

Lack of Flexibility

Automation tools are designed to be used in a certain way and have limited flexibility. They may not be able to accommodate certain inputs or may lack customization options to fit specific needs.

It creates a “one size fits all” approach that is not always the answer for startups. Instead, startups need a customized approach that follows their unique business model and growth trajectory.

Customization Is Key for Startups

Unlike established businesses, startups cannot always rely on pre-built templates and standard models. Startups must customize the model according to their business needs and goals.

Automation tools are designed to speed up the process, but without customization, the results may be inaccurate or misleading. At Numberly, we curate financial models per startups’ needs and offer real-time analysis tailored to specific requirements.

Backed by dynamic assumptions, our models grow with your business. Since the model is created for your particular situation, you can understand and use it in the best way possible. Schedule a call to learn more about how we do this.