A spreadsheet can produce a very precise answer to a question we have not thought through.
Change an assumption, extend a forecast, adjust the discount rate, and the value of a business moves. The calculations may be correct throughout. The difficult part is deciding whether the assumptions describe a business that could actually exist.
Teaching financial modelling has made me interested in what people learn while building the model. A useful exercise forces us to understand how a company works. Where do sales come from? What does growth cost? When does an accounting profit become cash that the business can use?
For IJK, these questions belong at the centre of investment diligence. The spreadsheet should help us investigate a business and explain our judgment.
Begin with the business behind the growth rate
Imagine a company forecasting annual revenue growth of 20 per cent. This is a hypothetical example, but a familiar kind of investment conversation.
That growth could come from finding more customers, selling more to existing customers, raising prices, or buying another company. Each route requires something different. A larger sales team costs money before it produces results. Higher prices may encourage customers to leave. An acquisition brings integration work as well as revenue.
I would want the forecast to explain those choices. A growth rate becomes more useful when we can connect it to customers, capacity, people and the cash needed to deliver.
A story gives the numbers a purpose
Investors need a view of the future. Without one, historical financial statements tell us what happened but offer little guidance about what might happen next.
A credible narrative connects a customer problem, a company's response and a plausible way to earn a return. It helps explain why the business deserves attention. The danger comes when an appealing explanation starts doing the work that evidence should do.
A large market does not establish that a company can reach customers economically. A popular product does not establish that customers will keep paying. Good technology does not settle who will capture its value.
I find it useful to turn each important part of the story into a question we can investigate. What would we expect to observe if this claim were true? What evidence would cause us to change our minds?
Ask where the assumptions came from
Forecasts often mix different kinds of information. Some inputs come from signed contracts or operating records. Others reflect management's plans, external estimates or an investor's own judgment.
All can be useful, provided we understand the difference. A plan to enter a new market deserves a different level of confidence from an established pattern of repeat orders.
Cross-border work makes this especially important. Evidence from one market may help frame the questions in another. It cannot settle local customer behaviour, distribution costs or the time needed to win trust.
Someone who understands how a business operates on the ground can expose an unrealistic assumption more quickly than another layer of financial detail.
Make the model explain what could go wrong
A single valuation can suggest more certainty than we possess. I would rather understand which assumptions matter most and how much room the business has if they disappoint.
What happens if customers take longer to pay? If expansion is delayed? If the company must spend more to win each sale? Can it still fund wages, suppliers and the next stage of growth?
These are connected operating questions. Slower collections may create a financing need even while reported revenue grows. Spending less to protect cash may then slow the growth forecast.
The point of a downside case is to reveal those dependencies early enough to make a better decision.
Keep the explanation understandable
A model can become so elaborate that only its author knows what drives the result. That makes a discussion harder, especially when founders, operating teams and investors bring different experience to the table.
I would ask for a plain-language explanation: these are the few things that must happen, this is the evidence supporting them, and this is the consequence if we are wrong.
Detail still matters. It should make the reasoning easier to examine. Complexity that hides a weak assumption has little value.
Leave room to change your mind
Investment judgment continues after the spreadsheet is finished. Actual results give us a chance to compare the original assumptions with what customers and management do.
That is an approach I want IJK's investment perspective to reflect: curiosity about the business, discipline about evidence and a willingness to revise the story.
The most valuable output of a financial model may be a clearer understanding of what we know, what we are assuming and what we still need to learn. A precise number becomes useful when we can explain the business behind it.
Adapted and expanded for IJK Capital Partners from Numbers and the narrative on Kenny Ng’s personal blog.