What Buying A Second-Hand Car In Panama Taught Me About Financial Models

In 2016, I moved to Panama.

The first time I set foot in Panama City, I quickly realized that I needed a car.

When you start exploring the second-hand car market in Panama, you soon discover that there are 3 main categories of cars:

1. Japanese and Korean cars,

2. American cars,

3. Luxury European cars (BMW, Audi, Porsche, and the like).

I was surprised to see how underpriced the cars in category 3 were.

Owning a Porsche Cayenne, a BMW X5, or an Audi Q7 in Europe is not for all budgets. In the Panamanian second-hand market, however, these cars are affordable.

There are 2 simple market reasons for these affordable prices:

• Low demand,

• High supply.

Only Europeans tend to buy luxury European cars when they first arrive in Panama. After some time, they realize it is not a wise choice and get rid of them in the second-hand market, thus reducing the prices.

Why is it not a wise choice?

Because Panama features a lethal combination of high temperatures, humidity, salinity, and poorly maintained roads.

Luxury European cars are sophisticated, sensitive, and picky. They're not designed to withstand such a harsh environment. In Panama, luxury European cars have an annoying tendency to break down often.

On top of that, spare parts are scarce, have to be imported, and might take months until they're finally delivered to workshops, while your broken down car awaits a repair. Besides, local technicians are not sufficiently skilled in the complexity of European cars.

You need a tough, robust car.

You might be wondering what buying a car in Panama has to do with financial models.

When buying a second-hand car in Panama, you need a car adapted to that specific environment.

When building a financial model, you need a model designed to answer a specific business question:

• What is next year's forecasted revenue?

• What is the lowest bid to offer to win a tender?

• What is the maximum amount of debt a project can borrow?

• What is a competitive premium to acquire the equity of a project?

• And so on...

A common approach in financial modeling is to start from an existing complex model, with all bells and whistles, and adapt it to answer a different business question.

Adapting an existing model to answer a different question can be time-consuming and costly. The cost will probably exceed that of building a new model specifically designed to give an answer to your business question in mind.

My point?

If you have to build a financial model, don't follow the approach of using an existing model and adapting it to answer a different question. That is not a wise approach.

Instead, be mindful of the specific business question you want your financial model to answer, and build the model accordingly.

Perhaps, you're in need of a financial model but you don't fancy either building a model from scratch or adapting an existing one.

If that's the case, my advice is to contact your nearest financial modeling workshop.

Like this.

P.S. My choice was a Honda Accord. Stylish, robust and reliable.

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