Using a spreadsheet-like software solution to create corporate budgets and forecasts may be very tempting but the amount of work and actual results may surprise you and make you think again.
Many finance professionals pride themselves on their financial modeling abilities, particularly when it comes to harnessing the power of spreadsheets when creating their masterpieces. I am not one of them.
I have used spreadsheets from several software vendors for a long time now, in fact, ever since the first commercial spreadsheet became available. I think I am a pretty good user of spreadsheets (nowadays MS Excel exclusively, is there any other choice left?); I use most of the common functions; I use macros from time to time and even place links in some of these worksheets, but I don’t consider myself an expert by any stretch of the imagination.
I know that because I see the work that many finance department employees do with spreadsheets at the client companies we service. Some of these Excel projects are gigantic collections of workbooks, each with many worksheets (Excel tabs), many of which are linked together. These monstrous creations are frequently not documented. They are the brainchildren of their creators and often present the company with major problems when these people leave or are relocated within the organization. I do, however, appreciate some of these people’s talents.
These spreadsheets, when designed and programmed correctly, and when accompanied by documentation that allows their maintenance, potentially can offer the ultimate degree of financial modelling power and freedom. Unfortunately, these home-grown financial models are often explicitly relied on and trusted by their creators and management personnel with no regard to the inherent risks in this type of financial modeling.
This regularly results in overlooking the possibility of errors and omissions due to lack of internal control over these worksheets, the difficulty in performing all the required work when changes are needed, and lack of process change management. These are the main reasons I strongly disagree with this approach.
Popular, first generation FP&A (Financial, Planning and Analysis) software solutions, some of which are offered to SMBs (Small and Medium size Business) use many of the spreadsheet concepts in their design. Users are given a great degree of flexibility and freedom when designing and implementing their financial models (e.g., annual budgets, sales forecasts, etc.). They can insert formulas and functions almost anywhere in the model, add links and tie different pieces of the work together.
The risks to these types of financial models are essentially like risks you encounter when using spreadsheets for financial modeling. Not surprising, users of “spreadsheet like” budgeting and forecasting applications are faced with the same challenges and issues that users of spreadsheets face, but with the following distinct differences:
- The initial setup and implementation is often contracted to the software vendor, since the complexities involved in getting the model up and running are often beyond the knowledge and capabilities of even the most sophisticated users of financial applications and their IT departments.
- Maintenance of the model is just as hard as maintaining a spreadsheet model. Extensive programming is required and often adding pieces to the model is accomplished by rebuilding significant parts of the model, at a great expense to the company.
- Changes and additions to the model take time, often a long time. Most users don’t have the time wait for these changes to be implemented and tested.
- New errors may creep into the model each time changes or additions are performed. These may go undetected, sometimes more so than spreadsheet programming errors, especially if there is no direct indication that something is wrong.
A much better approach is using software that is supplied by its vendor with built-in business logic and accounting rules. With simple menus and drop-down selections, use of drivers and datalinks to other parts of the software one can build a pretty comprehensive model, encompassing the entire corporate plan and budget.
It is true that one or more of the fine nuances of the company’s exact way of doing business may be slightly compromised, but is it really worth it to struggle with spreadsheet or spreadsheet-like modelling considering all the disadvantages mentioned above? I have seen budgets and other forecasts relying on incredibly complex models employing mind boggling calculations, only to miss the mark by millions of dollars. And these were not Fortune 500 companies but your middle of the road companies in the SMB space.
So now you are faced with these important questions:
- Is the added freedom in building a financial model more important than getting a reasonably error-free model at a fraction of the cost of implementing this using spreadsheet-like FP&A solutions (or plain spreadsheets)?
- Can you afford embarking on a project that may take months or even years to complete, as opposed to days or weeks that it typically takes to implement an intelligent plan?
- Do you think you will be able to maintain control over a spreadsheet-like process no matter how frequently changes are made?
- What about scaling the model, introducing new elements, what-if scenarios and multiple versions?
For all the reasons outlined here, I think taking the much more complex, spreadsheet-like route, is a risk no finance manager should take.
Alan Hart, MBA, is Principal Consultant at Pacific Shine Group in Portland, Oregon, with responsibility for client business development and hands-on client project implementations. Prior to starting Pacific Shine Group, he worked in various executive accounting and finance positions with technology and growth companies. Notable is his 18 years in the hi-tech manufacturing industry where he served as Controller, Vice President of Finance and CFO of several privately as well as publicly held companies in the Hi-Tech industry, such as Hybrid Arts, Inc., Hamilton Bay Associates and Syncronys Software. In his role in management consulting, Alan has worked in diverse industries and with a variety of clients, including fortune 1000 companies such as Boeing, Delta Airlines, Intel, Wyndham Worldwide and others, as well as many mid-market organizations such as Guitar Center, Ducommun AeroStructures, Cypress Semiconductor, TriQuint Semiconductor and others.
Combining his skills and experience in engineering with deep understanding of technical accounting, he is able to assist small and medium-size manufacturing companies establish GAAP compliant accounting and reporting systems.