The use of Microsoft Excel© by corporations is synonymous across all industries, company sizes, company age, and global location. The ubiquitous and user-friendly nature of spreadsheets has resulted in a heavily reliance by business. However, as a financial modelling professional, one is acutely aware its use and application can be good, bad or even downright ugly at times. There are certain areas of financial, business or management informational analysis, which are best served or kept in the sphere of accounting systems or databases.
The spreadsheet is one of the most used tools by businesses. It is easy to understand why, given its flexible, user-friendly and rich features of functions, VBA and formatting potential. For the financial modelling professional, it is still arguably the best tool to undertake strategic planning and business valuations; not to mention the added value of sensitivity and scenario analysis of a company’s financials.
Applying robust best practice financial modelling, model users can rightfully create a seamless, error-free and sophisticated financial model for corporate executives … but. This assumes, the financial model has leveraged the strength of an accounting system or other database, and not attempted to reinvent the informational wheel!
The advent of open-source software, cloud computing and a raft of accounting and other database software, has meant the cost to manage a corporation’s accounting or informational needs is more than offset by the benefits. The use of spreadsheets in place of Hyperion or Simply Accounting to manage a company’s accounts or sales transactions maintained in a spreadsheet repository, are examples of the bad side of spreadsheet use.
The best practice financial model is meant to complement and not replace the accounting or information system. This will be achieved via the importing of financial information into an area of the workbook.
These are the “car crash” statistics and studies, which signify the ugly side of spreadsheet use for financial modelling purposes. A lot of very public and well-documented corporate spreadsheet disasters would have been merely averted, if the basic tenet of best practice financial modelling had been followed – error checks. Across the world the ugly side of spreadsheet use has surfaced. Here is a graphic of material losses suffered from company spreadsheets turning ugly.
There have been studies that quantify the financial loss of the ugly use of financial models. KPMG and PwC have estimated 90% of corporate spreadsheet have errors, which equates to a monthly cost of between $10,000 and $100,000 per errorI. Another study by Panko states between 78% to 97% of spreadsheet contain “serious material errors”, which in turn will materially impact the bottom lineII.
The comprehensive use of Microsoft Excel© spreadsheets in the business community is clear. Financial modelling professionals can undertake powerful, value-adding and forward-looking analysis on a company’s financials, by leveraging the flexible and user-friendly functionality of Excel. However, there is the bad side of the application of spreadsheets; professionals employing it to undertake accounting or database duties – instead of a reliable accounting system like Hyperion or database such as SAP or Oracle.
The ugly side of financial modelling relates to the “car crash” statistics and research, which has often resulted in incorrect financial reporting and analysis by corporations due to spreadsheet errors. Upholding basic best practice financial modelling principles would most likely have averted or minimised the impact of these material errors on the companies in question.
I “Managing spreadsheet fraud”, Philip Howard, The Register April 2005
II “Beware the perils of spreadsheets”, Ian Cook, Financial Times May 2006