You are here

Spreadsheet: Friend or Foe of today's Business Planning Process?

Introduction

Spreadsheets are everywhere. They enable us to quickly perform analysis that would otherwise be difficult or time consuming to prepare. We all use them because we love the flexibility that comes with them and the undue trust we trend to place in the integrity of the analysis that we prepare. Even to drive strategic decision and to deliver operational and financial plans and analyses, most organizations rely heavily on the spreadsheet.
 
Errors happen although. A simple search on the internet for the words "spreadsheet mistakes” will provide you with more than enough evidence of the catastrophic effect the simplest of spreadsheet errors can have in business planning and reporting processes. Including an impressive number of press releases by quoted companies, explaining that financial restatement need to be made due to spreadsheet mistakes. Be it budgeting errors, financial statement errors, pricing errors, fraud or simply bad decision making as a result of poor information, the costs can be significant and the damage to your reputation can be far worse.

This all sounds a little unnerving. The risk associated with the use of spreadsheets has become increasingly high profile over the last couple of years. Businesses that are required to comply with the Sarbanes Oxley Act are likely to have created an inventory of spreadsheets deemed critical to the Financial Planning and Reporting process. Should all businesses be concerned about the risk associated with the use of spreadsheets? The simple answer is Yes.

In this article we mainly talk about spreadsheets, but we should keep in mind that most principles set out in this article apply equally well to informal databases or other user managed data analysis tools like Microsoft Access.

The cons of Spreadsheet Based Budget Processes

What are the main problems organization face using spreadsheets as the backbone for their budgeting and forecasting processes?

Some General problems in using Spreadsheets

Beside issues inherent using spreadsheet to the business planning, we should be aware of some key general issues using spreadsheets. To name of few:

  • Sensitivity of the information contained in the spreadsheet and the impact of information in the spreadsheet getting into the wrong hands;
  • Opportunity to use the spreadsheet to perpetrate fraud, for example by inflating budgets, covering up poor performance, manipulating key information on which bonus payments are based;
  • Dependency of the process on the spreadsheet and the impact of loss of the spreadsheet or information contained within the spreadsheet on the business;
  • Reliance on the spreadsheet as a key control over a business critical process;
  • The potential or direct financial loss and damage to the reputation as a result of spreadsheet errors is clearly important.

Spreadsheet flexibility- sort of

Spreadsheets offer flexibility, but without structure. You can model business scenarios but as business conditions change, goals are revised, accounts products and customers added or deleted, plans and reports must be modified quickly to see the impact changed business assumptions. Making such changes in a large, complex and multiple spreadsheet environment requires often an inordinate amount of time and attention, since it isn't always clear what change may be needed or where. And apart from the time consuming aspect, the risk of mistakes and false conclusions of the analysis or simulation, due to forgotten –but unnoticed & necessary- changes in formulas, is considerable. In these circumstances the flexible spreadsheet can become a nightmare, given the pressure to deliver response according a strict time schedule. 
 

Spreadsheets inhibits collaboration

Collaboration and budget owner's participation is a critical success factor to deliver an accurate and meaningful overall financial plan. Due to error frequency and deployment difficulties, spreadsheet based planning demands a constrained, centralized, finance driven process that can only, given the control restrictions, reach a small part of the organization. In addition the spreadsheets are created by finance people using a language and concepts barely understood by responsible budget owners. Multiple top-down, bottom-up iterations in the planning process are simply not an option due to the lack of system support. As a consequence collaboration and participation is further inhibited.
 

Spreadsheets support poorly the budget process management

Spreadsheet driven budget processes are very difficult to manage. You hardly can track the progress made by budget owners in setting up their budget. If organizations grow and organizations become more decentralized it is a laborious task to check the status of budget owner's contribution to ensure the delivery of quality budget results on time. Indeed spreadsheets inability to manage the budget process workflow often leads to ineffective planning processes, moving forward at the pace of the slowest participant.
 

Poor version control

It is very difficult assuring that everybody in the budget process is working on the correct version of a given budget of forecast. Poor version control results in consolidated budget figures based upon inaccurate data or the inability to consolidate at all.
 

Consolidation is a difficult and time consuming activity in Spreadsheet based Budgeting and Forecasting

Consolidation to aggregate the different inputs from multiple budget owners and their spreadsheets is very often a tremendous effort lasting for weeks, even if spreadsheets are delivered error free. It is not difficult to understand that if organization grow or decentralize responsibilities these aggregation difficulties grow exponentially with the number of spreadsheet contributors or budget owners. In the few cases where a "magic macro” has been developed over time, to assist in this consolidation process, we need to pray that the person that developed the macro stays in the same function and with our company …
 

Real Time budgeting and forecasting not possible

Spreadsheet based planning inhibits companies to quickly react on changes in the economy, market conditions or competitive actions because the planning process moves to slowly to gather the correct information to take corrective actions and allocate the necessary resources. When conditions demand rapid reaction, but real time information is missing, executives are forced to rely on their educated guess to respond. This is particularly true for the use of spreadsheets for forecasting purposes, where daily changes might arise, but where the "change” in forecast is only "captured” and brought to management attention at the "next” forecast cycle. "Big” changes in the information –in the best case- will end up in an email. For a lot of small changes, in the end maybe resulting in an even more considerable, different number, the company will "discover” the issue when the next forecast process is ended. Especially for quoted companies, we should strive for the process & technologies not hindering the real time visibility the markets require nowadays.
 

Budgeting and Forecasting regarded as irrelevant

The spreadsheet based budgeting is often so flawed that operational level managers regard the entire planning and performance management process as irrelevant, undermining the role the budget process should play in the company's performance management process, that is "Support the Implementation of the next step of its Strategy”. Despite the enormous amounts of time, management attention, and money that year after year is spent on the budgeting process, it is considered as the number one not value added activity.

Conclusion

Spreadsheets are going to stay and are not going away, nor should they. They are excellent personal productivity tools. But we should be aware of the real and significant spreadsheet risks across the business as a whole. Spreadsheets in no way respond to the requirements for Enterprise Applications. It is advised to design and implement a Spreadsheet Control Framework that is appropriate to your business to mitigate the risks associated with the use of spreadsheets.

Spreadsheets are greatly limited because they depend on fallible human users to generate complex formulas and macro routines, they work poorly in collaborative environments and they are unable to access and aggregate data from disparate sources.

The use of spreadsheets for budgeting and forecasting and reporting can result in significant error at a cost of millions, and can occasion serious doubt on the integrity of the financial plan and reports overall.

Spreadsheets make budgets and forecasts difficult to maintain and inhibit a collaborative enterprise wide planning process. As business plans become larger and more complex the inadequacy of spreadsheets based budgeting and reporting is only magnified.

True enterprise planning solutions for budgeting and forecasting are available.