Spreadsheets are Spreadsheets–Not Planning Tools

April 2, 2008

Financial planning plays a very important role in the running of any business. Creating a budget and tightly managing this budget are essential for keeping any business and its finances on track.

When running a business, it’s easy to get bogged down in day-to-day problems and forget the bigger picture. However, successful businesses invest time to create and manage budgets, prepare and review business plans, and regularly monitor finance and performance. Financial planners concentrate resources on improving profits, reducing costs, and increasing return on investments (ROI).

There are numerous software solutions used for budgeting, forecasting, and measuring performance against plan. Many financial management teams use spreadsheets because they allow:

The freedom to manage financial planning with needed requirements without depending of any other department, including IT.
The finance team to generate reports without being involved in the selection process for another tool, including garnering authorization from the IT department.

However, the use of spreadsheets as a financial planning tool for strategic planning has impediments that organizations oftentimes are not aware of, including:

Hidden costs
Integrity of information
Operability
Dependency

Hidden costs

The initial cost of spreadsheet software is quite low. However, organizations do not realize the hidden costs they incur month after month. Every time organizations generate a corporate budget or financial report, employees must first gather all the information from every department, then enter the data into an enterprise resource planning (ERP) system, validate it, adjust it, and then finally generate a spreadsheet for each operational unit of the company as a whole. The spreadsheet is usually integrated into a strategic business plan report and a presentation is given to management. The problem - If a change occurs in the information, the process must start all over again.

For example, during one company’s budget cycle, the department of Human Resources calculated the payroll budget, and then sent it through the cost centers to the Finance department. The Finance department integrated this report with other reports from every department and generated one spreadsheet per cost center. This was returned to each department head to capture and enter their data. Once completed, the Finance department integrated all the information to generate financial forecasting reports. Included in this process were numerous authorization requests and cycles between rejected and authorized budgets.

It was very common that once the spreadsheets were sent to each cost center, the Human Resources department modified the payroll budget, so the Finance department needed to reenter all the numbers, regenerate the spreadsheets, and resend them to the responsible party in each area. All of the original spreadsheets were eliminated and the process had to start from scratch.

To present budgets to management, employees entered information manually, then built presentations. They also generated confidential files for each cost center and distributed them to management. If the numbers changed, the employees had to build the presentations again.

The use of spreadsheets carries hidden payroll costs in this example. Manual data entry changes are time consuming, and often cause a snowfall effect that requires the whole budgeting process to start over.

Integrity of information

Sometimes, information within the spreadsheets contains errors and is not a true reflection of the financial health of the business. Some organizations have made critical decisions based on this information.

Two types of errors occur within the spreadsheets in some organizations: unintentional and intentional errors.

Using spreadsheets for financial planning is a completely manual process and involves a considerable number of people. It’s quite difficult to avoid human errors, such as typing a wrong key number, copying data in the wrong place, etc. These errors happen more frequently than you can even imagine.

However, not all errors are unintentional. Many times people will alter information to make it look better, such as when an accountant makes adjustments when some information doesn’t match with the business goals.

Operability

Businesses using spreadsheets as a financial planning tool have the ability to electronically monitor a report, but can not act on that report as you could if you used a financial planning solution.

Management likes to monitor the budget and see the financial status of every business unit. To do this, information must be gathered from the Finance department, which must integrate the information from each cost center.

If you need to consult reports of previous months, they must be requested from the Finance office because the spreadsheet usually only presents a financial report in the current month, not previous months. Most of the times, the spreadsheet is so large it becomes complicated to send it by e-mail; plus requires an enormous amount of time to open the spreadsheet and review it.

Often, especially if there are various employees working on the budget, it is hard to tell which is the correct version of the budget. If you are out of the office, you may not be able to determine which is the correct version either. Not using the correct version of the budget can be a costly mistake.

Analyzing the information within the spreadsheet is time-consuming. If you need to use specific formulas, you must repeatedly enter them month after month because they are not integrated into the tool.

Feedback and sharing comments is practically impossible since each user comments in their own document. In case you need comments, you would need to ask the Finance department to integrate them and generate them again for each cost center. The only comments that are integrated are the ones that the Finance office generates.

Sometimes, another handicap of using a spreadsheet as a financial planning tool is that users calculate results on their own, getting different results from the official reports.

Dependency

Spreadsheets can be customized through the creation of macros and advanced formulas in every cell. This is usually handled by a special programmer in the Finance department because of its complexity. As time passes, the macros and formulas get more sophisticated and are complicated to maintain, making this tool very dependable of one specific person. If this person leaves the company and does not leave any documentation on the macros and formulas, the spreadsheet needs to be created from scratch.

Structured planning can make all the difference to the growth of your business, placing your company on the road to success. But companies must use the right tools. While spreadsheets make good financial tools, they lack flexibility, expandability, and the power to solve real-world problems. By using enterprise performance management solutions, organizations can consolidate all financial information and budgets from each area, providing a unified, real-time view of the businesses performance.

David Abdo has been CEO of Bitam since 2000 and was a founder of CIE, one of the two companies that partnered to create Bitam. He was a systems consultant in the Human Resources department of Petrocel, a division of the Alfa Group. He also held a teaching position at the Monterrey Institute of Technology and Higher Education. Mr. Abdo holds a degree in Computer Information Systems and a Bachelor of Business Administration from the Monterrey Institute of Technology and Higher Education.

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Posted by Carl · Filed Under Uncategorized