The Entrepreneur's FD: The joy of Excel

26 Jan 2011 | Mike Cosby

Mike Cosby is principal at The FD Centre

First, let me confess to being a bit of an anorak when it comes to spreadsheets. I started with Lotus 123 in 1985 on the IBM PC with the twin floppy drives. Then, after a brief flirtation with Multiplan, I started working through the various versions of MS Excel. It took a while to be convinced of the merits of the 2007 release, but now I find myself looking forward to getting my next laptop with Excel 2010 installed.

Of course, the reasons we use Excel are quite simple. It provides us with a framework for performing calculations and preparing analyses that is completely customisable. It even allows us to express - dare I say it - some degree of creativity in our daily lives.

Some of you may follow the excellent pointers and opinions on Excel offered by the ICAEW's Simon Hurst on its IT Faculty blog. There is a lot of discussion at the moment about the risks associated with companies' reliance on the output from spreadsheets. A glance at the 'horror stories' section of the EuSpRiG (the European Spreadsheet Risks Interest Group) can cause an FD to sleep less soundly at night.

I would like to offer a slightly different view of the limitations of Excel. I like to group these under the headings of capacity, reliability and transferability.

Capacity is when your spreadsheet runs out of steam. You have decided to do the entire budget on a single Excel file - sales by product/customer, purchasing/manufacturing and so on. A glance in My Documents confirms that the file size has ballooned to 27mb, takes seven minutes to run an F9 recalculation and, even zipped down, exceeds the email attachment limit on the mail server. Perhaps we are trying to get Excel to do something it just is not designed to do. Because Excel is so simple and intuitive to use, we want it to mirror, even sometimes replace, the accounting system, often because the accounting system itself is far from simple and intuitive to use.

What about reliability? Let's say the following year you have learned from your mistakes. You will produce the budget using a number of linked spreadsheets - sales in one file, production in another. It's all going ok until the night before the budget presentation, when you open the top-level file only to discover that every cell returns the value #REF. Somewhere along the line you have lost the links to the calculation files and it has all gone horribly wrong. Of course, there are ways of mitigating these risks by building in some simple controls and by adhering to a few basic rules of spreadsheet design. It's the user who makes the mistakes - Excel itself works perfectly well.

And what of transferability? Some time ago I took over as FD at a company that manufactures central heating equipment. The previous incumbent had kindly done an exhaustive handover that included a run-through of all his management accounting spreadsheets. I could see what he had done but I knew I could do it better, so I spent many hours redesigning my predecessor's files from scratch. The result was a slight improvement in the quality of the numbers and in the presentation. Mainly, however, I felt comfortable that if something went wrong with one of the spreadsheets I'd know how to fix it.

The fact is that nobody is comfortable picking up someone else's spreadsheets, which set me thinking. How much time is spent on this activity each year? Let's assume there are 35,000 businesses with more than 50 employees in the UK. Assume that each of these has an FD or FC and that they have an average tenure of five years in the job. Assume also that it takes two weeks for the new job-holder to rework all the reporting and budgeting spreadsheets at, say, an average of £40 an hour.

On this basis, the annual cost of all this activity in this country alone is not far short of £30m. The assumptions can be questioned, but the fact is there is a very real hidden cost here.

I am not sure there is a solution to these issues. Companies can look at using secure and documented database applications where possible, but Excel will always have its place in every business.

Perhaps the key is for users - many of whom I could class as anoraks judging by how reliant they are on Excel, something which Financial Director wrote about recently - is simply to be aware of the risks and try to practice "safe spreadsheeting".

Mike Cosby is a principal at the FD Centre. He is a qualified accountant who spent time in internal audit in Europe and Asia, and later was managing director of a manufacturing business in Ghana working on behalf of Heinz. 

Follow our blogs from the FD Centre at our Extraordinary Items blog on the last week of each month


Reader comments

You've been "exceled"

As a CA and FD, excel is an invaluable and powerful tool. It has proved most useful in not only analysing historic financial data but forecasting and scenarios for business planning purposes. If it is being used in either an operational capacity or as a reporting tool it is probably a patch up job for inadequate ERP/CRM/financial software. There’s a new dawn in software, cloud computing. Why re-invent the wheel when capability can be bought relatively cheaply.

The real challenge for the entrepreneurial FD is to find ways of assisting a company in identifying the key business drivers and KPIs and, importantly, making sure that the information is available at “the coal face” to help them drive the development of the business. Empower people with critical information – don’t get caught in paralysis by analysis.

Posted by Paul Grant, 26 Jan 2011

Hidden cost or hidden benefit?

The cost of redrafting spreadsheets is not without gain - in preparing spreadsheets which closely mirror the business cycles the preparer can often gain great insight into how the business operates.

It might be time consuming but if done properly there is huge commercial gain.

Posted by David K, 29 Mar 2011