Why It’s Risky to Use Excel as a Financial Modeling ToolThe reliance on spreadsheet-based financial modeling is deeply entrenched in the culture of many organizations. This is often due to Excel’s convenience, flexibility and up-front time saving benefits, as well as companies’ reluctance to adopt new software and processes. Additionally, some organizations may be hesitant to invest in modeling software, instead preferring to use their own in-house legacy applications. Long-term strategic planning for any organization requires access to accurate data that demonstrates the future implications of key budget drivers, opportunities and risks. Spreadsheets, while useful for rudimentary calculations, are incapable of providing the complex, multidimensional analysis that financial modeling software was designed for. Aside from the cumbersome process of manually inputting data, spreadsheets pose real risks for organization relying upon them for business decisions.
1. Spreadsheet Integrity.
Human error – whether in the form of data input or calculation mistakes – makes spreadsheets susceptible to inaccuracies. It has been estimated that close to 90% of spreadsheets contain material errors, which leaves countless corporations relying on questionable analyses. Additionally, these errors are costly in terms of time and money wasted and can lead to embarrassing public mishaps that impact the reputation of companies.
2. Version Control Issues.
Unlike an integrated software platform, data flow is far from seamless when companies use spreadsheets to generate financial models. When Excel is shared between departments, version control issues can impact the accuracy of data. Whether it’s unapproved edits or data that has been erased, sharing one or more versions of a spreadsheet can quickly lead to chaos.
3. Lack of Security.
While Excel does offer some security protection, many programs are capable of hacking passwords and duplicating files within minutes. A company’s IP is also embedded into the formulas making worksheets even more risky. Compounding these issues is the lack of an audit trail, leading to difficulties in detecting fraud and making compliance and regulatory requirements nearly impossible to adhere to.
Excel is flexible and easy to use, which is one of the primary reasons it’s used so ubiquitously as a financial modeling tool. However, there are drawbacks to these attributes, particularly if spreadsheets are large and complex. Lack of boundaries around a financial model can have disastrous consequences if incorrect data is used for analyses.
5. Limits to Model Complexity.
Financial modeling involves the consideration of alternative scenarios and what-if analyses. Excel, on the other hand, is two-dimensional; incapable of considering the myriad variables necessary for a robust model. Additionally, new information or questions may make it necessary to change aspects of an existing model, which can be difficult to do in Excel.
6. Presentation Capabilities.
Telling a financial story is more than simply data -- a model’s results need to be presented as customized reports, charts and dashboards to effectively communicate to audiences of various sophistication levels. With Excel, resources are wasted on copying and pasting data from one program to another, leaving less time to focus on the strategic narrative key stakeholders need to make effective and timely decisions.
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