The Problem With Financial Modeling Software Solutions
5-Min Read
Financial modeling software solutions are used to answer a single, high-level question:
What will my business look like in the future?
In order to predict the future, most modeling solutions perform calculations (while operating under certain assumptions) that result in recommendations. Good financial models enable you to achieve clarity and consensus on what route your organization needs to take to achieve certain goals.
The challenge is dealing with the unknown. To address the unpredictable nature of forecasting, many analysts build models to account for different variables, assumptions, and decisions.
This seems like a good solution, but financial analysts will be the first to tell you just how tedious and time-consuming the process can be with traditional spreadsheet solutions. Excel and similar solutions are not only inefficient, but they also increase the likelihood of error.
In the end, you could spend hundreds of hours painstakingly preparing the best-looking financial model for stakeholders…while failing to answer the only question they care about:
What will my business look like in the future?
Here, we'll discuss the existing problems with current financial modeling software in more detail. Then, we'll explore the types of solutions that can serve any organization better.
The limitations of traditional financial modeling software
For many organizations, here’s how financial modeling works:
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The board of directors or trustees asks high-level financial questions to the CFO, such as, “How can we increase profitability by X percent?” and “What happens if we make this investment?”
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The CFO defines these particular questions and then hands them to an analyst to build a model.
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The analyst uses spreadsheets to build the financial model and answer these questions. They factor in different scenarios, using standalone spreadsheets to show how different decisions would change future outcomes.
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The analyst delivers these results to the CFO, who presents them to the board of directors.
This seems alright, doesn’t it? But in reality, it’s a process riddled with unnecessary complexities, inefficiencies, and risks.
Let’s dig deeper into the problems of these financial modeling software solutions.
The limitations of traditional financial modeling software
Financial modeling software solutions rely too much on spreadsheets and manual processes. Analysts waste a ton of time worrying over individual cells, clunky algorithm entry, and manual data visualization. They never get around to fully exploring as many scenarios as they should.
Frankly, the amount of time wasted in spreadsheets is shocking. Across Europe, for instance, even advanced spreadsheet users waste 9 hours per week doing repetitive tasks within tools like Excel. That’s 22.5% of an entire workweek!
Think about how much money is wasted across a five-person team of analysts. If you pay your analysts an average of $90,000 per year, that’s $20,250 burned per employee, and over $101,250 per year wasted on repetitive and redundant manual labor.
For that kind of money, you could have hired a sixth analyst.
Static, not easily customizable
Good financial modeling requires dynamic projections. Yes, you can perform calculations using different assumptions across spreadsheets, but that solution would be far too static and unwieldy.
Let’s return to the example of the CFO taking the financial model to the board. The issue is that the analyst gave the CEO static spreadsheets. By the time the CFO delivers the model to the directors, new information could have become available, making the scenarios dated before they’re even presented.
As explained by experts at leading finance and accounting firms, static analysis doesn’t “appreciate the sensitivity of bottom line results to changes in input variables." This makes it difficult to see how particular outcomes could be altered by certain decisions.
Spreadsheets simply weren’t designed to help analysts perform quick, real-time updates in their financial models. While that might have been fine back in the 1980s, it can lead to seriously poor decision making in the 21st century.
In order to make the best decisions in a timely manner, you need to know how different combinations of assumptions, drivers, and variables could change and impact every potential outcome.
So, if you can’t understand all the ways in which a decision could impact your business, how can you possibly make that decision with total confidence?
The answer is that you just can’t. You’re taking a big leap of faith. Is that something you really want to do with your business?
Vulnerable to human error
Since traditional financial modeling software essentially requires manual labor, work tends to get tedious and complicated very fast. And to err is human.
In fact, if you carefully analyze financial model spreadsheets, you’re more than likely to find an error. Unsurprisingly, almost 90% of spreadsheets contain errors.
And there are horror stories out there about million- and billion-dollar blunders.
Back in the 2000s, for example, the University of Toledo made a forecasting error, overestimating revenue. They only later realized they had a $2.4 million shortfall.
Far more infamously, NASA lost a $125 million Mars orbiter in 1999 because the Lockheed Martin engineers who designed the orbiter used American measurements rather than NASA’s metric standard. Ultimately, the orbiter was unable to properly navigate and was lost to space.
Granted, these are extreme examples of human error. But they’re both examples of the types of mistakes that can (and often do) happen when using and sharing spreadsheet-based financial models.
For instance, if you’re looking to take out a business loan, traditional financial modeling software wouldn’t allow you to test how the input variables for the loan impact other assumptions and your overall business. After all, the loan amount, interest rate, and term could all fluctuate.
If you can’t account for that, you’re left testing one assumption at a time when multiple scenarios could emerge at once.
And when you just test one assumption, your projections could turn out dead wrong.
Too two-dimensional
Instead of using different spreadsheets, some financial models may attempt to jam everything in one sheet.
The issue with this is that traditional financial modeling software is two-dimensional, with only rows and columns to choose from. Without any feasible alternatives, analysts are forced to create rows with additional assumptions. This necessitates complex ‘if… else…’ statements that are all manually entered.
Not only does this approach take time, but it is also highly prone to human error and can quickly grow disorganized, making it harder to clearly communicate with stakeholders. Any kind of disorganization can put the integrity of the entire model at risk.
The problem with traditional, spreadsheet solutions is that they focus on one or a handful of scenarios at a time and are only designed to answer a small set of questions using a small set of assumptions. This leaves CFOs and stakeholders unable to accurately picture the full scope of outcomes.
Difficult to share and explain
Answering high-level financial questions from the board involves a three-step process:
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Modeling
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Analysis
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Communication
If you don’t get the third step right, your financial modeling is worthless. With a financial modeling software solution that relies on burdensome spreadsheets and DIY data visualization, you can’t present a sophisticated range of outcomes to the board.
Simply put, static, complex financial modeling software makes it difficult for models to be shared and discussed across different levels of an organization, namely between high-level decision-makers and analysts.
A better financial modeling software solution
Long story short, spreadsheets simply aren’t built to serve as financial modeling software solutions. It’s time we go beyond Excel and use a more dynamic and powerful tool.
The ideal financial modeling software solution should:
- Be a purpose-built modeling solution that fully integrates all financial data.
Analysts shouldn’t have to build out rows and columns and worry if product and service revenue shows up on the income sheet. Financial model software solutions should have the income sheet, balance sheet, and statement of cash flows pre-programmed and fully integrated with one another.
- Be like a sandbox where all sorts of scenarios can be tested.
This will ensure quick, real-time analyses. New information can be easily integrated and the effects of new assumptions analyzed without reinventing the wheel each time. With such a dynamic solution, organizations could plan around an uncertain future more effectively.
- Have Photoshop-style layering to maintain model integrity and enable multiple scenarios to co-exist.
Photoshop-style layering makes multiple spreadsheets redundant and ensures you capture the full scope of possibilities. If you have to change the underlying math, it can be done in a single, shared “source of truth” (rather than across 5, 10, or 20 spreadsheet iterations).
- Offer a kaleidoscopic view so that analysts can explore any permutation of financial factors.
You should have the ability to toggle pre-set algorithms. This way, you could quickly see how even small changes in assumptions can affect the business over several years.
- Feature an embedded powerpoint-style presentation mode so stakeholders can work with financial analysts on interpreting the findings of the model.
This would make the software more collaborative. When a financial modeling software system allows for participation, along with real-time analysis, it brings decision-makers greater clarity. It also helps finance communicate and support their decisions and recommendations more effectively.
Intelligent financial modeling software
We got tired of spreadsheets and their shortcomings. Seeing the need for agile financial modeling software, we created Synario, a Photoshop-style tool for forecasting and visualizing the future of your business or organization.
With Synario, you get a purpose-built modeling solution that can adapt to real-time changes and account for multiple scenarios at once. With just a few clicks, you can explore all your assumptions and see what would happen to your business in every possible outcome.
Synario is the dynamic model organizations need to plan for uncertain futures. Moreover, the ability to quickly create powerful visuals empowers the finance team to better communicate with leadership.
And with more accurate projections in hand, CFOs can have full confidence that they’re providing stakeholders with the best possible recommendations going forward.
So how about it? Are you ready to build financial models smarter and faster than ever before?
