Long before there was Visi-Calc, Multiplan, Lotus 1-2-3, and Microsoft Excel there was Ticonderoga No. 2. In some ways it is still the most powerful tool in existence for financial analysis. Why? Because it is the only one that absolutely ensures that the human brain is fully engaged in the financial analysis process. While spreadsheets have their power to perform calculations quickly and over multiple periods, they work without any “gut check” for reasonableness. While the calculations themselves are always “accurate”, programming errors are easy and all too common in today’s complex spreadsheets with thousands of calculations.
One can quickly “copy and paste” formulas over multiple periods without checking to see if the results yield a logical answer. It is easy to move one cell too far to the left, right, up or down and capture data that was not supposed to be part of the calculation. Or fail to capture a cell and leave data out of a calculation.
Whenever I get a spreadsheet from someone else I begin by looking for the most common errors and trying to understand how it was built. Ultimately, I’m trying to understand the thought process of the person who built the spreadsheet and their underlying understanding of the business. Do they understand the business and have they translated it into numbers?
At times, I am stumped by a spreadsheet. It seems to generate an answer that just isn’t what logic and good business judgment would dictate. When this happens, I pull out a blank sheet of paper and a pencil with an eraser. I work in nice round numbers – usually even millions – and see if I can get close to the answer that the spreadsheet generates. It might take minutes, or it might take hours, but I almost always find a formula error at the root of the problem or an assumption carried to the extreme.
Recently, I found a spreadsheet that added $5 million dollars of cash to a business by increasing accounts payable substantially every month . . . forever. The assumption that AP increased for a few months and even for an extended period was not unreasonable, but a lack of thought allowed the amount to grow to a ridiculous number for the size of the business.
Another time, I was sent a spreadsheet with a dizzying amount of detail on cost projections. As all projection models do, it showed nice profits three to five years out. There was one little problem, however, the total expense line failed to capture one of four sub-totals leaving out millions of dollars of cost. When this was fixed, the model showed on-going losses.
Why does this happen? In the interest of increasing accuracy, spreadsheets authors include a mind numbing amount of detail and complex calculations that are often useless. As assumptions become more complex, the person building the spreadsheet becomes lost in the detail and fails to see the big picture and mistakes happen. But they trust the spreadsheet which means they are ultimately trusting that every key stroke they made was perfect. That’s a scary thought.
The next time you’re building or reviewing a spreadsheet, make sure your brain is fully engaged in thinking about the bigger picture. Step away from the keyboard and think about what the answer should be. Test the spreadsheet with a piece of paper and a Ticonderoga No. 2!
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to
your cash is flowing. know where.®
Ken Homza
Copyright @ 2011 Homza Consulting, Inc.