Financial reporting is a standard accounting practice that uses financial statements to disclose a company’s financial information and performance over a particular period, usually on an annual or quarterly basis. Simply put, financial reports reflect how much money you have, where the money is coming from, and where your money needs to go.
Accurate financial reporting is an indispensable component of decision making processes in any business, in addition to quality financial reporting tools. Potential investors and banks will also use a company’s financial reporting to decide if they want to invest or loan the company money.
There is an abundance of resources available to conduct financial reporting, among these is Microsoft Excel. Though it is a decades old application, Excel is still the language of finance professionals, as it is the most universally understood tool in corporate finance. Excel is also versatile and can be used for a multitude of tasks in financial reporting.
However, there are some who criticize financial reports in excel, claiming it’s outdated and prone to human error, among other things.
Though these criticisms are not unfounded, Excel is still an extremely effective resource in financial reporting, and will continue to be so for the foreseeable future. Finance teams simply need to know what are the advantages and disadvantages of financial reporting in Excel, and how to address the disadvantages with either:
A. Adjusted Excel methods
Or, using the best option of…
B. Implementing a software that ideally meshes well with spreadsheets.
Advantages of Reporting with Excel
Aside from Excel’s universality, two of the most advantageous benefits of its use in financial reporting are as follows:
- Improved Projections: Excel allows businesses to organize data into charts and graphs for business reports or presentations. With a number of chart options — including pie charts, bar charts and line graphs — data can quickly be organized into a visual representation of sales changes or percentages. Excel can even integrate a regression analysis into a line graph, added simply by selecting “Add Trendline” from the Chart menu for a line graph — to predict future developments based on your current data.
- Versatile Presentation Options: Spreadsheet applications such as Excel include tools for data visualization. You can take an existing data set within a spreadsheet and present it within a chart, with various types of graph and chart options to choose from. The resulting charts let business managers gain insight into the data by presenting it in graphical ways. These charts can also be used in corporate contexts, such as within presentations. You can manually control all aspects of a chart display, including chart type, labeling and colors. You can also print spreadsheet tables and charts for use within reports and other publications.
Criticisms of Reporting with Excel
Though there are many different perspectives of Excel, here are two of the most common and understandable criticisms:
- Spreadsheets are prone to human error: Studies have shown that 94% of spreadsheets have significant error, and nearly every spreadsheet has at least a 1% error factor within a formula cell. This is the most serious issue with Excel use. To illustrate the gravity of the consequences from human error: A single spreadsheet error in 2010 cost JP Morgan $6 billion after misreporting its overall Value at Risk (VaR) for years.
- Limited clarity/insights: It can be difficult to extract certain insights from spreadsheets — the visualization tools excel offers have their limits, and organizations have a wider variety of visualization methods when using a software system.
Addressing Criticisms & Finding a Solution
Finding a solution to the aforementioned problems by no means signifies that finance professionals should completely abandon Excel when reporting; it will continue to be well understood by everyone, and is still relatively versatile in its projection and presentation capabilities.
Fortunately, both of these common problems with spreadsheet usage in financial reporting can be solved through the implementation of a quality software system. The best part about this solution is that it can be done while continuing to use Excel!
To address the issue of human error:
Finance teams can use Excel in tandem with financial software to automate manual tasks and create seamless flow of data. This eliminates the problems of inaccuracy due to broken formulas or innocent mistakes on the spreadsheets because business rules can be implemented to do self-checks on whatever figures are yielded. It can be designed in a way which allows finance teams to drill through or investigate their figures for improved transparency. The finance team will not have a hard time adopting a software so long as it is aimed at complementing Excel.
In regards to the criticism of Excel’s limited insights and visual tools:
Implementing a software with Excel user interface allows you to do more deep level reporting and analysis tasks like testing assumptions, performing what-if scenarios or doing multi-level allocations.