The Top 5 Dangers of Using Spreadsheets for Financial Modeling

Businesses today continue to heavily rely on spreadsheet software like Microsoft Excel for financial modeling, despite the numerous examples of high-profile financial disasters caused by simple spreadsheet errors. While Excel has been an indispensable tool for businesses for decades, it has also become increasingly risky for financial modeling. The financial world has seen instances where copy-paste errors have cost JP Morgan $6 billion, hidden cells caused Barclays to purchase 179 unwanted contracts, and a single miswritten number on a spreadsheet caused a 25% dip in RedEnvelope’s share values, leading to the CEO’s resignation.

Therefore, it is essential for businesses to take a hard look at the dangers of using Excel for financial modeling and forecasting. While we do not suggest abandoning Excel completely, it is imperative to recognize the significant losses incurred by simple spreadsheet mistakes and explore new solutions that provide a safety net against such expensive errors. In this blog, we will outline the top five dangers of using Excel for financial forecasts and modeling and suggest alternative solutions to mitigate the risks.

Danger #1: Poor Collaboration Safeguards

One of the major dangers of using spreadsheets like Excel for financial modeling in today’s business environment is poor collaboration safeguards. With the rise of remote work and the need for businesses to work with teams spread across global offices, physical proximity is no longer a reliable means of collaboration. While Excel does offer remote collaboration capabilities, it does not adequately protect against the risk of “too many cooks in the kitchen.”

In many cases, financial spreadsheets are maintained and updated by multiple employees, each with different roles and responsibilities. Some may be responsible for creating the sheet’s structure and formulas, while others input data or perform other tasks. This can create significant risks, as any employee with edit access to the spreadsheet can potentially make changes that impact the entire model, whether intentionally or by accident.

Without proper collaboration safeguards, it is nearly impossible to protect against such risks, especially in a national or global team setting. Our recommendation is for businesses to upgrade to financial software that inherently creates custom permissions, provides transparency to data changes, eliminates the need for custom financial formulas, and gives individual user accounts. This will ensure that financial models are safeguarded against unauthorized or unintended changes, even in highly collaborative environments.

Danger #2: Lack of Version Control

When multiple employees work on a spreadsheet, it can be challenging to keep track of who made what changes and when. This lack of transparency can lead to errors, inconsistencies, and confusion, particularly when working with large or complex financial models.

Moreover, Excel does not offer built-in version control features, making it difficult to roll back to a previous version if a mistake is made or if the model needs to be reverted to an earlier stage. Without proper version control, it is also challenging to track changes made by different users or to collaborate effectively on financial models.

Our recommendation is to use financial software that includes robust version control features, such as the ability to track changes made by different users, roll back to previous versions, and collaborate effectively. This will help businesses ensure the accuracy and consistency of financial models and minimize the risk of errors caused by multiple users working on the same spreadsheet.

Danger #3: Lack of Real-Time Data Updates

Real-time updates are the new expectation for the modern business world. In today’s fast-paced business environment, leaders need to make swift decisions based on the most up-to-date information available. However, spreadsheets do not automatically link to bank accounts, investments, or other financial institutions to provide live updates of balances and transactions.

Furthermore, spreadsheets cannot code transactions, use artificial intelligence to speed up the process, or automatically generate charts without specific coding. This creates unnecessary lags in financial decisions and creates a high dependency on financial employees to keep data up-to-date and respond quickly to new situations.

Our recommendation is to use financial software with powerful third-party integration capabilities. This allows financial institutions, expense tracking systems, bookkeeping software, and other tools to feed directly into your financial forecasts and models, providing real-time updates and reducing the risk of errors caused by manual data entry. This can help businesses make more informed financial decisions quickly and respond to new opportunities or threats with greater agility.

Danger #4: Data Security Threats

Data security is critical, and no one can be too careful. With the increasing number of ransomware attacks, companies need to be extra cautious, especially if multiple employees use cloud-based spreadsheets.

Collaborative limitations of spreadsheets mean that conversations about data developments or strategies often occur on other messaging platforms or via email, which can pose additional security threats. Hackers can exploit these conversations to infiltrate a company’s financial data. Therefore, it is safer to use a single software that provides high-level encryption, unique logins and hosted messaging.

Our recommendation is to use financial software that promotes hosted messaging to keep financial conversations separate from emails, texts, or other unsafe messaging platforms. By creating individual logins for all employees, businesses can ensure data security and increase accountability, reducing the risk of unauthorized access to sensitive financial data.

Danger #5: Lack of Data Transparency

Spreadsheets can contain large amounts of data that are difficult to interpret by those who are not familiar with the finance department’s processes and preferences. This can create a significant challenge for company leaders who need to access current reports and financial visualizations no matter where they are. Additionally, the lack of continuity in data and the potential for significant changes due to employee turnover can make spreadsheets even more challenging to manage.

To address these issues, we recommend using financial software that can automatically generate preconfigured, user-friendly reports. This approach can reduce the burden on the finance department’s resources, safeguard against employee turnover and shifting preferences, and ensure that company leaders have constant access to clear and concise financial information.

Time to Abandon Spreadsheets?

Despite the numerous hazards associated with employing Excel for financial forecasting and modeling, it can prove challenging for businesses accustomed to the software’s features and functionality to completely abandon it. However, continuing to rely solely on Excel can be extremely dangerous for a business. Fortunately, there are FP&A software solutions for Excel users, which offer a way for companies to utilize Excel while minimizing the dangers of spreadsheets. By adopting these tools, businesses can benefit from Excel’s power and familiarity while also gaining the advantages of specialized financial modeling software.

Recent Posts

Leave a Reply

Your email address will not be published. Required fields are marked *