Are spreadsheets a danger to your business?
/The answer is most likely yes, but how well are those risks managed?
Spreadsheet error rates are high and small mistakes can have huge impacts on profitability and business survival, but a surprisingly large number of businesses, even large corporates, do not have robust, standardised modelling practices and a process of strict testing of critical spreadsheets.
Companies of all shapes and sizes rely on spreadsheets to help them make crucial decisions about whether to make a new investment, which strategic direction to follow and how best to run their businesses day to day at an operational level.
So, why do we not place more weight on ensuring that they are robust and fit for purpose?
Well, there are many possible explanations. Spreadsheets typically grow organically alongside a developing project or business, analysis often being required at short notice for commercial decisions with little time built in for planning and testing. Companies rarely commit adequate resources to crucial training in spreadsheet best practice that will improve modelling efficiency, effectiveness and accuracy in the long-run. Further, MS Excel is so embedded and accessible as a business tool that professionals with limited understanding of its power can feel overly comfortable using it, unaware of the risks involved. Thus, models all too often become complex and poorly underpinned, rather than simple and transparent, and users tend to place undue trust on model outputs.
Ray Panko, Professor of IT at the University of Hawaii, has studied spreadsheet risk widely: “When someone builds a spreadsheet, they will make errors in about 1-5% of all cells and experience doesn’t really matter. This means you are correct about 95-99% of the time. Trouble is spreadsheets are big - sometimes with hundreds of unique formulas. You’re almost certainly going to have a bottom line error.”
However, unlike in software engineering where it is routine to spend around 40-50% of time on testing, time allocated to testing spreadsheets in most businesses falls far short of this and in many is non-existent.
Of course, a balance must be struck between the costs and benefits of rigorous testing. Hence, a process that focuses on using a best practice standardised methodology is key, identifying and testing critical models within a business to different levels depending upon inherent risk, whilst also being cognisant of the timeliness of analysis in a commercial environment where spreadsheets are produced quickly and relied upon straight away.
So, given the risks involved and the important decisions made based on their outputs, it makes sense to take mitigating spreadsheet risk seriously.
How can we help?
At Financial Insights, we can help you to reduce your decision-making risks, put in place better controls and practices, achieve greater value and gain confidence in your decision-making tools through:
Model design, build, reconstruction and repair
Integrated and dynamic forecasts, business models, plans and option evaluation
Independent peer review and testing, including an initial Free Health Check
Procedures to identify, control and review your critical spreadsheets
Modelling resource to alleviate workload peaks
Good practice guidance to strengthen your in-house capability including tailored 'Clinics' and coaching sessions that focus on learning retention
Simple, cost-effective spreadsheets for SMEs, start-ups and funding applications
We follow and are a signatory to the FAST Standard, a recognised set of rules providing guidance on the structure and design of efficient spreadsheets.
Contact us to book your Free Health Check to assess your current risk exposure and learn how to mitigate it and unlock greater value in your business.