I think it’s helpful to break forecasting down into three distinct activities:

1. – Short term cashflow. This is the 13 week rolling forecast with a detailed analysis of expected movements on the bank account.

2. – Medium term – out to 18 months. This will start with the annual budget and then be periodically updated as new facts become known about the key drivers. This will help determine the operational strategy for each part of the business.

3. – Long term – out to 3, 5, 7 years. This can be the internal strategic plan or a business plan to be presented to a potential funder. It is the longer-term roadmap for the business and will be determined by the senior management.

The trick is to identify the appropriate tool for each activity. Perhaps the accounting package can handle 1., a budgeting / forecasting application for 2. and a driver-driven spreadsheet does 3.

One thing, however, is crucial. For each of the above you need to have historical figures against which you can compare the forecast. This puts the forecast outcomes into context and allows you to perform an ongoing “health check” on the numbers.

First, let me confess to being a bit of an “anorak” when it comes to spreadsheets. I started with Lotus 123 in 1985 on the IBM PC with the twin floppy drives. Then, after a brief flirtation with Multiplan, I started working through the various versions of MS Excel. It took a while to be convinced of the merits of the 2007 release, but now I find myself looking forward to getting my next laptop with Excel 2010 installed.
Of course the reasons we use Excel are quite simple. It provides us with a framework for performing calculations and preparing analyses which is completely customizable by the user. It even allows us to express, dare I say it, some degree of creativity in our daily lives.
Some of you may follow the excellent pointers and opinions on Excel offered by Simon Hurst and the other contributors to the Institute’s IT Faculty blog
http://www.ion.icaew.com/itcounts/blog/filteredlist/?key=excel . There is a lot of discussion at the moment about the risks associated with companies’ reliance on the output from spreadsheets. A glance at the “Horror stories” section of the EuSpRiG (European Spreadsheet Risks Interest Group) http://www.eusprig.org/horror-stories.htm can cause an FD to sleep less soundly at night.

I would like to offer a slightly different view of the limitations of Excel. I like to group these under the headings of Capacity, Reliability and Transferability.

Capacity
This is when your spreadsheet runs out of steam. You have decided that this year you will do the entire budget on a single Excel file – sales by product/customer, purchasing/manufacturing etc. A glance in My Documents confirms that the file size has ballooned to 27mb, it takes 7 minutes to run an F9 recalculation and, even zipped down, it exceeds the email attachment limit on the mail server.

Perhaps we are trying to get Excel to something it just is not designed to do. Because Excel is so simple and intuitive to use we want it to mirror and even sometimes replace the accounting system. This is often because the accounting system itself is far from simple and intuitive to use.

Reliability
So next year you have learned from your mistakes. You will produce the budget using a number of linked spreadsheets – sales in one file, production in another. It’s all going ok until the night before the budget presentation you open the top-level file only to discover that every cell returns the value #REF. Somewhere along the line you have lost the links to the calculation files and it has all gone horribly wrong.

Of course there are ways of mitigating these risks by building in some simple controls and by adhering to a few basic rules of spreadsheet design. It is user who makes the mistakes – Excel works perfectly well.

Transferability
Sometime ago I took over as FD at a company manufacturing central heating equipment. The previous incumbent had kindly done an exhaustive handover which included a run-through of all his management accounting spreadsheets. I could see what he had done but I just knew I could do it better and so I spent many hours redesigning my predecessor’s files from scratch. The result was a slight improvement in the quality of the numbers and in the presentation. Mainly, however, I now felt comfortable that if something went wrong with one of the spreadsheets I would know how to fix it.

The fact is that nobody is comfortable picking up someone else’s spreadsheets.

This set me thinking. How much time each year is spent on this activity? Let’s assume that in the UK there are 35,000 businesses with >50 employees. Assume that each of these has an FD/FC and that they have an average tenure of 5 years in the job. Assume also that it takes 2 weeks for the new job-holder to rework all the reporting and budgeting spreadsheets at, say, an average of £40 / hour.

On this basis the annual cost of all this activity, in this country alone, is not far short of £30 million. The assumptions can be questioned but the fact is that there is a very real hidden cost here.

I am not sure that there is a solution to these issues. Companies can look at using secure and documented database applications where possible, but the fact is that Excel will always have its place in every business. Perhaps the key is for users to be aware of the risks and to try to practice “safe spreadsheeting”.

ooble is the brainchild of Mike Cosby, an FCA with over twenty years’ experience working with businesses of all sizes. ooble can be used by Finance Directors or Finance Controllers of individual businesses and is also ideal for helping accounting firms, consultants and business advisors to bring tangible added value to their clients.

ooble was launched in March 2011. Please feel free to contact us for further details.