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The use of a Spreadsheet: the death of many businesses

Posted: 13 May 2013 in Blog

I am always amazed how many people/organisations use a spreadsheet in preference to an accounting system to control their business.
The problems with spreadsheets as a basis for accounts are numerous. I thought about writing a blog about the faults but then I found this article by Denizen, which eloquently states the flaws which, in summary, are:

1.    Vulnerable to fraud

This is perhaps the most damaging. Fraudulent manipulations in company Excel files have already resulted in £Billion losses. The main underlying reason behind this spreadsheet vulnerability is lack of controls, which makes it easy to alter formulas, values, or dependencies without  detection.

2.    Susceptible to trivial human errors

Missed negative signs and misaligned rows may sound harmless. But when they damage confidence or cause a loss of opportunity amounting to £millions (Are we serious? Google “spreadsheet horror stories” to find out)., it’s time to move on to better alternatives.

3.    Difficult to troubleshoot or test
Spreadsheets just aren’t built for testing. It’s not uncommon to have interrelated spreadsheet data scattered across different folders, workstations, offices, or even geographical locations. Worse, even if you are able pinpoint the locations of every related file, tracing the logic of formulas from one related cell to another can take ages.

4.     Obstructive to regulatory compliance
All, the above effect regulatory compliance. Serbanes-Oxley (SOX), Dodd-Frank, Basel II, Solvency II, EU Data Protection Directive, and FAS 157 are just some of the regulations that impact spreadsheet systems. Over the last two decades, we’ve seen a surge in regulations that directly affect spreadsheet-based systems.

5.    Unfit for agile business practices

We’re in an age when major changes are shaping and reshaping the business landscape - Mergers and Acquisitions, Management Buyouts, earthquakes, tsunamis, uprisings, climate change, new technologies, etc. If your business isn’t agile enough to adapt to such changes, it could be left behind or even face extinction.

Spreadsheets are normally created by individuals without the slightest know-how regarding software documentation. Spreadsheets become highly personalised user developed applications. So when a new person takes over they may have to start from scratch.

6.    Not designed for collaborative work
Planning, forecasting, budgeting, and reporting are all collaborative activities. They typically require information from different individuals belonging to different departments and the final documents are a result of multiple exchanges of data, ideas, and files.

If your company is scattered throughout the country or team members are separated by large distances, the only way to exchange spreadsheet data is through email which is susceptible to duplicate and even erroneous data. Team members will tend to find it hard to keep track of similar files going back and forth, and sometimes even end up sending the wrong version.

7.    Hard to consolidate

When it comes to simple data entry and quick ad hoc data analysis, spreadsheets are favoured by end users and are distributed throughout the company. To generate reports, you’ll go through a slow consolidation process. End users collect data from different files, summarise and submit to their department heads through emails, portable storage media, or copy to a commonly shared network folder.

Department heads will undergo a similar process before sending them to their superiors. This continues until all the information reaches the decision makers. Throughout this consolidation process, data is subjected to numerous error-prone activities such as copy-pasting, cell entry, and range specification.

8.    Incapable of supporting quick decision making
In a spreadsheet-based environment, extracting data from different departments, consolidation, and summarising of information for the company’s directors to make sound decisions is time consuming.

And because we know spreadsheets are susceptible to errors, everyone involved in the information processing has to be ultra careful to keep the integrity of the data intact. Hence it would be prudent to enforce double-checking.

This extra exercise can further delay the process. So, when the final information arrives at the top, there may not be much time to work with it.

9.    Unsuited for business continuity
Spreadsheet data is never kept in a single place. And it is in the hands of non-IT personnel, who are not familiar with storage and backup best practices.

Thus, if a major disaster strikes, full data recovery can be very difficult if not impossible.  The absence of data (e.g. accounts receivable records, customer records, and inventory) to work on can prevent the company from making a quick restart.

10.     Scales poorly
As an organisation grows, spreadsheet data is widely distributed compounding the issues outlined above. So a large organisation should stop using spreadsheets.

What’s the alternative?  Use a combination of an accounting system with properly constructed modelling and consolidation systems.

But what is an accounting system?
an organised set of manual and computerised accounting methods, procedures, and controls established to gather, record, classify, analyse, summarise, interpret, and present accurate and timely financial data for management decisions.”

There are many systems from the simple that cost under £250 to the sophisticated which can run into £millions.

They can either sit on your computer, organisation’s servers, or there are many “cloud-based” systems accessed via the internet. Generally they are reliable with great functionality and there will be one that meets your needs.  

The main disadvantages of accounting systems are:-
a)    they are not “free” like excel
b)    you have to learn how to use new software.
There are a number of good quality accounting systems for small businesses costing between £200 and £400 per year.  Many have much improved graphic user interfaces and are simple and intuitive to use as spreadsheets
There are also many modelling and consolidation systems that give you the information you need in a way that avoids many of the pitfalls of spreadsheets.
If you want to know more about how to avoid the pitfalls of spreadsheets or to find out more about accounting, consolidation or modelling systems please do not hesitate to contact me.

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