Overcoming the Risks of Spreadsheets with CPM - Finance Silos

Overcoming the Risks of Spreadsheets with CPM

Microsoft Excel has been the “go-to” tool for most finance professionals, business analysts, and small business owners for over 30 years. Why? It’s inexpensive, easily accessible, and simple to use. Excel is a fantastic tool for personal productivity, but it has its limitations. The product was not intended to support important business procedures, and its overuse can be risky and time-consuming. Continue reading to find out about Excel’s limitations and why many companies are replacing it with corporate performance management (CPM) software.

The Limitations of Excel

With Microsoft Excel, it’s simple to create a spreadsheet, enter data, perform calculations, add formatting, and share it with others. However, when it comes to supporting essential business procedures and financial choices, Excel has several limitations. Here are some examples of those limitations:

  • Error-prone — Users may key in incorrect figures or perform incorrect calculations, which may go undiscovered until it’s too late. According to a study by Ray Panko, a University of Hawaii professor, 88% of all spreadsheets have one or more severe errors.
  • Lacks control — When using Excel to support the collection and sharing of sensitive financial information, there are no validation rules, security, or segregation of duties.
  • No Audit Trails — Excel does not provide audit trails to show who entered, updated, or deleted data or metadata in spreadsheets that are used to generate financial statements and predictions, and when.
  • Limited Scalability — Excel performs poorly when a workbook contains a large number of rows of data and sheets, as well as numerous calculations and look-ups.
  • No Collaboration — When Excel is utilized for corporate activities like reporting and budgeting, there is no workflow to help manage data collection, reviews, and modifications. As a result, organizations face version control challenges when various versions of Excel files are exchanged between users.

The Software That Improves Excel and Reduces Risk

CPM software solutions attempt to help define and manage the strategic objectives of the organization. It’s utilized to create and implement procedures and processes that allow executives to manage and monitor key performance indicators. One of the most important tasks of CPM software is to help with forecasting, value proposition budgeting, and financial planning. Modern systems include configurable dashboards and graphical “scorecards” that provide key performance indicators (KPIs) to the company’s management.

Many companies have realized that Excel has reached its limit and have made the switch to current, cloud-based CPM software. As a consequence, they’ve reduced business processes, improved the accuracy and confidence in their financial results and predictions, and saved their companies time and money while avoiding the risks of making bad decisions based on erroneous data.

Consider the following examples of how simple spreadsheet errors resulted in unpleasant outcomes for some of the world’s greatest and most respected institutions — and what might happen if these mistakes snuck into your own Excel expense reports.

JP Morgan Chase “The London Whale”

The infamous London Whale catastrophe at financial giant J.P. Morgan was caused by an Excel user error. It appears that the organization was utilizing spreadsheets to develop value-at-risk (VaR) models, and one of the employees accidentally copied and pasted incorrect data from one spreadsheet into another. The resulting model drastically underestimated the company’s risk, contributing significantly to the $6 billion trading loss.

An error like this might easily be made by a finance employee processing many Excel expense reports. Consider how easy it would be to paste the correct information into the wrong place if your expense process comprises copying information from individual expense report spreadsheets and pasting it into a master spreadsheet.

TransAlta Copy & Paste Error

A simple cut-and-paste error cost Canadian power company TransAlta $24 million. The error occurred when an employee misaligned the rows of data in the spreadsheet, meaning high bids intended for in-demand electricity transmission path contracts were instead made for lower-demand ones. As a result, TransAlta ended up overpaying for these contracts and, in some cases, obtaining more capacity than they needed. Overall, the error cost the business a whopping 10% of its profits that year.

Hopefully, such an error in an Excel expense report template won’t cost you millions of dollars, but it might easily blow your quarterly expense budget. For example, if your template has spending restrictions coded into specific categories and those spending limits become misaligned, your employees may wind up claiming more in some categories than you intended.

Kodak’s Zero Typo

The stock of Eastman Kodak Co. plummeted in 2005, owing in part to a last-minute accounting adjustment to fix an Excel error. In this case, the error was due to a simple typo: an employee inserted too many zeros to a severance accrual record, resulting in an overstatement of $11 million.

Although subtle errors are the most dangerous, a typo like this would have obvious and severe repercussions on an Excel expense report. After all, if an employee filed an expense report claiming $11 million in office supplies reimbursements, you’d definitely notice right away. However, if he just transposed two digits or misplaced the decimal point, the error would be considerably more difficult to detect before providing the reimbursement.

2012 Olympics Sell Non-Existing Tickets

The organizing committee for the London 2012 Summer Olympics had 10,000 tickets to sell for the synchronized swimming event. Unfortunately, an employee made a single keystroke error and entered the amount of 20,000 instead of 10,000 onto the spreadsheet. As a result, the committee massively oversold tickets to the event, forcing it to recognize its error and apologize to thousands of ticket holders.

In an Excel expense report, this type of inaccuracy might be incredibly difficult to detect. For instance, if an employee intended to claim $40 in expenditures but unintentionally presses the 5 key instead of the 4 key, you may never notice that you have overpaid him.

Many more incidents like these have been reported in the news media over the last 20 years, and thousands more have gone unreported. Excel is not suited to support important business operations, according to auditors and other professionals, especially in mid-sized to big organizations with many users.

Conclusion

Overall, Excel is a fantastic tool for personal productivity, but when it comes to utilizing it for large business operations it can lead to complications. Companies dealing with massive amounts of data should look to tools built to support those efforts. Many of the tools available in the industry, such as CPM software solutions, allow data to be extracted from different data sources, reshaped into useable formats, and then provided to users for visualization and analysis.

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