A recent cash management survey showed that 43 percent of respondents continue to experience issues with their cash flow forecasting. Unsurprisingly, more than half of the market still uses spreadsheets to execute this business-critical function. The million-dollar question is, why?
According to the European Spreadsheet Risks Interest Group, the reliability of a spreadsheet is essentially the accuracy of the data that it produces and is compromised by the errors found in approximately 94% of spreadsheets.
If accurate cash flow forecasting remains one of the key priorities for treasury and finance professionals alike and the market has easy access to affordable, cutting-edge forecasting applications, why do we continue to rely on outdated, ineffective forecasting tools?
Common myths prevail that spreadsheets save money, are easy to use & flexible. In the spreadsheet’s defense, it’s a nifty tool, that ticks many of the aforementioned boxes and can work very well with cash forecasting solutions. But, for a growing business looking to mitigate risk and plan for the future, risks run high if you’re relying on a system that’s almost surely flawed, demands hours of manual input effort, prone to human error, exists largely undocumented and which no one really knows how it works.
"After the clever intern, who developed the nifty macros and formulas is no longer around……nobody knows how the application generates the numbers."
Pennywise, pound foolish
Spreadsheeting is, by and large, the manual process of gathering, inputting and administrating data. Typically, spreadsheets have been built up and added to over a period of years, becoming cumbersome to manage and share. In an eye-watering number of cases, the person originally responsible for constructing the spreadsheet has long since left the department. No one knows the algorithm behind the macros and no one assumes responsibility for its maintenance, let alone documenting changes and adaptations. The whispered precedent remains, “if it’s not broken, then leave it alone”……… Ouch!
Alternatives are perceived to be more expensive. Excel, for example, is cheap to acquire whilst Treasury Management Systems are expensive with lots of added features that SME’s in particular, don’t require.
Busting the myths
Cost is no longer a plausible reason to rely on spreadsheets for cash flow forecasting. Cloud-based solutions such as Analyste CashForecast, offer competitive pricing. Modular, on-demand, SaaS solutions have revolutionized application choice. Simply choose the modules you need, pay by the month, and no IT involvement is required. Free up more departmental time by reducing the number of resource hours required to maintain a spreadsheeting process and the cost-saving just got bigger.
Spreadsheet errors and inaccuracy are by far the most compelling reasons to consider a move to a specialist cash forecasting application. Finance and treasury cannot afford to make mistakes. Inaccurate cash flow forecasts can literally lay to ruin a company’s business reputation and/or result in a financial loss or penalty. No scare tactics are needed.
Mini Case-Study: Conviviality a ‘Spreadsheeting Horror Story’
At first, the drinks retailer Conviviality said profits would be 20% lower than the £70m expected by the City, with £5.2m of the £14m holes that had opened up in its forecast, down to a spreadsheet error. The remainder was a reflection of weakening profit margins.
On 21 March 2018, the Guardian (UK) reported “Firm issues third profits warning; says it will meet investors to raise funds via a share placing’’. The company, in a stock exchange announcement, said it was holding meetings with investors to raise £125m via a share placing that would help it pay a £30m tax bill due at the end of the month, fund overdue payments to creditors and repay a £30m loan.
The company blamed the first shock profit warning on a spreadsheet arithmetic error made by a member of its finance team and weakening profit margins, and then admitted it had not budgeted for the £30m tax bill due this month.”
Conviviality has since gone into administration.
Whether or not the use of spreadsheets was the sole cause of this bankruptcy is not clear, but it seems to have been a major contributor. Such cases are exceptional, but they do illustrate how relying on spreadsheets is not a sensible course of action for any finance & treasury team anywhere.
Many spreadsheets also contain, quite clever but complex, macros and apart from keeping these up to date, finance & treasury are responsible for ensuring their integrity. This is something that is not always feasible. Even when errors are spotted it is often very difficult to decode them, especially given the sheer size of the spreadsheets many finance and treasury folk utilize.
It’s easy to make data errors but, with a specialist cash forecasting solution, there will be controls available such as separate input and authorize functions. Spreadsheet applications, on the other hand, do not lend themselves easily to such controls.
Look out for Part 2 of the ‘Say goodbye to spreadsheets’ blog next week!