• Strategy
  • CFO Research Services

When Do Companies Outgrow Their Spreadsheets?

There comes a time at every smaller, growing company when managers perceive a need for more sophisticated software tools than spreadsheet-dependent planning, budgeting, and forecasting.

Pressured by senior management and boards of directors to produce more detailed budgets, forecasts, and performance data, while seeking a longer term view of the financial horizon, many finance executives at midsize companies are reevaluating their reliance on spreadsheets for planning, budgeting, and forecasting.

Many of the financial analysis problems endemic at large, complex public companies — such as finance’s need to cut costs and drive profitability, to make financial reports more transparent, and to partner with operating units in business planning — are also prevalent at smaller companies.

Midsize companies have relied on spreadsheets and manual budgeting and forecasting processes since the earliest days of personal computers, and spreadsheets remain the de facto standard for day-to-day quantitative analysis. Indeed, well-crafted spreadsheets may be all the technology a new company needs to get up and running quickly. They are easy to understand and use; nearly all staff have some proficiency with Microsoft Excel.

However, large enterprises in recent years have migrated from spreadsheet-dependent processes toward more sophisticated automated planning, budgeting, and forecasting tools. These tools promise a greater level of operational detail for analytical purposes, more robust financial reporting, quick consolidations of financial data, and more input by business managers. The tools also liberate finance departments from the mundane manual processes of “racking and stacking” data to focus on a more robust understanding of the real drivers of business. As software technology improves and a corps of technologically sophisticated finance executives come to lead new and smaller companies, a provocative question emerges: Can midsize companies derive similar benefits by implementing these analytical applications?

The Status Quo — “Spreadsheets from Hell”

Most midsize companies depend on spreadsheets and manual processes for planning, budgeting, and forecasting. A recent survey by CFO Research Services (a sibling of CFO.com) asked finance executives at midsize companies about their efforts to transform their planning, budgeting, and forecasting processes. Of the 287 company responses to the survey, 73 percent rely primarily on spreadsheets and manual processes, with only 16 percent using analytical applications, and 11 percent extracting the necessary numerical information from their accounting modules. The prevalence of spreadsheets is not surprising, given the vast installed base, ease of use, low cost, and simple user interface of this commonplace application.

This study found, across the board, that survey respondents believe they spend too much time on forecasting, budgeting, and planning. When asked about the most acute problems with their current planning process, more than 60 percent said it “takes too long.” Nearly 43 percent said “not enough time to analyze data,” and more than a third cited “lack of ownership by business units.” Among larger companies — those with more than $500 million in annual revenue — the inability to revise forecasts and budgets during the financial period was cited as the major problem.

What are the root causes of these problems? Respondents indicated that human factors such as collaboration among planning participants and uneven technical proficiency were primary causes. “Overdependence on key personnel” was cited by nearly 50 percent of respondents, “version control” by more than 35 percent, and “collaboration, consolidation of users’ work” by nearly 35 percent of respondents. These issues add time to the planning, budgeting, and forecasting process, thereby reducing the amount of time left to actually analyze data on operational performance.

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