Spreadsheet Modelling - Harness The Power of Excel 08

Introduction

A spreadsheet model takes your existing data and uses it to (i) make sense of current trends or (ii) attempt to predict future trends.

This is my most ambitious article yet - the sheer scale of modelling (from what it means to what it covers) - is just so varied and is ever changing.

The sheer scope of models is huge and can include items such as sales, budgets, cost allocations, cashflow projections, stock control, financial projections, market share, inflation, government interventions, technology advance, and numerous other applications.

Timelines

In most cases, the accuracy of the first year is of prominent focus, and subsequent years are more and more unreliable.

In almost all cases, forecasts are educated guesses. One thing they do very well is to focus on business direction.

Modelling Best Practice

The best approach is to ensure the strategic stakeholders and the providers of the financial information are fully aware of each other. Ensure there are no surprises!

When your business is in a highly dynamic environment, modelling is at the heart of its continued success, or even survival.

Sales / income projections are the most easily flexed assumption and really are the most crucial assumption in any model. You drive your business from the top down not from your cost base upwards.

Having a balanced approach in creating your model is key. Be both optimistic and pessimistic and see where the analysis takes you.

Modelling Factors

Dependent and Independent factors

So let us consider some examples in the context of profit and loss lines:

? sales growth volume of 5%

? headcount reduction of 10%

? entry into a new geographic area

? moving to a new office

? indexation considerations

? new marketing activities

? new technology or software

Scenario analysis

A spreadsheet modeller will be able to look at your operations, have discussions with the executives, examine the data and advise accordingly on how your business model can then be developed to consider predictions for the future of your business.

It is essential that when engaging with your Excel expert, who will develop your model, that they are made aware of a lot of the softer factors of staffing and not just the cost of staff. Some people relish geographic moves, others will not move for their own personal reasons.

Outputs of modelling

The crucial aspect of all models is for CEOs and Executive board members to visually see what is going to happen if the various projections hold true.

It is useful to set out four or six visual outputs (in the form of graphs, charts and tables) that will allow for easy recognition of what story the various scenarios are telling.

The model highlights how plans are put in place to deliver that strategy – and by using properly defined and augmented scenario analysis shows where planning may be flawed, or where it will require very close monitoring.

What can go wrong?

Too many variables

Most Excel models fail because they are too ambitious. Instead of focussing on two or three main drivers, the model attempts to be all things to all people.

Unless you are really exceptional at understanding variables and revenue and cost drivers, anything over four or five variables is totally un-manageable.

It is not that Excel cannot perform the calculations – it can do so readily. No, the problem is that the users need to fully understand all the dependencies that exist within the model.

The goal is to have a model that handles a small number of variables exceptionally well.

Too many cooks

When designing a model, many inexperienced modellers seek opinions of too many stakeholders. You do need a certain level of engagement – at too wide a level, this becomes self-defeating.

Just as with variables, there is no way that you can successfully design a model that is all things to all people.

Final Thoughts on Modelling

Your business success depends on great modelling. As CEO, you must drive the modelling strategy forward. By giving clear and concise guidance and short timescales, you can best leverage the power of Excel modelling. That modelling expertise may be internally or externally resourced.

Where do you go from here?

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1. Whether you run a large private or public enterprise, or operate in a small start-up, you can optimize your use of Excel. ?By using the tips provided in this series, I will save you time and save you money, plus reduce team frustration. All of which all leads to vastly increased profits.
2. Ask how I can help your team to introduce best practices from the ground up, create better reports and models, reduce the dangers of data misunderstandings, and generate huge savings of both time and money.
3. With a love of maths, maths, maths, and more maths I'm always keen to get my head around your numbers and understand your data. Plus, I'm extrovert too - very much the talk of the office and a great team-mate. Great for building up inter-departmental synergies.
4. Putting some fun into business. It's all very serious - and the numbers tell everything. And yet how we choose to deliver potentially bad news – be it with an open presence or a closed presence – determines hugely how quickly solutions can be developed and used.

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