Monthly Archives: January 2014

Excel in Financial Planning and Forecasting

Recently I read this articled titled Excel in Financial Planning and Forecasting: The old same problem for CFOs.  This was a great post which summarized the wide spread usage of Microsoft Excel in the area of financial planning and forecasting. In short, “43% of respondents use Microsoft Excel for financial planning and budgeting”. According to the article In spite of the high usage of Excel many survey respondents had some concerns about using this tool.   Amongst the concerns were:

  • Inability to preform what-if Scenarios
  • Inflexibility of Excel
  • Not friendly to users
  • Lack of skilled staff to perform the task

Many of the highlighted reasons stem from the limited Microsoft Excel expertise available in many organization.  Skilled staff should be able to create a financial model that solve the concerns above.  A financial model can be built to handle the planning and forecasting process in a seamless way.  What is a financial model?  Think of a model train.  The train model looks like a real train but may not have all of the components.  It resembles the real life version in some form or another.  A financial model is used to  forecast the impact on an organizations finances based on “what-if” scenarios.  Internal or external changes can be entered into the model to review the change on a business. The purpose of a financial model is to paint a financial picture, test various scenarios and support fact based decisions.  If this tool is built properly it can alleviate all of the concerns highlighted in the article above.  

In order to build a sound financial model a few things should be kept in mind.  The models that we have built in the past for institutions are the result of a through fact gathering process.  The process includes multiple discussions with key personnel, research on the specific industry and review of prior financial statements to name a few. As a result the models are more accurate, flexible and provide information quickly.  In order to build a good financial model below are  a few things which should be kept in mind: 

Build Ability to Test What-If Scenarios

Utilize tools in Excel like drop-downs and links to create the ability to test scenarios dynamically.

Design with Environment in Mind

In order to design with the environment in mind research the industry and key trends.  Include this information in the model.

Design with User in Mind

This is a key part of any software design.  Interview key stakeholders.  Who will be using the model? Who do they report to?  What type of information will they need to produce?  What types of ad-hoc request did they receive in the past?  What is the proficiency level of the primary user with Excel?  The answers to these questions and others will help in the design of a tool that is easy to use.

Outsource Design & Internalize Knowledge

Many organization lack the skilled staff to build such a tool.  In many cases it is ideal to outsource the development of the tool but internalize the knowledge associated with it.  For example, often after we develop a tool for an organization we provide training and documentation.  After this point key personnel are able to modify the financial model as the business changes or products\services are added.

Microsoft Excel has become the software of choice for planning and forecasting primarily due to its flexibility.  This same reason is a source of concern for many organizations which lack the skilled staff.  Outsourcing the design of a financial model can increase accuracy and speed up the planning and forecasting process.