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Budgeting & Forecasting: Replacing Excel

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More than 70% of companies use Excel® as their principal interface for budgets …

More than 70% of companies use Excel® as their principal interface for budgets
and forecasting. Many of these companies are in “Excel Hell”, a continuing
state of inefficiency and disruption related to using Excel for collaborative
planning. The spreadsheet symptoms of Excel Hell are broken formulas, consolidations
that choke, and wrong numbers. The organizational symptoms are
inefficiency, frustration and decisions based on bad information.

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  • 1. More than 70% of companies use Excel® as their principal interface for budgets and forecasting. Many of these companies are in “Excel Hell”, a continuing state of inefficiency and disruption related to using Excel for collaborative planning. The spreadsheet symptoms of Excel Hell are broken formulas, con- solidations that choke, and wrong numbers. The organizational symptoms are inefficiency, frustration and decisions based on bad information. For the strategic CFO who needs better answers and more analysis, and for the financial planning manager who’s pulling too many late-nighters trying to get clean rollups, this white paper explores the root causes of Excel Hell and lays out criteria for solutions. Specific issues explored include: modeling using cell-based formulas; structures needed for activity-based plans, multiple user security and rollups; and the state of analysis, or the lack thereof, because there’s not enough time. Alight Planning, a financial planning and analysis software package, delivers feature sets that address the most serious issues of Excel Hell.Escaping Excel Hell:Budgets & ForecastingBy Rand Heer Jennifer should be home with her family, but she’s not. She’s in Excel Hell and won’t escape soon: Jennifer inserts new line items for T&E for Conferences and for T&E for Cus- tomer Visits. The travel account total doesn’t pick up the added items. She links a line item for travel expenses for sales reps to a subtotal on the head- count worksheet. Values for months 9 through 12 are wrong. After 30 minutes, she gives up trying to find the problem. It’s noon the next day. Peter Forrester, Fi-It’s 8 p.m. Jennifer Hoover, the New Eng- nancial Planning Manager for Whitehorse,land Sales Manager for Whitehorse Corp., a is studying the Excel workbooks that the$300 million manufacturer of electronic line managers have emailed him. They’re aequipment, is reworking the Excel budget mess. Peter is in Excel Hell and won’t betemplate due the next day. escaping soon:© 2006 by Alight LLC. All rights reserved.
  • 2. Escaping Excel Hell: Budgets & Forecasting The first pass rollup chokes on Jennifer’s hundreds of spreadsheets workbook. The consolidation routine with inconsistent data hits two #REF!s it can’t handle. Peter definitions, altered fixes the same errors in seven other formulas and extra workbooks. Five workbooks have dif- rows added by ferent problems. Only two come in creative managers. It’s clean. such a huge task just to get the numbers to add The next morning, Peter has an error up properly that free rollup. Revenues look good, but there’s little time left margins are too high. Two hours later for analysis or he finds the problem: marketing set up a optimization of resource allocation.”* new product but it has no cost of sales. The situation hasn’t improved much since.George Gladwell, the CFO of Whitehorse, is Despite advances in database technology,finishing up the budget review with the ex- and in particular OLAP (online analyticalecutive staff. The presentation isn’t going processing), there hasn’t been a meaningfulwell. exodus of mid-market companies from Ex- The numbers add up, but George and cel to planning applications. Even in very Peter can’t answer a number of ques- large corporations spending millions on tions about underlying assumptions. BPM (business performance management) Much of the detail is offline in scratch software, a substantial number of managers notes or unconnected spreadsheets that at the business unit level still use Excel for the line managers built on the side. building up budget detail. While Peter spent days pulling the presentation Despite advances in database tech- together, there clearly isn’t nology…there hasn’t been a meaning- enough analysis. Another review meeting is scheduled ful exodus of mid-market companies to follow up on the CEO’s from Excel to planning applications. “what if” scenario questions. The budget deadline is pushed out two This white paper explores the root causes of weeks. Excel Hell for line managers like Jennifer and financial managers like Peter andExcel Hell Roots George. The issues we address include problems with cell-based linking, the needIf you Google “Excel Hell”, you’ll get over for planning structures, and ideas for15,000 hits. Most of these reference the analysis tools.kinds of problems experienced at White-horse and articulated by Steve McMinn, a We also discuss criteria and application so-partner at Accenture, in 2002: lutions needed to help companies escape“It’s believed that some 80 percent of globalcompanies use Excel almost exclusively as aplanning tool. Often, that means finance * As quoted by Alice Dragoon in “Escaping Excelfolks spend weeks attempting to consolidate Hell” in Darwin Magazine, May 2002.Page 2
  • 3. Escaping Excel Hell: Budgets & Forecastingfrom Excel Hell and describe features sets in checking syntax, and auditing results.Alight Planning, a financial planning and The cell-based syntax does not call outanalysis software package, that address spe- what the formula is actually doing. Tocific spreadsheet problems. audit, you need to trace back and look at the cell references.Issues with Modeling 2. The only person who understands anThe simplest models for budgets and fore- Excel financial model is the one whocasting are where salaries and headcount built it. With budget templates, usersdrive payroll taxes and benefits. Sophisti- regularly destroy model subsets by mis-cated financial plans typically include com- takenly typing into formula cells.plex models for such items as: sales bychannel, customer type and geography; di- 3. Changing the structure—e.g. adding,rect and indirect product costs; activity- moving or deleting rows and columnsbased headcount; variable bonuses; sales as Jennifer did—frequently creates er-commissions; and similar items. A budget rors such as incorrect subtotals or bro-for a mid-sized company may include hun- ken formulas. Broken formulas containdreds of such modeled relationships. the notation #REF! which ripples through financial statement rollupsCell-based formulas and linking making them unreadable.You build financial models in Excel usingthe formula bar and links to cells in the cur- 4. Excel modeling requires specializedrent or other worksheets. Below is an exam- skills learned only through experience.ple of a formula that builds up a cost ele- For folks like Peter, Whitehorse’s plan-ment for a service product in cell L67: ning manager, it’s their job. Line man- agers like Jennifer, however, typically don’t have modeling skills. Best of in- tentions aside, that’s why most errors occur. Modeling criteria and solutions Planning applications typically support modeling for budgets and forecasting at some level. Most fall short, however, be- cause they either maintain a cell-based for- mula interface like Excel (or even use Excel),The syntax of the formula is “cell-based”— or they simplify modeling interfaces andthat is, the references for calculation of the functionality at the expense of flexibility.cell L67 point to cells notated by row and Following are criteria for software featurescolumn headers on other worksheets. needed to help both line managers and fi-Cell-based modeling is a root cause of Excel nance staff escape from Excel Hell for mod-Hell. Below are several unavoidable issues: eling. Examples of solutions using Alight Planning are also included.1. Building formulas is an inherently inef- ficient and error prone process requiring clicking between worksheets, double Page 3
  • 4. Escaping Excel Hell: Budgets & ForecastingObject-based linking. An effective solutionfor dealing with the problems of cell-basedsyntax is to make linking object-based. Forexample, instead of =Admin!L25 * Assump-tions! $H$21, computing payroll tax wouldbe in the form of: Salaries * Payroll TaxRate. In addition, such linked relationshipswould automatically function across alltime periods without having to be manuallyrepeated with fill operations.Audit trails. Financial models are inher-ently complex. Audit trails should be avail-able to help users trace how objects relate to Alight Planning’s modeling is object-based using aeach other including what the current line company’s own business terminology. Line items mayitem is linked to and what line items are be linked to the units, rate or amount of any other line item or subtotal. Links automatically operate acrosslinked to it. Audit trails should also let users time periods—i.e. one object-based link does it all.enter notes, identify who last changed anitem and when, and be easily viewed.Modeling interfaces. The modeling envi-ronment should be intuitive and easy touse. Modeling tools should be flexibleenough to let users create any planningmodel they would otherwise create in Excelbut without the problems of a cell-basedsyntax. Interfaces should let finance and linemanagers create models focusing on impor-tant activity-driver relationships, not syntax. Alight Planning tracks everything happening in a model and makes the information available to users. For ex- ample, system notes display all linking relationships plus who last modified the item with a time stamp.Alight Planning incorporates six intuitive modeling in-terfaces for building any complex model you would cre-ate in Excel, but without a cell based syntax. In the ex-ample, the Accumulate tab interface lets you createcross time period accumulations for subscription mod-els and balance sheet accruals.Page 4
  • 5. Escaping Excel Hell: Budgets & ForecastingReport management. Planning applicationsshould protect users from themselves. Op-erations such as inserting a new line item,adding total and variance columns, andspreading values across total columnsshould be automatic and error free.Input cells should be easily Planning applications should protectdistinguished from formula cells, users from themselves. Operationsand users should be preventedfrom overwriting formulas such as inserting a new line item…without having to manually set should be automatic and error free.protection cell by cell.Alight Planning creates reports using “intelligent operator” columns which compute subtotals, variances and otheranalyses without formulas. In addition to traditional variance analysis, Alight includes a Causal Analysis operator, asshown below, that automatically computes the volume and rate impacts of actual versus plan variances. Shaded cellsare inputs, or in the case of actuals, imported values from outside databases.Issues with Structure Structure criteria and solutions Most budget and forecasting applicationsHaving the flexibility to do anything you are heavy on structure but light on model-want isn’t helpful when you’re staring at a ing support and interfaces. Price tag andblank worksheet. Budgets and forecasting ROI aside, a typical trade-off is to sacrificerequire structure, lots of it: activity planning modeling flexibility—i.e. Excel’s inherentinterfaces; accounting rollups to GAAP capability for building any type of financialcompliant financial statements; multiple model—for the benefits of gaining structureuser support; integration of actuals; and which Excel severely lacks. Following aremuch more. Called budget templates, you criteria for structure elements of planningbuild such structures from scratch in Excel applications:using cell-based formulas and macros.These templates take weeks or months to Activity planning. Budgeted amounts typi-develop; they’re difficult to maintain; and cally have underlying activity assumptionsthey frequently break when well inten- about units and rates. For revenue planning,tioned managers like Jennifer do things that units sold * selling price = the sales amount.cause errors. For headcount, # heads * salary rate = sal- ary amount. Planning applications should support unit/rate/amount activity plan- ning for any type of financial and opera- Page 5
  • 6. Escaping Excel Hell: Budgets & Forecastingtional planning. Some applications achievethis by using a multi-dimensional databasefor plans and actuals.Rollup structures. This includes minimummulti-dimensional support for productgroups, cost centers, and natural class ac-counts which then roll up to integrated fi-nancial statements—P&L, balance sheet andcash flow. Within the rollup structure, linemanagers should be able to add any num-ber of line items on-the-fly to document un-derlying assumptions and thinking. This iswhat Jennifer tried to do and what Georgeand Peter were missing—line item detailand assumptions that are otherwise lost ifnot incorporated into the plan file androllup. Alight Planning’s architecture is based on units, rates and amounts thereby allowing any type of ac- Who Moved My Excel? tivity planning with linking at any level of detail. Excel’s lack of structure is the principal reason companies move from spread- sheet planning to budget and forecast applications. The tradeoff is this: the costs of wasted staff time, delays, errors and frustration finally exceed the capital and ongoing costs of buying a planning application. Most mid-sized companies never reach the cross over point because robust planning and reporting packages cost six figures or more for the software, implementation and ongoing IT support. For Fortune 1000 divisions, it’s a different story: enterprise BPM (business perform- ance management) packages focus on corporate level rollups and reporting. This In addition to integrated P&L, balance sheet and often short changes division level model- cash flow, Alight Planning’s financial statements ing and analysis requirements. As a result, include a contribution analysis which segregates fixed and variable costs based on algorithms that Excel is frequently used alongside BPM identify underlying links to revenues. packages at business units for modeling and documenting plan detail.Page 6
  • 7. Escaping Excel Hell: Budgets & ForecastingMulti-user structures. Planning managers Issues with Analysislike Peter need to set security controls todefine what plan elements each user may Finance staff like Peter and George are soaccess and the level of access; for example, consumed by the problems of Excel Hellchanging values only versus adding line that there is little time for analysis. Too of-items. Process controls should provide ap- ten budgets go to press without any realproval levels, version management and au- analysis of linkages to strategy. Rollingdit trails to identify line items changed since forecasts, caught in the squeeze between thea cutoff date, and who changed them. Usersneed to work from a complete model set to Too often budgets go to pressview the impact of changes interactively. without any real analysis of linkages to strategy. month end close and due dates for the man- agement report, are too frequently finalized without adequate analysis of the future impact of variances or updates from line managers. As an alternative to Excel, planning applica- tions should cut the cycle time for budgets and forecasting, thereby freeing time for analysis. Most do. In addition, applications should automate critical analytic jobs suchAlight Planning’s multi-user capabilities allow a broad as sensitivity analysis and scenario analysis.range of security controls. After consolidation of userinputs, Alight automatically identifies added and Sensitivity analysis is the process of chang-changed line items since the last version cutoff. ing individual input assumptions and ob- serving the financial impact. This is difficultImport actuals structures. Planning applica- in Excel because inputs are typically spreadtions should be able to import and integrate across multiple worksheets separate fromfinancial and operating actuals data from the financial statement rollup. Planningany source at any level of detail. Such im- packages can streamline sensitivity analysisport capabilities need to be automated with by identifying the most critical assumptionsmaintenance routines that update import in a plan and provide interfaces for testingtemplates for structure changes in the plan- impacts. Otherwise, it’s hunt and peck.ning file. Applications should also providetools for modeling and linking imported Scenario analysis is the process of changingactuals data and for plan data to “look multiple input assumptions to create an al-back” or reference actuals data in forward ternate financial plan. This is supported bylooking projections. most planning packages. Scenario analysis should allow an unlimited number of sce- narios with easy switching between scenar- ios to compare and analyze results. Page 7
  • 8. Escaping Excel Hell: Budgets & ForecastingAlight Planning’s sensitivity analysis interface lets users automatically create a ranked list of inputs that impact a speci-fied target, such as operating profit or net sales, providing an instant picture of the most sensitive assumptions in a fi-nancial plan.Alight Planning’s scenario analysis interface lets plan managers create up to 100 alternate financial plans all within thesame plan file. Scenarios can be automatically updated for the timing of key events such as launching new products,opening new channels or raising capital.Summary _______________________________________Escaping Excel Hell for budgets and fore- Rand Heer is President of Alight LLC and thecasting is a growing priority for companies creative force behind Alight Planning. He was ain today’s fast changing and competitive contributing author to “Business Intelligence:economy. Application software companies Making Better Decisions Faster” published byneed to deliver improved structures for ac- Microsoft Press. He was also the founder of Pil-tivity-based planning, integrated financials, lar Corporation and designer of Hyperion Pillar,multiple-user processes and integrating ac- the first enterprise software for budgets and fore-tuals that address Excel’s greatest weak- casting, and founder of FP&A Train, the origi-nesses. At the same time, they must design nal Essbase training company.more powerful and intuitive modeling in- (800) 960-7717terfaces that provide the flexibility of Excel www.AlightPlanning.comfor building any kind of financial model.Finally, there is a world of analytic tools yet Excel is a registered trademark of Microsoft Corporation in the United States and other countries.to be invented for moving financial plan-ning and analysis to a new level of thor-oughness and insight. This is what Alight isworking on next.Page 8