Following the recent hullabaloo about some seemingly simplistic spreadsheet errors in a recent study, many articles have decried the pervasive nature of spreadsheet errors.
What we’ve found though, is that just as typos are the not the biggest problem with written work, it is weak or sloppy analysis that is the real problem in many more spreadsheets.
Spreadsheets, like sentences and paragraphs, communicate ideas. In a financial model for a startup, the ideas include overt and hidden assumptions about major variables, such as length of a sales cycle and the salary requirements for a software engineer. But a model also communicates a vision of how the various assumptions fit together and becomes a representation of how the business functions just as clearly as any flowchart or business process diagram.
We’ve reviewed hundreds, maybe thousands of financial models. Many are constructed correctly, in that the cells match up and the formulas do what they say. But those same spreadsheets fail at the task of communicating the business model — how the company takes capital and employs it to bring in revenue, capture gross margins, and operates the business in such a way as to produce positive cash flow.
No, the real risk in your spreadsheets is that they correctly answer the wrong questions.