Has Your Business Outgrown Excel and Spreadsheets?
Excel and similar spreadsheet tools have been essential to real estate investment companies for nearly three decades now. They are affordable and flexible. Just about any business can afford to purchase it and use it for data analysis. And because it is so widely used, time and cost associated with training are minimal. Most will have experience with it from college or previous jobs. It is simple and user-friendly enough for a novice to achieve a desired result but powerful enough for a more advanced user to do very complex tasks like statistical modeling, trend analysis, forecasting, or scenario analysis.
While it is a great tool, there are situations where it becomes dangerous. When a business needs to scale, ad hoc systems can become challenging. The classic example of complexity and Excel gone wrong is JP Morgan. They used a model that relied on series of complicated Excel spreadsheets that had to be manually populated by copying and pasting data from one spreadsheet to another. There was no automation, controls, or other methods of risk management in place to prevent incorrect, false or fraudulent data. They made one fatal error within the spreadsheet, dividing by a sum rather than an average, that lead to the loss of several billion dollars. We do not all work for companies the size of JP Morgan, but losses of any amount because necessary precautions aren’t taken should be considered unacceptable.
Examples of Excel’s Limitations
No one is perfect. Manually keying in every value and formula in a spreadsheet with thousands of cells being used is a tall task. It is unreasonable to believe all that data can be entered without error. In fact, the average benchmark for manual data entry error rate is generally acknowledged to be 1%. And various studies have reported that 9 out of 10 spreadsheets (88%) contain at least one error. most which are avoidable human errors.
When a small business is started, the downsides associated with Excel are manageable. Data sets are smaller, the number of users is minimal, and dissemination of information isn’t as necessary. As the data set expands and users increase, it becomes more difficult to ensure data integrity.
Unrolling Aggregated Data
As data accumulates, there is a need to summarize and aggregate it so it is easily digestible. Oftentimes, data is aggregated multiple times prior to being centralized. This leads to important information being hidden under layers of spreadsheets. and formulas with no way to quickly drill down into the more granular raw data. And many times, a data point could have been pulled from another spreadsheet entirely without any indication of its original source.
Errors Go Unnoticed Until it is Too Late
Most errors are rather innocuous and many times don’t result in a colossal loss, like what happened at J.P. Morgan. Once they are noticed, it is oftentimes too far down the road to easily pinpoint where the mistake lives. Excel spreadsheets are incredibly difficult to do data validation and auditing.
Spreadsheets and Real Estate
One example of a real estate investment management task that almost exclusively lives in spreadsheets is waterfall calculations for distributions. Creating all associated rules from an operating agreement in Excel is difficult and time consuming for one deal. If a business is looking to scale, this is a process that needs automation implementation. But people don’t always know that there is a better option. Since 2016, IMS has calculated over $117,000,000 in distributions of behalf of our customers. Our software is designed for efficiency, is fully integrated with the platform, has built-in workflows to ensure accuracy, and is easily auditable to help troubleshoot discrepancies.
To learn more about how IMS is adding automation to the waterfall process, click here.
Download one of our waterfall case studies.