Spreadsheets are Hazardous to CRE Firms’ Health – Risks, Dangers, and Disadvantages
Excel and alternatives like Google Sheets are fantastic tools, known for their ability to help an individual solve complex problems. Since its launch in 1985, 81% of businesses use Excel on a regular basis, and because of how ingrained Excel is into businesses today, it becomes the de facto solution for all problems. The thing that most don’t realize is that Excel may not be the best solution or software for a situation. Your business may be trying to put a square peg into a round hole when a square hole is readily available.
The overuse of spreadsheets in business may be one of the best practical examples of the law of the instrument (otherwise known as the law of hammer, the golden hammer, or Maslow’s Hammer). As the saying goes, if all you have is a hammer, everything looks like a nail. Companies are regularly using Excel in ways that are ill-fitted to the product’s design (e.g. as a database, CRM system, project management and workflow tool, integration tool, or budgeting tool). What makes Excel so widely adopted is the business applications seem endless due to its flexibility (there are more than 1 billion Microsoft Office users worldwide). The problem is the amount of responsibility it puts on the user and the risks, dangers and disadvantages that creates.
Excel and other comparable tools are used for a multitude of tasks within the commercial real estate investment industry. Those include but are not limited to waterfall calculations, investor management, financial modeling. Continue reading to learn about perils of Excel for CRE investment firms.
Built For The Use of One, Not Many
If you are the only individual handling financials at a small mom and pop shop, then Excel is a fantastic tool. You are probably not receiving data from other sources, so you are not legally obligated to consolidate information into a particular format and report to regulatory bodies such as the SEC. But the situation is a little different for businesses like commercial real estate investment firms that are handling more complex tasks that involve many people contributing to one project. Spreadsheets have their limitations, and, simply put, Excel was not designed as a collaboration tool. Whether you are managing investor data and contact information or doing complex distribution waterfall calculations, if there is more than one proverbial cook in the kitchen then Excel is ill-equipped handle the task. And on average, six people are involved in some capacity with the private equity waterfall distributions. However, getting more parties involved actually increases the prevalence of mistakes.
How does one know if a spreadsheet is accurate, complete, or up-to-date? Most CRE firms have a single person who is responsible for the data entry in distribution waterfalls and then a person or two who review and approve the work. For the approver, it’s hard to help the owner of the spreadsheet double check their work. Imagine needing to locate a single error within thousands of lines and multiple sheets of data that could span years, if not decades, of historical distributions. A recent study shows that 88% of all spreadsheet have at least one error. Common spreadsheet errors include mistyped numbers, incorrect formulas or logic, rounding mistakes, improper cell formatting, and copy-and-paste inaccuracies. Just one small error – a wrong number, a misplaced decimal point, an omitted negative sign, etc – can have a ripple effect across dozens of linked spreadsheets and many lines of data. Sometimes it’s clear when a mistake has been made, at which point you still need to figure out where it is or what is causing it. In other cases, it’s not obvious, and the (inaccurate) data is accepted as truth. Most errors are relatively innocuous and lead to a negligible data discrepancy, but some can have catastrophic consequence like J.P. Morgan’s $6.2 billion trading losses that resulted from errors in spreadsheets used for analysis.
Lack of Governance
While Excel offers users incredible freedom and flexibility, it might be too much freedom in the world of commercial real estate investing. Financial data should not be housed in a place where alterations can be made instantaneously with no change-log recording that activity. There is also no way to guarantee data consistency between data sources and the spreadsheet because spreadsheets are not designed to be a system of record. In order to solve this issue, many businesses mitigate the risk of spreadsheets by investing in purpose-built solutions like financial management systems.
Data Security Risks
Are your spreadsheets backed up on either an external hard drive or just saved on your computer desktop? There is risk associated with both of those situations. A computer or hard drive can be lost or damaged. In cloud-based SaaS solutions, data is constantly backed up. One single version is maintained and can be accessed by anyone on the team who has permissions. The cloud makes you less susceptible to hacking and data breaches. Your files may house sensitive information about your business and your investors. The encryption levels cloud-based solutions can provide will go a long way to ensuring the safety of sensitive data and information.
To be clear, there is a time and a place for spreadsheets – they should not be abolished entirely. For example, there is no better way to do ad hoc analysis or modeling. But Excel is not a hammer and your business is not a nail. If you look up from those spreadsheets, you might just find that there is a better way to do certain things. In a webinar titled Avoiding Five Spreadsheet Pitfalls, presented by Ventana Research and FinancialForce.com, Jennifer Jenkins, controller at wireless services and software company Nexius, explained that her organization moved away from QuickBooks and Excel after experiencing significant growth. She said that the finance department was generating 500 spreadsheets per month, which predictably led to errors and data quality issues. Technology solutions like the IMS Platform are purpose-built to solve these types of problems while adding efficiency to your business.
If you think it is time for your firm to find a purpose-built solution for some of those tasks currently being completed in excel, check out our checklist designed to help you chose the right technology partner. Download it for free today!