The question of whether business owners should use spreadsheet software like Excel or switch to special software is a matter of ongoing debate.
On one hand, spreadsheets are the traditional way of creating financial models. It is fully customizable, allowing you to build a fresh model that’s generally suitable for any business layout or structure, encompassing a wide range of calculations and formats. However, it is not error-proof. Or to be more precise, it is suspect to human errors depending on who handles it.
At the same time, software specially designed for financial modeling can do wonders by preventing errors and offering perfect financial modeling structures. However, it might not allow you to include assumptions that are exclusive or specific to your company.
So how do we approach this complicated subject and how do we choose what works best for your online business?
We’re here to help you decide for yourself by evaluating the pros and cons of both excel spreadsheets and specialized software. Let’s give you a comparative overview of how spreadsheets and software stack up next to each other, based on some key pointers.
Spreadsheet vs Special Software
Custom changes and human intervention
Spreadsheet applications like Excel let users get actively involved in building and customizing their own financial models. As a business owner with very specific criteria to fulfill, you can fine-tune it according to your needs.
In other words, it is super flexible and that’s undoubtedly why an overwhelming majority of business owners and retailers, both online and otherwise, tend to use it.
On the other hand, specialized software can be a stellar addition to speed up your process and also minimize room for erroneous calculations. But this only works in a scenario where:
a) the software matches business needs and
b) there is no scope for any drastic change.
Meaning it can be fast and effective but its application may be limited to certain businesses only.
Standardization and accuracy
Let’s clear up a quick misconception you may have right now. We’re not saying that using an excel spreadsheet is going to give you inaccurate results. Rather, we’re stating that just like every other application where the user has leeway, your financial model may be prone to errors depending on how you carry out calculations.
The human element is crucial to note here. At the same time, we can also say that if you pursue a rigorous method for financial modeling, your results will be accurate.
On the other hand, specialized software is designed to be error-free and because human intervention is minimal, the scope for error is also lesser. In this regard, specialized and automated software offers much more standard and accurate outcomes.
The core function of a good financial model is analysis. No matter who examines it, be it a business owner, an accountant, or an investor, it should be fit for making conclusions and gaining insights. In other words, there is a level of critical thinking involved here. The assumptions you use may differ based on time, market, and results.
In financial modeling software, however, the possibility of deep analysis is absent. The process is largely automated and the scope for manipulating assumptions is limited to a certain extent.
This is a major reason why we create financial models in the first place. Spreadsheets do allow for sensitivity analysis, but the predicted outcomes have their own limitations.
Specialized software has the added benefit of being equipped to process a wide range of simulations that can offer you much-needed insights into future risks that your business may face.
There are certain connections between input, assumption, and eventual output that only a human analyst can make. This is a tricky area to explore in specialized software. Tricky as in time-consuming. Why?
Because the software is probably pre-programmed to only allow for a limited number of possibilities and scenarios.
What may seem obvious to an analyst may appear unnecessarily complicated for the software. As the flow of operations becomes more complex, the in-built logic can become inadequate.
This is an area where specialized software excels (no pun intended). There are a lot of applications where you can get quick, color-coded visual infographics based on inputs. These comprise graphs, charts, and icons that are not only appealing to look at, but also give you a better sense of scale and proportion for analysis. In such cases, using spreadsheets along with special software is a smart choice, albeit an expensive one.
Some data sets are simply too vast. Excel has its limitations when it comes to massive information. A lot of specialized software is better equipped to handle extensive and cross-dimensional information.
Understanding the business through user-involvement
Unlike automated software where most of your work is done for you, spreadsheets are a great way to get actively involved in the process. This then helps you understand the business better as you become more aware of how variables directly affect outcomes.
On the other hand, a fully automated software might give you the desired outcomes for forecasting but you wouldn’t be able to appreciate how you got the results.
The bottom-up process of creating a financial model using Excel is much more suitable for understanding the business better.
A typical financial model may have multiple users. Even if you run a small-scale ecommerce business, the users may vary to include: business owners, stakeholders, investors, accountants, analysts, and financial institutions.
A spreadsheet-based financial model is much more accessible to different stakeholders because of how flexible and customizable it is. Adaptable to work on virtually any software, it has a basic layout and an intuitive style that makes it easy to use.
Freedom of access
Using an excel sheet is a no-brainer for anyone engaged in business. You don’t require a separate license to open or operate it and it adapts to different systems just like that.
The licensing and operating skill requirements of specialized software are what make it unattractive for some. If the investor doesn’t have a certain prerequisite plugin to open the financial doc you shared with them or if the file type isn’t recognized by their software, this can be an inconvenience.
If you want to limit access to your financial model and keep it restricted to just a few users, then specialized software can be apt. You can protect the file from third parties as well as the internal staff who don’t need to see it.
Scope for change
Depending on how your business evolves, grows, and expands in the long term, you might have to change and include additional areas in your financial model.
For instance, if you plan on introducing a new product or extending over to a neighboring city, your existing financial model might undergo significant changes. In such cases, specialized software is more favorable compared to spreadsheet-based models.
This is why you need to plan ahead and envision your business’s journey and growth in the long term. Think about the changes that are likely to happen and what prospects are happening. It can help you decide which assumptions are standard for your business and which ones can change.
Internal Budgeting vs Pitching to External Parties
When your goal is budgeting on an annual basis with a standard template, then special software is more suitable. Some platforms are cloud-based and allow you to plug in certain extensions that work in tandem with the software to create a hybrid, live and fast-paced financial model for your business.
However, if your purpose is pitching your business to investors, acquiring another company, or selling your business hares, then a generic Excel spreadsheet model is still the best choice.
Not all software comes with great functionality. Some are overwhelmed when you test them with scenarios that grow in complexity. The results you get then are oversimplified and not accurate at all which defeats the purpose of creating an accurate financial model.
This is where Excel really shines. You can simply customize your model while maintaining its standard structure, create additional rows and change multiple calculations without compromising the whole model. Unlike some software, you won’t have to rebuild entire portions from scratch because of slight changes.
Investors tend to favor spreadsheet models more because of how adaptable they are. They can literally take it home, test it personally and decide for themselves. It gives your business a level of transparency and access that is absent in most specialized software.
Running a sales forecast on special software is super quick and dynamic given you integrate it with the normal accounts software. Excel sheet models are different. Some scenarios may take longer to test because of multiple assumptions.
Overall Cost and Relative Cost
Specialized software can cost you more in licensing costs, subscriptions, and other charges while saving up significantly on time.
On the other hand, spreadsheet applications have relatively minimal set-up costs but take up expenses when it comes to paying staff to build, operate, manage and analyze the financial model. This can take hours of paid work. At the same time, Excel is easier to implement new developments compared to special software.
Finding which option works best for you is a balancing act. You have to make a personal call on this based on what type of online business you’re running.
At the end of the day, you have to decide which works best for you based on the pros and cons we just discussed. Consider why you’re creating a financial model in the first place, who will be using it and how you plan on creating it.
Remember that automated software promises innovative ways of forecasting, speed, and visual appeal while spreadsheet models are simple, straightforward, accessible, and easy to navigate.
Sometimes combining the ease of an Excel model with the features of a special platform is the best way to go. It all depends on the scale, purpose, and needs of your business. However, such a hybrid approach might be too expensive for a start-up or a small scale business.