It's true, Excel is very powerful and it is amazing. It is the best tool to create a financial model from scratch and configure it as much as you want. You can do very amazing things with it. But, not everything that shines it's gold.
We probably love Excel as much as you do, but sometimes it is not the right tool for the job. Although it is true that until now every financial model was made with Excel this was because of a lack of a better tool. Excel is very powerful and can do pretty much anything, but, "With great power, comes great responsibility" and sometimes, too much power can bring you to make some unnecessary mistakes.
You can think of this situation in the same way as how inventory management or logistic management were some years ago. They were mainly done with Excel and everything worked fine, but no real tool specifically made for the job was used. Then all the now well known ERP came and now they are the industry standard having improved upon and replace Excel.
The common errors of financial modeling in Excel
There are some common errors and known problems that arise when building a financial model using Excel, here is a list of the main ones that we have found across industries and models:
- What are inputs and what are outputs. Basically which cells can be edited and which cells are the result of a formula or are static and should not be changed. Unfortunately there is not a way of solving this. In a good financial model you use different formatting for your assumptions so you can see which cells you can edit and which cells you can't, but there is nothing that stops you from actually editing every cell.
You can go into any cell and change the value of any number or even scarier, change the formulas. If you change sometimes you shouldn't have, you could break the whole model.
- How has the most recent version? If more than one person is working on the same model or you have various versions, there is the age old question: who has the latest version? Excel doesn't have a way to deal with this and you need to use external systems that make your life harder.
- How can I share it? of you need to share your financial model with someone you need to send it via email or some other messaging platform. Then the other person needs to open it and hopefully, everything will work. But sometimes the other person doesn't have the right program to open it, or maybe they have a different software version and now the whole model is screwed.
Or maybe the file is corrupt and they can't open it. Or maybe they touch something they shouldn't have and now the model is not correct anymore. How can you know if they opened it?
- It's easy to make mistakes. Every time you write a formula you could always be making an error and you could copy this error in all your model.
- It's impossible to check for mistakes. If something doesn't work, or if a formula it's acting strange, you need to check every single possible thing that might have caused the problem, maybe every single cell. It's just too much of a time drain making it impossible.
- You need to know Excel or learn it. To create a good financial model, you need some medium-high skills in Excel and if you don't have those, you will waste a lot of time learning them.
- You need to know Finance and Accounting very well. To build even a basic financial model you need to have some good skills in accounting and finance, skills that may not be required for your job. Learning those skills just to create a model it's a big time sink.
- You need good design skills. A correct financial model, with poor formatting and an ugly presentation it's a bad model, since it can't be understood by those who read it.
- You need a different file for each of your models. If you have different projects or different products that need their own financial model, if need to create a different file for each one of them, leaving you with a lot of files and even more room to make mistakes.
You end up having a bunch of loose files around, not knowing which one is the correct or most recent one and you never have a clear picture of all your company projects.
- You need to make some irreversible decisions. Is your financial model monthly, quarterly or annually? what if you want to change mid-way? And what if you want multiple one at the same time? It is just to much of a hustle and the complexity will go through the roof.
- Although excel being very powerful, it is generic and it will not help you. You are free to do whatever you want, including making mistakes. If you write the formula for calculating your EBITDA wrong, Excel won't stop you, because it doesn't know what you are trying to do so it can't help you.
The financial modeling alternative
Having said all that, we still think that Excel it's a great tool, but it is no longer the best for financial modeling. After years of experiencing this problems ourselves, we decided to create a tool specifically designed for creating financial models.