Many small business owners start out doing their accounting using Microsoft Excel or another spreadsheet program. While it’s possible for a business to use spreadsheets effectively when starting out, doing your accounting in a spreadsheet can easily turn into a liability that can cost you everything, even your freedom. In 2013, Forbes columnist Tim Worstall wrote, “Excel might be the most dangerous software on the planet.” Let’s look at some of the reasons why.
How Secure Are Your Spreadsheets from Inside Tampering?
The answer is “not very.” Spreadsheet programs like Excel have no built-in backup and are not designed with security in mind. Anyone with access to the files can alter formulas, change data, and overwrite the old files. They are designed to organize and analyze data and present the results in a tabular format. The data can be anything, from dollar amounts to the number of calls each employee takes per hour. The strength of spreadsheets is the user can make changes and run “what if” scenarios.
For example, take a small retailer with several items in their inventory. If someone in the business were investigating the revenue impact of raising the price on a few items, they could go into a spreadsheet and change the selling price. They could then easily see the impact by changing values with just a few keystrokes. Unfortunately, it’s just as easy for the reader to save the spreadsheet with the hypothetical changes and overwrite the correct price data. When someone else (say, the accountant or owner) looks at the spreadsheet and uses the incorrect data to make financial reports or do the taxes, the results could be disastrous.
Many Employees Lack Training
Spreadsheets are relatively easy to use, and the business owner may already be familiar with how to use and edit them. Unfortunately, very few business owners invest in formal training for themselves or their employees on how to use the software and errors are extremely common. There is an entire industry based around helping large businesses assess and manage risk from spreadsheet errors.
A 2011 survey performed by Consumer Intelligence and ClusterSeven of approximately 1,500 businesspeople in the United Kingdom found 56.5% had received no formal training on the spreadsheet software they were using, and 72% said there was no internal safeguard for catching errors. The result was 47% made between one and four errors, while 12% made between five and ten. Most worryingly, nearly 7% made more than 11 errors.
The Well is Already Poisoned
Some business owners use spreadsheets created by others either as a free download or commercial product, but a spreadsheet is only as good as the person who created it. In the past, spreadsheets were created by programmers or accountants. Now anyone can create one and release it for sale or download. According to a 2013 story in MarketWatch, a 2008 analysis of multiple studies found 88% of spreadsheets contained errors, and even after careful development, spreadsheets on average contained errors in 1% of formula cells.
There is no shortage of examples of spreadsheet errors causing embarrassing and costly debacles. In 2010, two Harvard professors released a widely-cited economic paper on national debt sustainability with a spreadsheet error that was not discovered until 2013. Banking company JPMorgan cited spreadsheet errors as one of the reasons it lost over $7 billion on bad investments in 2012.
Spreadsheets are an essential part of many businesses, and they do have their place. That place is nowhere near your financial reports.