Wednesday, February 25, 2009

Crisis courtesy Microsoft Excel

Microsoft Excel is a dangerous tool. Although excellent software, Microsoft Excel has some part in the current recession. Back in the early nineties when I was sitting for my MBA, I used it to calculate the potential of a new business idea. ‘Navigator’ was to be a piece of software distributed by travel operators interactively selling holiday destinations in sound and motion. Of course the business plan accompanying it was made in Microsoft Excel. In just a few hours, we had projected how the business would grow. We’d see fat profits. This time next year we would be millionaires! Microsoft Excel said so! After investing ALL my savings into the project, I quickly found out that calculating yourself rich in Excel was just way too easy. Excel was deleted from my PC and the network.

Over the years though the use of spreadsheets became increasingly popular. Accountants and investors projected (and expected) infinite growth based on its formulas. Business managers, blinded by fat profits displayed in numerous different colorful charts, made the corresponding investment decisions. Excel operators even started making it into decision making positions – and competing with their excel operator friends for the biggest and most ‘profitable’ spreadsheet.

Even BANKS, notoriously slow, and conservative, succumbed to the Excel bug, and so things multiplied and we now have the biggest recession since the 30’s.

I have always ignored the content of spreadsheets, preferring that projected growth be explained in words. It’s a lot harder to do, and it sifts out quite a bit rubbish from the get -go. Business decisions should be based on intuition, not on spreadsheets.

10 comments:

Matt Landis said...

Nick,

Managing by the numbers that you can know is absolutely essential and not doing this, in my estimation, is the #1 killer of small VARs.(and businesses)

After spending the first several years as a VAR going largely on intuition (with slim profits to show for it) I've been cured of that. ;-)

I believe that every company has a handful of numbers they need to be watched like a hawk. For a VAR this could numbers like: % of billable time, % margin on service, overhead % of revenue and more. These handful of numbers need to drive what happens everyday. These numbers are like a heart monitor for your business. I have a screen on my monitor that shows me these numbers live at all times. When company health starts deterioting in a certain area, I can drill down and find out what daily activity/who is causing this and get it back on track far before it becomes a big issue.

Realistic projections can be extremely helpful in acheiving a goal. (it helps a lot if you've been following your "numbers" to know your track record on what you can do) This past year we decided we needed to hit a certain rev. goal for a company our size. So we figured backward on what activities need to happen and with some adjustments for reality we projected almost to the dollar our year end rev. midway through the year.

Where I do agree with you is where you don't have specific information available or "getable", then you need to have "killer" intuition.

I feel pretty strong about managing by the numbers, so you pressed a button. ;-)

Thanks for the good articles.
matt

Nick Galea said...

Good point Matt. I am not against the use of numbers in monitoring a business. Sure its good to do that. But i believe that too many new business projects are evaluated based on numbers alone.

And maybe i should stick to making phone systems rather then giving business advice :-)

Matt Landis said...

Nick,

No, keep the articles coming.;-)

matt

Mike Deerfield said...

Well, I think that you are both right. The vitality of the business model has to be "explainable", and it has to be supported by realistic numbers.

I agree with Nick - in that many start-ups create business plans based upon numbers that do nothing more that satisfy a lender/investor, and serve to validate their own ego/idea. Many business plans to not contain operational numbers like Matt suggests - those are the most important. And also, many business plans assume a steadily growing economy and overlook to some extent the "W" and "T" of the SWOT analysis.

Martin Blake said...

"And maybe i should stick to making phone systems rather then giving business advice"

You probably should. And should consider taking some spelling lessons, too.

Nick Galea said...
This comment has been removed by the author.
Nick Galea said...

Martin - Spelling is UK English. You should get out of Excel more often :-)

Wayne said...

Good post :-)

Careful not to blame the recession totally on Excel though. Bill Gates won't be pleased.

I think the recession is a mix of short sightedness from lending managers multiplied exponentially by media sensationalism.

The media is fuelling pessism and should be hanged for what is happening right now.

Nick Galea said...

True, wouldn't want to upset Bill gates :-) The link to Excel is of course just a joke, but the unrealistic expectations of bankers and shareholders alike in regards to profits and growth are real. Excel just made those things worse but of course not the root of the problem....

Matt Landis said...

Martin Blake: Ouch! Is there something I'm missing in that response?