Making Sense of Spreadsheets

abacus.jpg In the days before spreadsheets, senior managers could terrorise junior managers by spotting errors in their calculations. This was normally done by quickly adding up rows or columns and finding that the sum didn't come to 100.

The arrival of spreadsheets has destroyed this form of terror, but the bar has been raised for management -- they need some other way of showing that they are good at numbers.

The secret is that you do not need to be good at numbers in order to be good at analysing spreadsheets. You need to know how the spreadsheet was constructed.

All spreadsheets are constructed the same way -- from the bottom right hand corner backwards. In other words, staff start with the answer you want and work back from that. If you expect a 15 per cent return, you will find the spreadsheet delivers 15.4 per cent; if you want a million dollar profit, the spreadsheet will predict $1.057m.

Armed with this knowledge, you can now analyse the spreadsheet successfully. There are three basic questions to ask:

  1. The venture capitalist's question What is the track record of person presenting the numbers? A B-grade spreadsheet from a manager with an A-plus track record is worth far more than an A-plus spreadsheet from a manager with a B-grade track record. The numbers are only as good as the person who stands behind them.
  2. The banker's question What are the assumptions that lie behind the numbers? Subject every number to the "what if" test -- growth rates, market share, costs, salaries etc. Start with the big assumptions: assumptions about the costs of the coffee machine will not make or break the spreadsheet (unless your business is selling coffee machines).
  3. The manager's question Do I recognise these numbers? Every good manager will know the basic operating numbers of their business -- margins, costs, growth and more. See if the numbers on the spreadsheet align with what you know to be the reality of your business.
If you get positive answers to all of the above, you are probably looking at a robust spreadsheet. By asking these questions you may also uncover some uncomfortable truths.

Either way, you will be in severe danger of looking very smart, even if you are the sort of person who normally hates numbers.

(Photo by Ansik, CC2.0)