Practical Spreadsheet Advice (March 2011)

Last month, I wrote about the pitfalls of being overly trusting of spreadsheets. As a follow-up, I felt compelled to offer some practical advice. Below are my top ten - it could easily be many more.

1. Know the answer before you start. That might sound impossible but it’s important to have a hypothesis before you start to build a spreadsheet. It gives one a chance to formulate a mental model before the spreadsheet model and to constantly ask which is right.

2. Use “check digits”. It’s amazing how many times spreadsheets don’t foot. Balance sheets may not balance and the sum of twelve months may not equal the annual total. Double check the math with a formula that adds all of the months and all of the years to be sure they balance. I always have a few rows and columns that should equal zero; it’s easy to spot if they don’t.

3. Calculate two ways. I often throw in an extra formula to calculate an answer in slightly different manner. There is often more than one way to get to the same answer and taking this extra step will ensure that your logic is sound.

4. Develop all three financial statements. There is a reason accounting relies on an income statement, balance sheet, and statement of cash flows. They all tie together. It’s easy to cheat and stop at EBITDA and I’ll admit to doing it myself from time to time, but each statement presents different information and allows for a greater chance of seeing a result that is illogical.

5. Color code. I often hi-light various rows and columns to draw my eye back to them. Sometimes my spreadsheets look like a rainbow but this is easily eliminated later.

6. Sumif. This is one of my favorite functions. It can eliminate formulas with long strings of adding individual cells which are prone to either missing a cell or capturing it twice.

7. Keep it simple. It’s easy to create exceedingly complex formulas but I’d much prefer a simple formula that yields a result of $10,500 than a complex one that yields the result of $10,479.52. For forecasting purposes one is no more accurate than the other and the simpler formula is easier to audit, trace back, edit and for others to understand.

8. 100 months! Almost all simple formulas are only valid within a relevant range. It takes seconds to run a spreadsheet out for 100 months or more. The model will start to break down logically and you can use these insights to determine if there are things you should be thinking about over a shorter, relevant horizon.

9. Set it aside. Whenever possible, set it aside for a few days or longer. I’m a firm believer that things need to percolate in the sub-conscious for a while.

10. Ask a trusted colleague who understands the business to review the results. Sometimes a fresh set of eyes will spot something that should have been obvious.

Does all of this guarantee that you won’t have an error in a cell? I wish that I could say that it did. Typos happen. Ultimately, however, the goal is neither perfection nor precision. It is accuracy of the significant digits and the soundness of business decisions made from the data.

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to


your cash is flowing. know where.®

Ken Homza Copyright @ 2011 Homza Consulting, Inc.

Ticonderoga No. 2 (February 2011)

Long before there was Visi-Calc, Multiplan, Lotus 1-2-3, and Microsoft Excel there was Ticonderoga No. 2. In some ways it is still the most powerful tool in existence for financial analysis. Why? Because it is the only one that absolutely ensures that the human brain is fully engaged in the financial analysis process. While spreadsheets have their power to perform calculations quickly and over multiple periods, they work without any “gut check” for reasonableness. While the calculations themselves are always “accurate”, programming errors are easy and all too common in today’s complex spreadsheets with thousands of calculations.

One can quickly “copy and paste” formulas over multiple periods without checking to see if the results yield a logical answer. It is easy to move one cell too far to the left, right, up or down and capture data that was not supposed to be part of the calculation. Or fail to capture a cell and leave data out of a calculation.

Whenever I get a spreadsheet from someone else I begin by looking for the most common errors and trying to understand how it was built. Ultimately, I’m trying to understand the thought process of the person who built the spreadsheet and their underlying understanding of the business. Do they understand the business and have they translated it into numbers?

At times, I am stumped by a spreadsheet. It seems to generate an answer that just isn’t what logic and good business judgment would dictate. When this happens, I pull out a blank sheet of paper and a pencil with an eraser. I work in nice round numbers – usually even millions – and see if I can get close to the answer that the spreadsheet generates. It might take minutes, or it might take hours, but I almost always find a formula error at the root of the problem or an assumption carried to the extreme.

Recently, I found a spreadsheet that added $5 million dollars of cash to a business by increasing accounts payable substantially every month . . . forever. The assumption that AP increased for a few months and even for an extended period was not unreasonable, but a lack of thought allowed the amount to grow to a ridiculous number for the size of the business.

Another time, I was sent a spreadsheet with a dizzying amount of detail on cost projections. As all projection models do, it showed nice profits three to five years out. There was one little problem, however, the total expense line failed to capture one of four sub-totals leaving out millions of dollars of cost. When this was fixed, the model showed on-going losses.

Why does this happen? In the interest of increasing accuracy, spreadsheets authors include a mind numbing amount of detail and complex calculations that are often useless. As assumptions become more complex, the person building the spreadsheet becomes lost in the detail and fails to see the big picture and mistakes happen. But they trust the spreadsheet which means they are ultimately trusting that every key stroke they made was perfect. That’s a scary thought.

The next time you’re building or reviewing a spreadsheet, make sure your brain is fully engaged in thinking about the bigger picture. Step away from the keyboard and think about what the answer should be. Test the spreadsheet with a piece of paper and a Ticonderoga No. 2!

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to


your cash is flowing. know where.®
Ken Homza
Copyright @ 2011 Homza Consulting, Inc.

What's Your Right To Exist? (January 2011)

I believe every business must earn its “right to exist” in the marketplace – and, yes, I said, earn. No business has an inalienable right to exist. Rather, in a competitive marketplace, that right has to be earned day in and day out.

Every business must ask itself how it earns this right. More importantly, it should also ask its customers. What specific niche does it serve in the marketplace? What does it do better than any of its competitors? Does it compete solely on price (a valid strategy)? Ultimately, why do customers choose to spend their dollars with the company?

Another way of asking this question: What is the core competency of the business? What does it do better than anyone else?

Sometimes, a business is surrounded by competitors but delivers excellent service (they are among the best of the best). There may be room for many or few in the particular market but delivering outstanding service at a fair (not necessarily low) price is a proven strategy. Sometimes a business delivers such good service that they are able to dominate the marketplace.

Other times, price leadership may be the strategy. There is usually room for competitors that offer a good product or service (perhaps not the very best) but at a great price. Customers who are price sensitive or to whom “good enough” is satisfactory will frequent this business.

Another unique position in the marketplace might stem from geography. I frequent a drive through car wash and although they offer excellent service, they occupy a unique geographic advantage. Customers would only be willing to travel a certain distance to a competitor regardless of the price or service advantages they might offer.

When answering questions about market positions, right to exist and why competitors frequent a business, one should think broadly about the marketplace. Thinking broadly opens up a world of possibilities. Think about the differences between shopping at Nordstrom’s and Wal-Mart, for example. The differences are striking but both have a place in the market. Of course, you can make an argument that these two retailers are not competitors – clearly they are targeting very different segments of the marketplace. But at some level, they do compete – you can buy a pair of socks at both!

When a business asks itself tough, probing questions about its position in the marketplace, it can use the answers in the strategic planning process to help determine how it can and should profitably grow. Ultimately, this is the most important question business must answer and it is the primary responsibility of leadership.

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to

your cash is flowing. know where.®

Ken Homza
Copyright @ 2011 Homza Consulting, Inc.

Change (December 2010)

In my practice, one of the things that I often deal with is change . . . or sometimes lack thereof. I see companies at both ends of the spectrum when it comes to change. Some are in a constant state of flux – desperately trying to change in order to find something that works. Others are so afraid of change they won’t try anything new. I talked a company during 2010 uses green ledger sheets for their accounting! They are wedded to the past.

Some companies are trying to do a little bit of everything and aren’t doing anything well. This is almost always a recipe for disaster. When companies don’t commit to goals and objectives it is easy for them to lose their way. They may start down a path only to change direction before they are able to see results. They are always “sticking their toe in the water” to gauge the temperature but never diving in and committing to an idea or objective. They are dabbling. They have tried to change so many times that future attempts are lost on the organization. These are the companies that are in a constant state of flux. Chaos rules.

At the other end of the spectrum are companies (usually guided by a single majority owner) that are afraid of committing to change. They continue to do things the way they have always done them. As a result, their market share erodes or they end up owning 100% of a shrinking market. Their competitors have walked away. In rare cases this may be a lucrative spot, but in most they are serving a handful of customers who have refused to change as well. Often, the company is serving the current owner but doesn’t have a robust future (and won’t unless the next generation of management shakes things up and moves the company forward).

It’s that time of year where most companies are wrapping up 2010 activity and thinking about 2011. It’s a natural time to ask oneself what you want the company to look like at the end of 2011. Will you be satisfied if your company looks the same at the end of next year as it does today?

In order to truly be successful, one has to commit to an objective. If you’re a company that dabbles and is in a constant state of flux, it’s important to decide on a few key priorities and stick to them. On the other hand, if you’re one of those companies that are afraid to change, I’d encourage you to start making incremental changes in order to build momentum. Meaningful change is hard. But anything worthwhile comes at a price.

What do you want to change during 2011?

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to

your cash is flowing. know where.®

Ken Homza
Copyright @ 2010 Homza Consulting, Inc.

Don't Be Too Much Like The Big Guys! (November 2010)

For small companies, emulating the practices of “the big guys” usually has value. There is a reason why the big guys have been successful and gotten big. But they should only be emulated to a point. They have resources that the small guys don’t and that needs to be considered.

Financial statements should be treated differently in big companies vs. small. Yes, in both you are going for predictability and understanding, but in small companies, they must be simpler and easier for the management team to understand. They must also cause focus.

In big companies, you have a finance staff to understand, explain, provide variance analysis and make sure people are watching. Despite some notable exceptions (Enron & WorldCom, for example) big companies are actually pretty good at this. Internal financial analysts spend their days understanding changes and variances and can report to senior management. They watch the income statement, balance sheet, statement of cash flows and understand how these three statements relate to each other.

Small companies are different; they have neither the staff nor the depth of understanding. Accordingly, their financial statements must provide more focus on key issues. Where big companies often use the balance sheet to smooth certain income statement trends, small companies should use the income statement to shine a light on period to period variances.

In big companies, there is a reserve booked each period for bad debt. Usually this is a percentage of sales and insulates any month from a large bad debt write-off. If managed properly, this is an appropriate practice. In a small company, this same practice takes the focus off the income and onto the balance sheet (which unfortunately, receives only minimal attention). While it helps match revenue and expenses, it also tends to obscure bad debt issues which management needs to understand so that they can manage credit and customer relationships. Before deciding how to treat an issue like this in your company, consider the management team and their understanding of the issue.

Another example I saw was a company that accrued legal expenses monthly (buried deeply in the SG&A line). The result was that they actually used the accrual account to put money onto the income statement when needed. They were managing results. Not only were they fooling the Board, but they were fooling themselves. They didn’t understand their own financial statements. I stopped this immediately. While I use this practice for predictable expenses (dividing the known cost of the annual audit by 12 is a good example), doing the same thing with an unpredictable item such as legal expenses hides the true cost from the income statement and makes a cost that is already difficult to control virtually impossible to control.

The bottom line is that financial statements are a tool. The CFO or Controller has to consider management’s expertise before making decisions about the best practice of looking at monthly statements with the goal of improving that understanding over time. Of course, at year end, GAAP (Generally Accepted Accounting Principles) prevails, and monthly statements should follow GAAP as closely as possible – but with an eye toward simplicity, transparency and understanding.

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to

your cash is flowing. know where.®

Ken Homza
Copyright @ 2010 Homza Consulting, Inc.

Competing Silos (October 2010)

Last month, I wrote “Is Ignorance Bliss?” which was about the effect that a lack of perspective on a company’s financial situation has on an organization. One of the side effects of this is silos within an organization. While the lack of financial perspective isn’t the sole cause of a silo-ed organization, I certainly believe it is a contributing factor.

“The silo effect” is people working only with their own or departmental goals in mind, often to the detriment of other departments or the entire organization. I almost always find that there is a lack of perspective on financial performance for the organization as a whole. People simply don’t understand the “bigger picture”. It’s often not their fault. No one has ever given them the data and facts, even in a limited fashion.

Rather than pulling together and fighting against the competition, people end up fighting with each other for internal resources. Victories are about winning vis-à-vis other departments. People consider it a “win” when they get to add a person and another department doesn’t. When they get above average raises for their people. Or when one department gets new computers while another doesn’t. These “victories” are often based upon the political influence of department heads (i.e. how effectively they lobby their points) as opposed to the optimum allocation of resources within an organization. This is destructive to the organization, causes further competition, resentment by the “losing” departments, and contributes to an apathetic attitude toward the decision making process.

I believe people are naturally competitive. If that is true, then why not give them someone to compete against that is healthy to the organization? Otherwise that competitive energy will end up hurting the organization rather than helping it. Employees will end up competing with each other as opposed to your competitors in the marketplace.

There is story that at one point in the history of Anheuser-Busch they launched a “Kill Miller” campaign. Think about that. Two words and everyone in the company knew the objective. Moreover, it could be measured in terms of market share. Ultimately, everyone would know how the company was doing in its quest.

I spent five years at LensCrafters. The leadership team there clearly knew how to focus the organization’s competitive juices toward company objectives. There were times when it was simply inspiring to see the entire organization focus on an objective . . . and exhilarating to be part of accomplishing the goal.

If it is a given that people in your organization are going to compete (and I believe that to be the case), then give them something to compete against that is healthy to the organization. Make sure they know that the true competition is about winning customers in the marketplace and providing better products and services than the next guy. Not about who gets a new desk or office chair or which department gets a slightly bigger share ot the raise pool.

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to

your cash is flowing. know where.®

Ken Homza
Copyright @ 2010 Homza Consulting, Inc.

Is Ignorance Bliss? (September 2010)

There is an old saying, “Ignorance is Bliss?” But is it really? I often see key managers in organizations operating with little or no knowledge of the company’s financial situation. While this may allow them to go about their duties without the burden of understanding the financial position of the company, it doesn’t allow them to help the business as much as they should.

While I’m not suggesting that everyone in the organization have a detailed understanding of financial performance, it is important for key managers to have a working knowledge of the financial facts so that they can make business decisions with that perspective in mind. Too often (particularly in poor performing organizations), I see companies where the CEO tries to shelter the rest of the organization from dealing with the facts.

On the flip side, successful organizations tend to share financial performance measures much more broadly than do poor performing organizations. I don’t think this is coincidence. Nor do I think it is because successful organizations are proud to share their results while poor performing are ashamed to do so (although that is likely true). I think there is a cause and effect relationship.

Organizations that find a way to share financial performance measures and, more importantly, reward employees for overall performance, get better results. Employees throughout the organization can work toward a common goal and have a financial perspective (if not a detailed understanding) for decision making. They better understand why management takes certain actions and can make decisions that are consistent with those of senior management.

If the “grass roots” of the organization has no appreciation for the financial performance of the firm, you often find them making decisions that are in direct opposition to those that more senior management is making. Nowhere is this more apparent than in struggling organizations where employees are “empowered” to make spending decisions but lack the proper context with which to make those decisions.

Imagine trying to row a boat with other people if there was no agreement on which direction you wanted the boat to go. How effective do you think you would be compared to a boat with people all rowing in the same direction at the same pace?

Think about your organization. Is ignorance really bliss?

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to

your cash is flowing. know where.®

Ken Homza
Copyright @ 2010 Homza Consulting, Inc.