How to Eliminate Endless Versions of Excel-Built Financial Models

Written by: Lucro Staff 2 months, 2 weeks ago

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There’s a time and a place for Excel. For investors who need to quickly analyze with a bit more sophistication than on the back of a napkin, it works. Excel is also useful for people tracking data, or for people who want to create simple charts to use in a presentation.

Excel becomes far less functional when multiple users have to use the same workbook. Beautifully designed models can easily become riddled with errors unless the team has an inflexible workflow in place to account for Excel’s lack of version control.

Most large real estate investment shops have created beautiful modeling templates—but some deals are so complex that multiple templates need to be pieced together. When the financial model is sent downstream to other partners (investors, lenders, appraisers, etc.), the other partners may not trust or understand the logic of a particular model and end up recreating the model altogether. This happens with every subsequent partner at every stage in a deal, leading to a wide range of models that are all calculating differently than the original. The process starts all over again making information sharing akin to a very expensive game of telephone.

Let’s use a typical scenario: an analyst spends hours manipulating data for an office building the firm is contemplating purchasing. Once complete, the analyst emails the Excel model around for his team to review. The spreadsheet then gets manipulated by three other users, all at the same time. With no way to track changes in Excel or to create an audit trail, the analyst has no way of understanding who changed formulas and numbers.

Let’s say the management team is presenting the deal to the investment committee tomorrow morning; it’s going to be a long night. In your best case scenario, an analyst will be able to solve the data duels and correct for any errors caused by multiple users working off of the same spreadsheet. In the worst case scenario, the lack of version control costs the company thousands or even millions of dollars.

The $2.4 Million Excel Typo

The University of Toledo knows how expensive Excel errors can be.

In 2004, administrative staff at the University of Toledo thought they had an extra $2.4 million in their budget. They didn’t. Someone had made a formula error in Excel. As a result, UT drastically overstated its budget. The error was caught one day before a meeting of the Board of Trustees to approve the budget for the following academic year. The accounting error was especially painful for UT because the university had already crafted its budget around $1.5 million in anticipated state cuts. Filling the shortfall was challenging enough, but was made even

more complicated by the financial modeling errors. UT was forced to postpone several new initiatives slated to roll out the following year.

Raymond Panko, a professor at the University of Hawaii’s Schidler College of Business, explains there are three different types of spreadsheet errors:

1. Quantitative: The spreadsheet gives an incorrect result, usually because of a mechanical error such as someone mistyping a number or inputting data into the wrong cell.

2. Logic: Someone enters the wrong formula because of a mistake in reasoning. Logic errors are more common than quantitative errors and are difficult to detect.

3. Omission: A data point is left out. Omission errors are the most difficult to detect.

Panko’s research concludes that in 88% of spreadsheets, at least one of these errors occurs. Excel errors are even easier to make when multiple users are working off the same model without any sort of version control.

Real estate professionals cannot afford to make these mistakes when reviewing or presenting deals.

New Modeling Software Reduces Version Control Errors

The traditional Excel model has become so ubiquitous that some companies assume there is no better alternative. That was until Lucro, a Chicago based real estate technology company, hit the market. Lucro released their modeling software in Summer 2017 and commercial real estate professionals have already recognized its game-changing potential. By eliminating the traditional Excel workbook, Lucro does away with messy version controls and trying to merge spreadsheets.

Like most real estate professionals, CEO of Lucro Brian Axline had been using traditional Excel models to run complex financial analyses. The version control burden had become all-encompassing. Even when the team started using a Dropbox file to save information, the lack of version control persisted.

Axline set out to create a simpler, more intuitive way to create commercial real estate financial models. The end result is Lucro, financial modeling software that solves for the errors created by a lack of version control. Lucro allows all team members to work off the same version of the financial model. All changes are tracked within the document, and previous versions of the model can be easily restored if need be.

This new software also allows team members to collaborate in real-time. Real estate brokers, developers, investors, lenders, appraisers, and other key professionals can collaborate on a project and receive notifications when an update to the financial model is made. Every member

of the project will see who made which change and when. Meanwhile, managers can easily follow along to see how deals are moving through their pipeline.

These capabilities allow deals to move forward with increased efficiency. By eliminating hours spent creating, refining, aggregating, and scrubbing financial models, teams can now be spend more time finding and closing new deals.

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