Importance of Spreadsheet Models in 21st Century - Assignment Example

Discuss the importance of spreadsheet model to small and large scale Businesses in the 21st Century: An Introduction A spreadsheet is a rectangular table or grid of information. The word came from "spread" in its sense of a newspaper or magazine item that covers two facing pages, extending across the centrefold and treating the two pages as one large one. The compound word 'spread-sheet' came to mean the format used to present bookkeeping ledgers-with columns for categories of expenditures across the top, invoices listed down the left margin, and the amount of each payment in the cell where its row and column intersect-which were traditionally a 'spread' across facing pages of a bound ledger (book for keeping accounting records) or on oversized sheets of paper ruled into rows and columns in that format and approximately twice as wide as ordinary paper. [01] Spreadsheet models are an important part of any function of a present day organization. Be it required for making a simple format for daily use or an automated worksheet, spreadsheet models by far show up as a very effective and efficient tool for managing a business. The concept of an electronic spreadsheet was first outlined in the 1961 paper "Budgeting Models and System Simulation" by Richard Mattessich. A spreadsheet program is planned to carry out general computation tasks using spatial relationships rather than time as the primary organizing principle. Many programs designed to perform general computation use timing, the ordering of computational steps, as their primary way to organize a program. A well defined entry point is used to determine the first instructions, and all other instructions must be reachable from that point. In a spreadsheet, however, a set of cells is defined with a spatial relation to one another. It is often convenient to think of a spreadsheet as a mathematical graph, where the nodes are spreadsheet cells, and the edges are references to other cells specified in formulas. This is often called the dependency graph of the spreadsheet. References between cells can take advantage of spatial concepts such as relative position and absolute position, as well as named locations, to make the spreadsheet formulas easier to understand and manage. Spreadsheets usually attempt to automatically update cells when the cells on which they depend have been changed. The earliest spreadsheets used simple tactics like evaluating cells in a particular order, but modern spreadsheets compute a minimal re-calculation order from the dependency graph. Later spreadsheets also include a limited ability to propagate values in reverse, altering source values so that a particular answer is reached in a certain cell. Since spreadsheet cells formulas are not generally invertible, though, this technique is of somewhat limited value. Many of the concepts common to sequential programming models have analogues in the spreadsheet world. For example, the sequential model of the indexed loop is usually represented as a table of cells, with similar formulas. [02] Small and Large Business Businesses, large or small, depend significantly on spreadsheet models. Small businesses depend more on them due to the basic fact that they do not have enough resources to install and maintain a heavy infrastructure for an ERP system. Therefore, their dependence on spreadsheet models is very large. In comparison, large scale businesses have resource allocation for ERP systems. Not only the large scale organizations have more resources, but they also have high set of standards maintained by them. This is also one of the reasons that large scale organizations do not reply heavily upon spreadsheet models for perfect decision making. However, these large scale business organizations do use some of the interim formats and their procedures are taken care of using a spreadsheet model. Financial planning is a critical activity for every business irrespective of its age and size. For new enterprises, the preparation of financial projections is integral to the business planning process. For larger companies, financial planning forms part of annual budgeting plays an important role in long-term planning, business appraisals, corporate development etc. Central to the task of preparing a set of projections is the construction of a mathematical model to reflect the finances and activities of a business. In practice, financial planning models are much more complex as they must accommodate multiple time periods (months, quarters and years) and handle hundreds of variables relating to sales, costs etc. The volume of data mounts up very quickly when each variable is multiplied by the time horizon, for example, by twelve months. [03] In the industry, spreadsheets are so ubiquitous that it is difficult to find a knowledge worker whose computer lacks a spreadsheet. There is a small but powerful empirical literature on the importance of spreadsheet models. It can be found out that spreadsheet models are essential to the finance industry in the United Kingdom, and that spreadsheets are so valuable that "within certain large sectors, spreadsheets play a role of such critical importance that without them, companies and markets would not be able to operate as they do at present." Spreadsheets models are being used as application software and used for essential roles in financial risk management, executive information systems, business process infrastructure, and complex analytics. It is easy to obtain anecdotal evidence regarding the prevalence of spreadsheets by speaking with business school alumni or by walking down the aisle of an airliner and chatting with the spreadsheet users that one inevitably encounters. [04] Modelling as a tool Spreadsheet model can be used for a number of jobs. These models help in linear progressions, projections based on available data. Histograms are also an important benefit as a result of using spreadsheet models. Some of them are: 1. Cost Estimation 2. Maintaining the status on work in process 3. Tax Calculation 4. Lease Calculation 5. Maintaining attendance 6. Capacity utilization planning 7. Backing up the data of an ERP system These are just few of the processes where spreadsheet model suits the need. The list is many folds. Decision making These models help not only in decision making with an organizational structure but also help in disseminating the updated information across an organization, for E.g. in case of Work in process. The problems faced in decision making based on a spreadsheet model is not because of the fact that it uses a spreadsheet but rather it's a problem due to improper usage of functions available. These functions are an intrinsic part of any spreadsheet system. Model building tools and their uses Spreadsheets and their concepts have become so popular among the business organizations over the years that different vendors have introduced variety of spreadsheet programming applications in the market. Each and every kind of such applications uses different sets of tools for creating different spreadsheet models. Microsoft has incorporated ROB (Rhythm of Business) spreadsheet modelling tool into their spreadsheet software Microsoft Excel which performs conditional formatting with rich data visualization features. With multiple options for fonts and colors, users can more easily discover and illustrate important trends and highlight exceptions in the data. Users can therefore more easily demonstrate variances with graphical elements such as traffic lights or data bars. They can also define thresholds for key metrics to identify whether projects are performing positively or are in need of attention, enabling them to make better and faster business decisions. Actions taken based on identified trends become more proactive and no longer reactive. Mailbarrow's Spreadsheet Professional uses a variety of model building tools in its application. For example, building bar, translation bar, spreadsheet formula tracer, spreadsheet painter etc. Spreadsheet professional also has in built documenting tools by which documenting a spreadsheet model has become automated. Super Delphi Tool is also a model building tool for creating Delphi modelling sheets which is being used for producing summary statistics and histograms of results by automatically analysing the questionnaire forms filled by various individuals. Annotation Tool is being used for interconnect communication in the communication industry. Problems affecting decision making Although spreadsheets models are very useful for accounting tasks and making simple projections, they have weaknesses when used for many quantitative modelling tasks in decision making process, particularly those involving systems that evolve in complex ways over time. The major weaknesses of spreadsheets models are discussed briefly below: 1. Complex spreadsheets models are generally not transparent and can be very difficult to explain to others. Because of the row and column paradigm used by spreadsheets, the fact that equations are written in terms of cell references, the invisibility of the dependencies between cells, and the lack of a graphical means to document the model, most spreadsheet models have a low level of transparency. This can make it difficult to explain your models to others. It can even make it difficult to understand your own model, particularly if you have not looked at it for some period of time. 2. Complex spreadsheets models are usually prone to errors. Due to the lack of transparency of complex spreadsheet models, not only can it be difficult to communicate your model to others, but it can also be difficult to check for errors. As a result, complex spreadsheet models have a very high incidence of errors. 3. Spreadsheets models cannot easily represent complex dynamics. In a spreadsheet model, you typically deal with dynamics by adding a row (or column) for each timestep that you want to forecast a value for. In addition to being a very awkward way to represent dynamics, this has a number of serious disadvantages: 1) it is difficult to represent dynamic feedback loops and delays, where a change made to one part of the system has a delayed impact 2) sudden events are difficult to accurately represent 3) changes in the system's structure with time are hard to represent 4) the length of the timestep cannot be dynamically adjusted during a simulation Uses of Spreadsheet Model Tools in the Industry WhiteLight Systems London: Company is using a spreadsheet model to improve decision making process. The Spreadsheet model can improve the decision-making processes of WhiteLight managers by integrating a range of internet-based information sources with internal sources. Their spreadsheet models test the potential impact of events where the company can detect if a loan is being granted when it should not be. [05] Capital Budget Spreadsheet model is being used all over the world by many leading investment companies. With the use of this model, capital budgeting has become far easier for the managers. Private and smaller companies have been using various spreadsheet models to adjust the discount rate i.e. cost of equity, for a private firm to reflect the lack of diversification on the part of the owner or potential buyer. Salfi Textiles (leading textile mill for production of textile yarn in Karachi) is another company which has benefited hugely from spreadsheet modelling which they use with the background help of Microsoft Excel. They have been maintaining their production planning as well as tracking of practices of over 12000 employees with the help of spreadsheet models built specifically for them. [06] Conclusion and Summary Spreadsheets are wonderful tools. They help track what is, figure out what was, and they help predict what will be. Despite the popularity of spreadsheets, despite their wide use, and despite our familiarity with them, most of us receive only a fraction of the benefit we could derive from our work with spreadsheets. The importance of spreadsheet modelling in practice and as a pedagogical method is a huge. These models provide facilitate production of information and thus help out management while coming up with excellent approaches such as in supply chain management. Spreadsheet models are essential to modern time business world. The state of research knowledge regarding spreadsheet models stands in marked contrast to research knowledge regarding "traditional" procedural languages and object-oriented programming environments. Information systems and computer science researchers have intensively studied traditional programming, and have developed vast theoretical and empirical knowledge about programming practices, software engineering, productivity, quality assurance, and many other issues. Therefore it can be said that the way that people create and use spreadsheets models, merits broad and sustained inclination of business world towards the growing usage of these models. Works Cited Page [01] Wikipedia - The Free Online Encyclopaedia (Online), Spreadsheet. Available: http://en.wikipedia.org/wiki/Spreadsheet [February 21, 2007] [02] Power, D. J., "A Brief History of Spreadsheets", DSSResources.COM, World Wide Web,http://dssresources.com/history/sshistory.html [February 21, 2007] [03] Preparing Financial Projections, Planware [Online] Available: http://www.planware.org/financialprojections.htm [February 21, 2007] [04] Croll, G. (2005), "The Importance and Criticality of Spreadsheets in the City of London," European Spreadsheet Risks Interest Group 6th Annual Symposium, London, UK. [05] Integrated Decision Processing, ENTERPRISE-WIDE RISK MANAGEMENT SPECIAL REPORT - RISK NOVEMBER 1999. Available: February 21, 2007 [06] Use of innovative Technologies, by Dr. Hafiz-ur-Rehman, Textile Journal of Pakistan. Read More