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You use Excel for what?

image I heard the story of a girl – let’s call her Betsy — who started a couple years back at my firm, who had a very interesting exchange with a partner.

Betsy was a sweet girl, and this was her first time doing any business-related work. She had been an art history major in college, but felt like consulting was the right way for her to get introduced into the professional world.

Betsy’s first assignment was to help a partner with some client-development work. At pretty much all consulting firms, consultants spend some part of their careers helping partners pitch new cases to new clients. In this case, Betsy was asked to help build a model in Microsoft Excel.

For those of you who are unsure what that means, financial models are tools used by businesspeople to help determine the financial impact of a particular decision. It usually involves forecasting sales and profit margins for a couple of years, a task which lends itself to being done in an Excel spreadsheet. Successful financial models are those which clearly lay out their assumptions (i.e. sales will grow every year by 5%) and are “soft-coded” (e.g. in the sense that it’s easy to change the assumption of 5% sales growth and the rest of the spreadsheet cells will update themselves automatically).

After spending an entire day working on her model, Betsy proudly presented it to the partner. The partner looked at it – it was a little choppy, it was her first model after all – and was impressed; it looked very nice. He then asked, “Betsy, what would happen if we changed the growth rate to 10% instead of 7.5%?”

Much to his dismay, Betsy burst into tears. Not sure what was wrong, the partner assumed that Betsy had hard-coded the model (i.e. did not make the Excel model flexible enough to easily change assumptions) and immediately began to try to calm her down.

It turned out that not soft-coding was the least of Betsy’s problems. You see, Betsy had thought Excel was merely a way to format data in a pretty way. She had not been aware that people did calculations in Excel, and so, she had done all the number-crunching with a calculator and pen & paper, and then manually entered the numbers into the spreadsheet.

I’m fairly sure she never made that mistake again.

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