RIP Paper Thinking

I see it in most financial models. Paper thinking is the natural evolution from printed financial reports produced by traditional computer systems - to those same reports, or similar reports produced with XL. XL freed us to run reports when we wanted them; to format them as we pleased, to add what we needed, or remove what we didn’t. XL is wonderful. But XL isn’t paper. XL can do more.Financial reporting is about what happened. Financial modelling is about what may happen. That difference noted, financial models often follow the same conventions as financial reporting and its ‘paper thinking’. A symptom of paper thinking is embedded subtotals. Paper reports have totals and subtotals because report consumers wanted to know the “bottom line.” When the total seemed odd report consumers searched through lines of detail to find each subtotal, and when a subtotal seemed odd, they examined the detail lines. With paper this was the most efficient way to do things. XL has more efficient options like PivotTables.

PivotTables can collapse thousands of rows into a handful. Model consumers can see the bottom line easily because there just isn’t that much to sift through (and PivotTables can be graphed astonishingly easy!). IF model consumers need to examine subtotal details they can double click it to reveal supporting numbers. This approach transforms static models into interactive analytical dashboards.

Some people object to this approach because their executives do not know XL. That’s ok. It takes seconds to demonstrate PivotTable’s drilldown and when they see this magic for the first time, their astonished expressions fill us with job satisfaction.

Do your models have embedded subtotals? Almost all do. Mine don’t. Why did I change? Because my customers love PivotTable magic and it takes me less time to produce Pivots than embedding subtotals. I’ve left the paper paradigm behind. Have you?