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the spreadsheet software together with cell addresses can be keyed into a cell. The formula isn‟t
displayed in the cell; the result of the calculation of the formula is displayed in the cell.
For the accounting and finance executive, spreadsheet software has had the greatest impact on
productivity at work. Imagine the controller of a company who has been asked to prepare the budget
for the coming year. The company manufactures over 1,000 products with special pricing, depending
on volume. The controller not only has to make assumptions about material costs, which might change
over time, but also has a prior history of expense levels that must be factored into the analysis. Using
pencil and paper (usually a columnar pad), the controller calculates and prepares all of the schedules
necessary to produce the final page of the report, which contains the income statement and cash flow.
The controller presents the findings to management, only to be asked to modify some of the
underlying assumptions to reflect an unexpected change in the business. As a result, the controller
must go back over all of the sheets, erasing and recalculating, then erasing and recalculating some
more.
The creation of spreadsheet software rendered this process less painful. Spreadsheets allow the user
to create the equivalent of those columnar sheets, but with embedded formulas. Consequently, any
financial executive can create a financial simulation of any part of the business. By merely changing
any of a multitude of assumptions, one can immediately see the ramifications of those changes.
Spreadsheets allow for quick and easy what-if analyses. If the bank changes the interest rate on our
loan by 1%, what will the impact be on our projected cash flow and income?
Spreadsheets also provide a “calculate backward” feature called goal seeking. The user might have
a target value in mind. The spreadsheet software can calculate backward to determine what one (or
more) of the input values needs to be in order to get that answer. For a simple example, consider debt
financing in which the loan amount is known, the time is known, and there is a desired monthly
payment in mind. What would the interest rate need to be in order to get that monthly payment for that
loan amount for that time period?
Exhibit 19.3 provides an example of a simple spreadsheet application, a company‟s pro forma
income statement. The spreadsheet is a plan for what the company expects its performance to be. In
this example, the company expects to earn $85,361 (cell H18) after tax on $774,000 (cell H3) of sales
revenues. At the bottom of the spreadsheet, there is a series of assumptions that are used in the
calculations performed in this spreadsheet. For example, cost of goods sold will be 32.75% of sales,
and advertising will be 12% of sales. Likewise, the income tax rate for this company is set at 25%.
(Note: Some totals might be off due to rounding.)
Exhibit 19.4 shows the spreadsheet‟s formula infrastructure. For example, cell B4, which calculates
the cost of goods sold for the month of January, contains a formula that requires the spreadsheet to
multiply the cost of goods sold percentage that is shown in cell B21 by the sales shown in cell B3; the
formula in cell B5, which calculates the gross profit, subtracts the cost of goods sold in cell B4 from
the sales in cell B3; and cell H5, which calculates the total gross profit for the six months of January
through June, contains the formula that adds the contents of cells in the range B5 through G5.
The spreadsheet is set up so that should the user wish to change any of the assumptions, such as the
cost of goods sold percentage, the contents of that assumption cell could be changed to a new value,
and any cell affected by this change would immediately display its new value. This is the power of the
spreadsheet: the ability to recalculate once an input value has been changed.