Decision Critical vs. spreadsheets
The day-to-day operations of real-world enterprises can be chaotic. A spreadsheet model based on extrapolation of ratios can over-smooth data, leading to wrong conclusions, especially in regard to cashflow-based metrics such as solvency and valuation. Decision Critical does not rely on ratios to extrapolate financial data from other financial data – the financial reports for all Decision Critical enterprise models are instead built on top of an actual operational model to maximize realism. Below are just some of the major differences between a standard "quick and dirty" spreadsheet model and an enterprise model built in Decision Critical:
Ratio-based spreadsheet budgeting: common practice
Decision Critical
Use an arbitrary buffer to represent working capital needs.
All payment terms and inventory holding periods are run through the model to calculate actual working capital needs period-by-period based on assumptions. Buffer is used only for bona fide unexpected items and can, itself, be scientifically built through stress-testing.
Apply ratios smoothly to all expenses, regardless of the practical realities of deployment – for example X% to cover facilities.
True representation of semi-fixed expenses is predicated on expenses occurring as the result of discrete events. Each event is the result of a direct assumption or of fulfillment of an operational condition. An event comes with its own cost and payment conditions, which are anchored to the event itself.
Income statement only. Or with over-simplified balance sheet and cash flow projections.
Income statement, balance sheet, cash flow statement, reconciling to each other and automatically updated.
Limited drilldown to select subaccounts.
Multi-dimensional drilldown to the most granular level, trace results to root assumptions / drivers.
No or sparse operational data in financial models.
Full set of operational data and reporting which drives the financial reports.
Updates to model require re-do or structural changes.
Update logic easily through changes to dependencies.
Exceptions to rules require labor-intensive structural changes / frequently introduce errors that manifest elsewhere.
Rules-based structure with the ability to make granular exceptions.
Extensive manual maintenance and testing required to ensure formulas do not break.
No user-entered formulas.
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