Excel as a Crystal Ball

Reading the Future with Data

How do you figure out what to do? Well, some of us consult astrology or go with our guts, and others of us build out financial models.

I love fucking around in spreadsheets. Watching how numbers align to tell a unique story that you could only have discovered by crushing through cells. Prior to an MBA, I focused my spreadsheet skills on looking at customer data, brand trackers, and market research. Or planning my quarters and years, vacations, group dinners, renovations, anything that was easier to think through in little cells that built on each other. 

In an MBA, you live in spreadsheets even more. You learn to predict the future and diagnose the past based on how the numbers line up.  Net Present Value is one of the crystal ball tools that we learn, a way to assess what something will cost and what it will earn, making a few assumptions along the way. It’s one of the things that finance bros and CFOs use to take guesses at the future, whether in investment portfolios or in capital investments.

What about ROI, you ask? ROI is a simple calculation of net income over amount spent. In advertising, because we’re such a short term medium, it can usually suffice. But if you’re really looking into the future, so many other factors come into play. Ever heard of inflation? Or, if part of your investment is borrowed money, changing interest rates? 

The idea is to understand the money an investment earns—whether it’s a new business, or a new part of your business—in today’s dollars so you can make a solid comparison.

The math is not too hard; here’s a simple model where you plug in what you’re investing, what you think it will earn you each year. In the end it tells you, yes, this is a great idea to invest in! Chances are, without major changes afoot, you will make money! Or no, this is a terrible idea, you will lose money in the long run.

Of course, this model is built on a lot of assumptions. And if you’re thinking about how tenuous and tumultuous the whole world is today, it’s true in the financial world too. The assumptions that are made in an environment with 0% interest rates are very different from the ones that are made in 5% interest rates. When people in finance are making bets five or ten years into the future, the crystal ball gets very cloudy. Predictions get muddy and contradictory. And knowing what assumptions underlie a prediction becomes more important than ever.

So if you’re a number-crunching Excel junkie, what do you do? The beautiful thing about having a clear model is that you can update your assumptions, and predict the future some more. This is useful for making long term decisions, which takes an upfront investment and starts to generate returns. So much advertising spend is short term—ad placements, production and agency fees aren’t calculated over 10 year time frames. But it’s useful to understand as a crystal ball for decisions that may take you over the horizon of the latest trend.