A Reasonable Approach to Headcount Forecasting

head count forecasting
Don’t make the process more complicated than it needs to be

A while ago I saw a discussion on Proformative.com centered around the topic of headcount forecasting and people looking for advice on implementing a super-powerful model (in Excel, of course) to allow their finance and HR departments to forecast the need for employees in various areas of the business and when those employees would be needed.

HR needs this information in order to plan their recruiting efforts; when to advertise for open positions, when to schedule interviews and several other activities that must be planned in advance in order to successfully hire the most qualified persons for all open positions.

Finance, on the other hand needs this forecast in order to budget payroll and payroll related expenses. These forecasted expenses, an integral part of every corporate budget, must be reasonably accurate and reflect growth and any changes contemplated and communicated through planning and budgeting.

Designing and implementing a headcount forecasting model is no trivial task using a common spreadsheet application such as Microsoft Excel. In addition to the many global assumptions and a myriad of formulas, functions and links, the model must be capable of expanding as needed and be sufficiently documented so any reasonably skilled Excel user can take over and continue to maintain it. Another requirement, hardly ever present in most companies, is periodic audit of the model plus the need for a set of internal controls, designed to mitigate potential risks to the model resulting from formula errors, broken links and other assumption related errors.

This is no different than using spreadsheets to build other pieces of the corporate plan and various budgets, but may actually be even more challenging due to the dependency of the headcount on other areas of the plan, such as revenues, inventory requirements, etc.

For example, in a manufacturing environment where the direct labor force represents a large percentage of the total headcount, the number of production employees is directly dependent on sales budgets, or more accurately the making of inventory in the budget periods driving sales revenue, since making of inventory is the activity that requires the labor force.

Is there a reasonable approach to forecasting headcount?

The only reasonable approach is to abandon the use of spreadsheets for all kinds of forecasts that are incorporated into corporate budgets. Many organizations, even SMBs (Small and Medium size Business) have already come to the realization that use of spreadsheets for budget work is a bad idea. This has been covered here in this blog in much greater detail Replace Excel with a Dedicated Planning, Budgeting and Analysis Solution and Forecasting a Balance Sheet in a Spreadsheet World.

Forecasting headcount is no different. You need a system with built-in business logic, giving you the ability to make the headcount dependent on other factors (e.g., sales forecasts and their dependent inventory requirements).

By using existing, company developed KPIs, such as production employees per unit of revenue (e.g., number of production FTEs per $1MM in gross sales of manufactured inventory, number of FTEs per $1MM of inventory (at cost), produced in a period, etc.), you can link your needed manufacturing headcount to the sales forecasts. If required, inventory production can be made dependent on sales forecasts, allowing you to have a forecast of production FTEs in each period of your budget.

A popular SMB software solution, Budget Maestro from Centage Corporation can accommodate all these needs and will allow even a small organization to forecast its employee headcount requirements with tight dependency on inventory production needs or any other drivers applicable to its business. Of-course, the entire corporate budget should be prepared using this software solution, and there is not a single formula or link that must be provided by the users since all business logic and accounting rules are already built-in and ready to use Business Logic and Accounting Rules Built into the Budget.

With such compelling reasons to abandon spreadsheets in favor of a dedicated solution in the preparation of a corporate headcount forecast and all other budget elements, the whole process can be moved into an environment specifically designed for this purpose.  Struggling to scale and maintain a set of unwieldy spreadsheets and with limited output usefulness will become a thing of the past.

Make a Conscious Effort to Forecast Your Financial Position

forecasted financial statements
Why SMBs Need to Pay Closer Attention to their Forecasted Balance Sheet and Use Good Analytics.

Most small and medium size companies (SMBs) do not have the resources that larger enterprises have.  Their accounting and finance functions are often performed by the same persons and strategic and operations plans and budgets are usually done once a year, before a new fiscal year is about to begin and without too much attention to analytics.  Quite often, the planning and budget work is not done and monitored year-round.

Companies that perform well during the year, and especially those that enjoy a string of successful years with moderate to strong earnings have a tendency to fall into a state of complacency, that is, they seem to pay less attention to how their actual results compared with budgets and in many cases do little to make decisions based on actual results and their corresponding budgets. Many simply do not have the proper tools to be able to build a well-planned budget and continually monitor actual results and compare against the budget as actual accounting data becomes available.

Many SMBs still use spreadsheets in their budget preparation process, which limits their ability to properly plan and develop a budget that can be maintained throughout the year.  They also don’t have the right tools to gain much needed insight into their future financial position.

Those that happen to be on the right track and perform well may seem content with not making changes, although we see more and more such companies actively looking to change the process to a purpose designed solution, and recently to a more contemporary approach with a software solution that behaves similar to an actual accounting system, one that is able to deliver a full set of forecasted financial statements which are fully synchronized to one another and to the underlying budget.

But what happens to these companies when after several years of relative success things change and their performance starts slipping?

Unless the organization’s finance function is sophisticated and employs both experienced persons and especially sophisticated analysis tools and a good data collection system, these companies may unknowingly start drifting into an unhealthy financial position, a process that in many cases can take as long as 2 or more years.

Managements are certainly aware of unprofitability; after all, they get periodic profit and loss statements that show, on an accrual basis, that their net profit is negative.

Certain changes are usually made in order to return to profitability, but these changes, often including employee layoffs, are seldom the solution to the problem.

If the company uses a credit line or other forms of debt to finance operations, it is not uncommon to see this credit line or other debt actually finance losses. The company may be perfectly compliant with their debt obligations, and make all required loan payment.  However, in the background, their financial ratios keep deteriorating and in the case of financial loan covenants Forecast and Monitor Your Loan Covenants Compliance, there comes a time when one or more financial covenants go out of compliance, often discovered by the banker before the company has a chance to calculate it.

From my experience, one of the most important aspects of planning, budgeting and financial forecasting is the ability to forecast the Balance Sheet with reasonable accuracy, for the duration of the budget. The forecasted balance sheet must be as accurate as the budget itself and update in real time as changes are made to the budget Why You Must Forecast Your Balance Sheet Part 1 and Part 2.

Companies that have such forecasted Balance Sheets (and forecasted Statements of Cash Flows which are constructed from Income Statements and Balance Sheets) must pay close attention to how certain values change along the budget timeline. Since a Balance Sheet represents the financial position of the company (I often use the term Financial Health), using analytics tools can quickly reveal key financial ratios, financial loan covenants calculation results and other key data and how they behave and change during the budget timeline.

When you look at different versions of the budget or use several “What-If” scenarios, each of which produces a different set of forecasted financial statements, you will clearly see how the financial position of the company is affected by these various budget versions or “What-If” scenarios. This is critical to perform, so you must properly implement capable budget and analytics solutions and use them year-round.

Using analytics, coupled with a solid budget, one that produces accurate financial statements in each budget period will make all the difference between approving a budget that may not just be unattainable, but also be detrimental to the financial health of the company, versus one that is realistic, sensible, and constructed in a system that was carefully designed and implemented for the job at hand. Do this, and you will align the budget with your company’s actual capabilities.

The best news is that everything I am describing here can be achieved by even smaller companies in the SMB company space. My experience with Budget Maestro by Centage Corporation shows that even with a modest licensing and implementation cost, a smaller (or larger) organization can achieve the goals presented in this blog with a surprisingly short implementation time and with good results the first budget year it is used for.


Impressions from the First Budget Maestro Annual User Conference

budget maestro

A memorable experience and confirmed realizations

I just got back home from the first Budget Maestro Annual User Conference. The event took place at the beautiful Hotel Marlowe in Cambridge Mass., overlooking the Charles River with the Boston skyline in the background. With a hot, but otherwise beautiful weather, the conference was off to a great start.

With customers, both veteran and new in attendance I recalled when I first became a Budget Maestro user.  It was a 1” display ad in CFO magazine that caught my eye. At that time, I was looking for a solution to assist me with the preparation of monthly forecasted balance sheets for a new venture capital opportunity in the hi-tech industry.

I needed to use my forecasted monthly P&L sheets and produce an accurate and complete set of balance sheets, one for each budget period. No software solution at that time could deliver that and relying on Lotus 123 (the go-to spreadsheet of that era) was not an option for many reasons that we all know now, Replace Excel with a Dedicated Planning, Budgeting and Analysis Solution and Is It Time to Switch from Spreadsheets to Business Budgeting Software?.

Budget Maestro delivered what I was looking for. While being rudimentary, with only a fraction of the features it has today and with no analytics module, it got the job done. It wasn’t called Smart Budget since the term didn’t exist back then but it had some of the elements of a Smart Budget with its built-in business logic and accounting rules.

At the time of my purchase I had no idea the company had only two employees.  Somehow, the person I talked to was able to communicate a message that eventually evolved into the message I now use both on this blog, Planning, Budgeting and Forecasting – Why Tradition May Be Dangerous – Part 1 and Part 2 and whenever I share it with customers or anyone in finance looking for a budgeting, forecasting and analytics software package.

The conference was packed with informative sessions, powerful customer stories and testimonials and new product announcements. There was a great deal of entertainment too and a good time was had by all.

There were, however, two major areas that left a strong impression on me. First, meeting many of the customers in attendance and listening to their stories and experiences with implementing and administering a budget solution in their companies validated that the Centage approach to budgeting, forecasting and analysis is correct and no other solution in the SMB space (Small & Medium size Business) can deliver what Budget Maestro can.

Customers shared their positive experience with Centage employees, including training, customer support and other personnel and how pleased they were with the overall implementation experience and putting the product to good use within a short period of time.

It was refreshing to learn that more customers are using the forecasted balance sheet and statement of cash flows, a lot more than in past years. I listened to customers discussing their needs and challenges in implementing Budget Maestro and what they were hoping to accomplish next with the software and offered suggestions and tips on how to best utilize this solution.

Second, I had the opportunity to meet new company employees and reconnected with people I already knew at Centage. They all shared their experiences of working at Centage and the common theme was always providing the best possible customer service and support experience while enjoying the work environment and connecting with their coworkers. It was apparent that the company has matured to a point where I believe it will be propelled to the forefront of its industry.

When making my initial purchase of the software license I had no idea it would all lead to such a great event and a maturing company with an outstanding product line. I was simply looking for a solution to a specific but big challenge I had at the time. All that has changed now and given what I see, Centage Corporation is poised for great success and is sure to become a force to be reckoned with.

What does the Annual Budget Mean to you?

Close-up of business documents lying on the desk, office workers meeting in the background

How different functions in the company have different views on the process

In all but the smallest companies there are quite a few people involved in the annual budget preparation.  While finance generally owns the process, every division and department in the company has something to do with it.  As such, many employees are familiar with at least their piece of the process and even though (and admittedly) many loath these activities, they all have their own unique point of view on the process and its purpose.

Let’s start with division or department heads.  These are people generally responsible for the P&L in their immediate area, be it a department, division or profit or center.  To them, usually, the process starts two or three months prior to the end of a fiscal year.  They are given templates of revenue and expenses to fill out and return to finance or the budget administrator(s) within the finance group.  Some companies require a zero based budget, meaning every expense line must be individually entered and justified – a lot more work for department heads, but we would assume they are accustomed to doing this.

To them, the budget represents the anticipated performance of their business units, such as sales, expenses, profits and losses communicated through the budget; perhaps proposed growth through release of new products and services, cost savings, etc.  Usually, their budget preparation responsibilities end at their department level.  During the budget year they try to perform within the budget constraints hoping performance falls within budget or perhaps even exceeds it.

In companies where periodic analysis occurs, these people are questioned when their business unit’s performance exhibits variances from the budget, and operational changes as well as reforecasting often occur.

The budget administrator (more than one in larger companies) is concerned with releasing budget worksheets or templates to budget participants.  They also collect these data and incorporate them in a consolidated corporate budget book.  If their company still uses a set of spreadsheets (which we all know by now is a very bad idea) in its budget preparation process, they are in charge of maintaining these spreadsheets, the programming of formulas, functions, links and macros, and most notably, continually troubleshooting these spreadsheets.

If the company is fortunate enough to be rid of their spreadsheet-based budget, these budget administrators are focused on maintaining the budget model, releasing and collecting electronically filled-out worksheets from the various budget participants, consolidating the many budget sheets into a corporate budget book and handling all revisions and iterations of the budget until it is approved.  Then, some may perform analytics functions, usually based on their system’s capabilities and company mindset.

The VP or Director of Finance, or in smaller companies the Controller is involved in budget reviews and modifications throughout the budget preparation process and then, hopefully, in reviewing the periodic analysis performed during the budget year. Traditionally, their primary concern is accuracy and completeness of the data, and understanding variances of actual performance from budgeted numbers.

The company CFO, together with the CEO and Board of Directors are mainly concerned with the completion of the budget preparation process and in its approval, as well as periodically reviewing analysis results and questioning performance of the company in response to variances from the budget.  In most companies with a traditional purpose designed budget and analysis solution there is not much more they can do.

However, there is a lot more they should do.  The CFO should always forecast the future financial position of the company (a.k.a. the future financial health).  This can only be done through obtaining a complete and accurate forecasted Balance Sheet, one that is synchronized in real-time to the forecasted Income Statement which is always derived from the underlying budget.  We already know that next-generation budget and analytics software solutions such as Budget Maestro by Centage Corporation (www.centage.com) were designed to do that.

Next-generation budget tools are used on all levels of the budget preparation and analysis process; each user category described above is a participant in the system; each has a set of responsibilities and access to the areas most appropriate to their function in the organization.

Budget administrators no longer have to struggle with unwieldy budget models that never work properly and where different pieces are broken at any given time.  They can now focus on properly administering the process, collecting reliable and timely data from budget contributors, compiling reports and generating output that can be relied on.

CFOs can finally have the tools they really need.  Through smart budgeting technology they have access to a budget that is an extension of their company’s actual accounting system.  They can now see what their company’s Balance Sheet will look like in the future and test more than one version of the budget to see the effect on the forecasted Balance Sheet.  Most importantly, they can initiate changes in response to actual results compared in real-time with the approved budget.

CEOs and companies’ Board of Directors can finally rely on the budget and analytics processes to be able to ask the right questions and respond much quicker to actual business changes.  This also extends beyond the company to shareholders, customers and vendors, all indirectly benefiting from the results of a well-executed and managed budget and analysis process.

Why Out-of–the Box Implementation and Integration is Important for SMBs

ERP related concepts in word tag cloud isolated on black background

The solution should allow users to do most of their own implementation and setup with minimal outside help

Two of our larger clients went through system conversions in the last five years in the hope of implementing an all-encompassing enterprise ERP solution.  What was supposed to be a straight forward project with well-defined deliverables and a reasonable timeline turned out to be the exact opposite for both companies:  Major budget overruns, long delays in achieving practically every project milestone and seemingly endless amount of customization and software code modification in order to accommodate everyone’s needs.

One thing in common to both implementations was the fact that all planned integration of the new software with existing pieces of software and sub-systems still had issues after the implementation was complete and some still don’t work as expected to this date.

What was evident was the large number of outside consultants and the extra stress on company employees having to interact with the consultants and participate in testing and other project activities.

Even though our firm was not directly engaged in these implementations, our work in helping with consolidated financial statements and disclosures was greatly impacted as the data available to us to do our work was at times unreliable and insufficient due to poor integration and questionable report writer scripting.

I imagine many readers of this blog don’t find this experience particularly unusual.  Most people with enough experience in accounting or finance, working for even mid-sized organizations experience this from time to time, especially with company acquisitions, mergers and other drastic changes to their business organizations, where existing systems are determined to be insufficient or lacking in certain areas, or perhaps not able to deliver on the reporting requirements of management.

Unfortunately, such projects are not limited to only very large companies where there usually is a legitimate need to implement a better solution or perhaps more efficiently integrate existing systems with a centralized accounting and finance package. It is also not surprising that in smaller organizations this can be very taxing on the company and its employees (and indirectly customers and vendors) and will pose a long term financial burden at best.

Often, smaller companies get caught between legitimate needs to improve their information systems, streamline operations and improve reporting capabilities and delivery, and IT and software solution vendors and their partners / consultants who manage to give these prospective buyers bad advice. It usually ends up with the customer making purchase agreements and engaging the vendors in projects that at times seem will never end, all to the detriment of the customer. Once the software is implemented the customer is usually committed to it for a length of time (SaaS solutions) or is so involved in the new implementation and conversion of the old data that no reasonable changes are possible for a long time.

The costs sunk into such projects can be significant, even for a smaller company. In the case of ERP software implementations, I’ve seen consulting costs to fully implement a system exceed the initial perpetual license fee by 400%-500%. In the case of SaaS delivery, although there is no large up front licensing expense, consulting expenses can still be sizable and often exceed the original budget.

Planning, budgeting and analysis software is sometimes as difficult to implement as ERP solutions and the integration to the ERP software accounting GL can be difficult and almost always requires outside consulting.

SMBs should choose to go with a more reasonable approach and maximize the out-of-the-box installation experience, with minimal customization. When it comes to CPM class software for SMBs I really like Centage Corporation’s approach with its Budget Maestro suite. The entire package can be installed by the customer (on premise version) or is ready to implement and use immediately for the Cloud version. With a solid GL link like Link Maestro, many of the more popular actual accounting GLs are available to automatically link to the Budget Maestro built-in GL. The overall implementation time and expense are minimal and you can be up and running and productive within days or weeks and not months or years.

The best part is that users don’t have to give up functionality with this approach because the system was designed to be adapted to almost any business type. With its built-in business rules available to users in every budget area, and built-in, GAAP compliant accounting rules, you get a system that uses the budget to drive all required financial statements in perfect synchronization with one another.

To me this is the best of both worlds: Quick and inexpensive out of the box functionality and immediate integration with the actual accounting system (automatic for several popular GLs, or through an export-import step for all others). This quick, predictable and inexpensive implementation is something I think SMBs cannot afford to not consider.

Why Enter Notes in a Budgeting and Planning Software Application?

Business lady feels pressure working under control of her boss

The little time you spend entering notes and comments will pay generous dividends when you need to refer to these notes

I spent many years in the software industry.  I was not a programmer or software architect but was very close to many of the technical aspects of the business and got to observe some of the good and bad practices used.

One of the worst practices I recall was not entering comments next to program code lines, or not writing clear and sufficient notes to allow both the original developers and other people to fully understand the original code.

This became evident when we lost one of our best programmers, who left for another opportunity.  Although we owned the copyright to the code, every programmer who looked at it could not make sense out of it and although the code was near completion with initial testing of functionality underway, we had to scrap it and start from scratch.  We learned a very expensive lesson:  Enforce the practice of documenting all programming work and minimize the risk of losing your own intellectual property due to negligence and bad work habits.

Computer programming, design and engineering are good examples why notes must be kept, however, many other activities, both business and personal, can use this discipline.

As I gained experience in corporate accounting and finance I started to adopt this concept in my work and introduced a policy that all accounting transactions (e.g., journal entries into the GL) must be accompanied by notes or comments explaining the rationale behind them and anything that would help a reader understand the underlying events that required the entry.  Automated entries from sub-systems are pre-defined and repetitive with built-in comment codes and other data that explain the transactions, but manually entered transactions such as journal entries are not.

I often see journal entries made by clients without any explanations; not even the journal header notes or the one-line text per GL line, let alone the memo field where one can enter a free form text memo, add simple tables explaining the entry, etc.  This feature is available in all ERP and accounting software nowadays and the excuse that they only give you eight characters to record a comment (or file name) does not work anymore.

When you make such journal entries or other financial related data entry such as in putting together a corporate budget you have to ask yourself:  Will I be able to remember what I just did six months from now?  Will I be able to explain my work to managers, co-workers, or auditors?  Will I look at the transaction in a totally different way and maybe even suspect there are flaws in it?  Simple documentation, right next to the transaction will solve all that.  The common excuse that documenting your work will add extra work with no real benefits is not valid.

The real benefits are significant:  For a little extra work you gain confidence that the logic used during the transaction entry will still hold at any time in the future; that other employees and managers will be able to understand your work; that any internal or external auditor will have complete information on the audited transaction; and that your financial statements and internal control over financial reporting will be more robust due to this practice.

In Budget Maestro by Centage Corporation, every area of the software has a notes section, accessible through the Notes Tab on the upper right side of the screen.  Users can enter an unlimited number of individual notes for every budget line in every module (Revenue, OpExp, Personnel, Debt, etc.).  These notes can be filtered by user, date entered or description.

The notes can even contain copied and pasted simple Excel or Word tables.  Files that back up the logic or data used in establishing budget lines can be attached to each note within each budget line.  These files (e.g., Excel, Word) can be directly opened from the notes’ associated files area.  With very little effort you can reveal the data and logic used to create the budget line.

Since Budget Maestro allows users to create complex models using built in business logic, Business logic and accounting rules built into the budget, it is imperative, in my opinion, that these budget lines, many dependent on other data sources, with increases or decreases during the budget year plus other logic applied (e.g., Drivers, Based Upon) be clearly documented.  It will make your work easier and more productive.  You will be able to clearly explain the rationale behind choosing the various logic elements that Budget Maestro offers.  It will make the budget review a lot easier and you won’t get caught trying to figure out what you were thinking at the time these particular budget lines were created.

While it may seem an extra amount of time and effort to enter notes (in Budget Maestro or in any other software application), the benefits are going to be evident the first time you need to refer to one or more of these notes.  Budget Maestro makes it easy to enter notes and associated files everywhere in the application, so use this feature liberally.

Should Financial Planning and Analysis Functions Be Outsourced?

Close-up of businessman explaining a financial plan to colleagues at meeting

See how, with the right tools and control over the process, most organizations don’t have to outsource their FP&A functions


A number of years ago Deloitte UK released a white paper titled “Financial Planning & Analysis – The Next Frontier of Business Process Outsourcing?”

In the paper the authors explore outsourcing critical finance functions, such as planning, budgeting and analysis – functions usually synonymous with FP&A (Financial Planning and Analysis) activities.

The authors state that transactional functions have already been outsourced by large organizations to certain service vendors and that the same organizations are currently contemplating transitioning certain FP&A functions to these and other specialized vendors.

According to Deloitte, the argument in favor of outsourcing is gaining popularity among the largest organizations for a number of reasons:

  1. Potential substantial labor cost savings in the finance organization, where financial planning and analysis functions are usually performed by experienced, highly paid employees.
  2. Opportunities to centralize FP&A functions by delegating them to specialized outside vendors.
  3. The ability to streamline processes and leverage the outsourcing vendors’ specialized talents.

Deloitte realizes that not all FP&A functions can reasonably be outsourced.  Among those functions that large finance organizations are likely to keep in-house are:  strategic planning, policies (accounting, tax, etc.) and acquisitions and divestitures.

Although there are many arguments in favor of this newly developed practice, Deloitte admits that the hardest part is the transition of financial planning and analysis functions to the outsourcing vendor.  This is particularly true for organizations that have complex structures, span large geographical areas and that have fragmented information technology systems.  Another concern for the CFO is the project’s complexity, the initial high cost and the time required to make the transition. Another factor is the uncertainty of success, always a factor at the time the decision is contemplated.

In an actual case study in the white paper, certain benefits were identified:

  • Turnaround time was reduced for a significant number of management reports.
  • Higher-level analytics than was possible before the transition.
  • More accurate reports.

What about SMBs (Small and Medium-size Businesses)?

The white paper references only large organizations, not mentioning smaller companies, and probably for a number of good reasons.

From my experience working with such organizations, I believe that outsourcing financial planning and analysis functions is not applicable for SMBs due to complexities in the transition, high up-front cost and on-going expenses that cannot be justified in smaller companies, especially those that employ a small or no finance organization (where finance functions are performed by accounting personnel or solely by the controller).

Fortunately, SMBs have excellent options to maintain FP&A in-house, and even make the process more robust and streamlined, with meaningful insight into the company’s financial health, present-day and future.

A great example is a financial planning and analysis software solution developed and published by Centage Corporation of Natick, Mass.  The application includes Budget Maestro, Link Maestro and Analytics Maestro, which together provide an all-encompassing solution, from planning, budgeting, forecasting to analytics.

The software’s real-time and tightly integrated approach to linking to closed accounting periods and treating budget output as an extension of the actual accounting into future periods allows managements to gain insight into the financial health of their companies, identify potential rough spots and additional opportunities, well ahead of time, and support critical decisions.

I have covered many aspects of the Budget Maestro suite in this blog as a user of the application since it was first released and know with confidence that an SMB organization employing Budget Maestro will never have to resort to outsourcing critical financial planning and analysis functions.

Vow to Make Business Budgeting Reasonable

business budgeting

It’s time we take a serious look at this process and vow to make a positive change

I was just reading a discussion on Proformative.com titled “Vow to Make Budgeting Reasonable,” initiated by Proformative member Mary Driscoll, a senior research fellow at the American Productivity and Quality Center. This post and its various member responses (including my own, encouraging more people to participate) touch on a critical subject: The corporate budget process and how convoluted and unreasonable it can be.

My contribution to this discussion was that no matter how reasonable or unreasonable the business budgeting and planning process may seem to some of its participants, and however companies arrive at their budgets, there has to be a way to turn the budget into something much more meaningful and useful for company managements to rely on in making timely and informed decisions.

I pointed out that budgets must be able to automatically generate a complete set of financial statements, and not just the commonly produced income statement, which is simply a list of revenues, their associated costs, and other income and expense items, plus a provision for income tax expense.

However, many organizations, regardless of the software they use to generate the budget, stop at just the income statement. Whether they monitor actual results against this forecast, their process is never going to be complete.

I could argue that any reasonable person managing the process, or any member of senior management should know that a forecasted P&L does not tell the whole story.  What is really missing is a forecasted balance sheet, one that many companies ignore altogether, or at best think of as nice to have, but technically unattainable due to the limits of their budgeting software, or use of only spreadsheets.

The few that do produce a calculated forecasted balance sheet, and maybe also a statement of cash flows, do it using high-level formulas and assumptions, since they can’t rely on every single budget line entry to individually contribute to the automatic generation of the forecasted balance sheet and its companion statement of cash flows. We can think of a forecasted balance sheet as a set of beginning (and known) account balances, plus all changes to these account balances resulting from future accounting transactions, derived from all budget lines and their attributes.

Is there a way to make the budget process and its outcome more reasonable?

That depends on the individual company’s financial leadership and management mindset, and how open they are to investigating and implementing more current methods and technologies – and whether they realize that traditional methods not only are unreasonable, but also can be dangerous, as we explored in recent blog posts: Planning, Budgeting and Forecasting: Why Tradition May be Dangerous – Part 1 and Part 2.

What I do know is that the planning, budgeting and analysis processes must have defined and clear benefits to the company, and simply following tradition can be a waste of time and resources. There is no reason to do something you are not going to benefit from.

As a finance manager, do you truly believe that the data available from your company’s budget is the best it can be and that senior management can reliably use it to make important decisions? Can your existing budget give you meaningful insight into the future financial health of the company? Wouldn’t a forecasted balance sheet that is always synchronized in real time to its underlying budget (and the P&L) be much more useful – and let you explore critical financial aspects of the organization that a P&L simply can’t reveal?

My personal experience working with Budget Maestro from Centage Corporation, shows that the budget process and its outcome can be reasonable to its users, and can afford significant benefits to companies and their managements, even for smaller and medium-size companies.  This is exactly what I discovered long ago when I vowed to make my company’s budgeting process reasonable.

Another Year: Time for a Budgeting Software Resolution?

Daily planner with the entry New Years Resolutions

Have you made the commitment to move to a dedicated, more automated business budgeting process?

I’m writing for this blog just before the end of another year and with a new year right around the corner. As we transition into the winter months in the Northern Hemisphere, those of us who are on a calendar year no doubt have just finished another annual budget cycle, hopefully less stressful than last year’s and with less iterations and a smoother review and approval process.

Those who are on a fiscal year, fast forward or rewind a number of months, but the annual budget process and the benefits it promises to bring are exactly the same.

Have you finally made the transition from a spreadsheet-based process to a dedicated budgeting software solution?

Have you implemented an analytics process whereby you are able to accurately monitor your actual results against your approved budget?  Are you able to set up any reporting format and automatically display the financial data specifically intended for certain managers’ reviews, in exactly the way that makes sense for your business?

Are you able to automatically connect with your ERP or accounting software GL and quickly and accurately retrieve the needed GL data (e.g., trial balance) immediately after an accounting period (e.g., month, quarter) is closed?

Those of you who have taken this major leap from manual processes, which are always riddled with errors, require a lot of manual data input and updates, and have significant limitations in producing accurate and timely reporting, undoubtedly realize how smart that move was.  I’m sure there was a certain learning curve, like with any implementation of new technology, maybe unfamiliar territory at first, but as you’ve become comfortable with your new setup, the new process became second nature, and you stopped looking back.

With each accounting period close, you became more familiar with your new CPM (corporate performance management) solution and found ways to improve the reporting presentation and the interpretation of the data the system provides.

The second annual budget you prepare with your new software will be much smoother. You’ll discover more ways to collect budget data from operational units. You’ll learn to better use the system’s built-in logic to create forecasts driven by data and applied logic to perfectly match your business model, and you’ll appreciate the software’s built-in accounting rules, which immediately result in more meaningful reports. And you’ll realize how simple it is to obtain a full set of forecasted financial statements, including forecasted income statements, balance sheets and statements of cash flows to match your actual financial statements.

If you have not yet made the transition to a dedicated budgeting software solution, it could be a perfect New Year’s resolution. It may be a little late to implement it for the new, 2017 calendar year but certainly not too early for the next year, whether calendar or fiscal.

For SMBs (small and medium-size businesses) I would highly recommend the solution I use: Budget Maestro from Centage Corporation. It does everything I mentioned above (and actually a lot more) and will become your CPM solution year round and not just for a couple of stressful months just before the beginning of a new year.

Let your Auditors Catch you Doing Something Good

Midsection of male auditor scrutinizing financial documents at table in office

If you’ve been through a financial audit, either an integrated audit required for filing an SEC annual report Form-10K or one done voluntarily per the direction of the board of directors and endorsed by the shareholders, you know how stressful this can be. Like many, you probably feel you are not ready, and the interaction with the auditors can be awkward at times. They ask questions and look for information that you simply don’t know how to respond to; the data is there, of course, but how to convey it to them in a meaningful way is another matter.

Then, there are these junior auditors, who due to lack of experience seem to have a hard time understanding your business – their questions appear to be irrelevant or insignificant, in short – it feels like a total waste of time, especially when you get approached by them with the same question more than once.

I’ve been through many types of audits and the financial statements audit seems to be the one I was having the most challenge with. Through experience as an audit client and as a consultant to our clients I gained the knowledge and insight I think is necessary to survive an audit and most importantly be prepared for one.

Auditors are people too

One of the most important aspects of the audit is building a rapport with the auditor. Your main goal is to convey to them that you run the accounting department with confidence and control over the processes. A good way to accomplish that is to have a candid discussion with them prior to the audit where you will convey to them the department culture, the internal control environment and the level of automation used in the processing of transactions.

I like to have simple and clear narratives explaining the basic processes, accompanied by flow charts. These documents should be reviewed at least annually and updated as needed. There should be evidence of the review and update. A collection of guidelines in each area is also going to be very useful

The importance of clear communication with your auditors

When you forward these documents to your external auditor you are communicating to them that you have clear and defined internal control over financial reporting. Although the external auditor cannot tell you how to run the accounting department or how to perform the various tasks, they can certainly tell you that you are on the right track and that the audit will be conducted taking into consideration some of these processes and guidelines.


Many of the management estimates, such as reserves, cannot properly be audited unless the auditor has some reference to the processes surrounding the review and calculation of such reserve balances.  Your narrative or guidelines describing an inventory reserve for obsolescence will clearly convey to the auditor how you perform the analysis and how you determine that updates to the reserve are required.

If they agree with your methodology, all they have to do is audit the accuracy of the calculations.

Having clearly defined processes and knowing how to convey them to the auditors will make the entire audit experience less taxing on the company and its accounting and finance staff.  The external auditors will repeatedly “catch” you doing good things, rather than point out flaws in the process, which are normally a major contributor to accounting errors.


When your external auditors are confident that you have a reasonably complete and accurate internal control environment, they will be able to proceed with the actual audit and usually this will result in them spending less time in your office, and doing less work in their office. Both of these will translate into lower audit fees. This will be evident in subsequent years’ audits, especially if your auditor can maintain the same audit team.

Although there are no perfect audits, by following these pieces of advice you will experience a much more pleasant external audit engagement, often with only minor exceptions discovered, some of which will not require any audit adjustments.  You will also realize how good it feels when your auditors catch you doing something good.