Sales Fix Everything

A common cure to an age-old ailment

If you spend enough time at a company, or if you’ve worked for several companies during your career, you’ll inevitably encounter slow periods, and financial hardship, and even occasionally company reorganization, liquidation, a buyout or simply shutting down operations altogether.

There are many reasons why companies fail or temporarily underperform. Among them are bad management decisions, lack of planning, lack of leadership in certain areas, diminishing customer demand, inventory or technology obsolescence, focus on the wrong product lines or service offerings, and more.

I’ve seen all of these occur at several organizations I was involved with or consulted to, and concluded that company failure was usually attributed to a combination of some of the reasons listed above.

There is, however, one common contributor to company failure or temporary hardship: Lower than expected or declining sales.

In recent years we’ve seen examples of companies that had bad or inexperienced management and lack of proper planning and other reasons that would normally cause a company to fail, or at least experience either a temporary or prolonged financial hardship, yet these companies seemed to thrive and grow rapidly despite many of the errors that good management skills should’ve prevented.

These companies had one thing in common: Sales. Customer demand was strong and increasing, and these companies, despite high inefficiencies and unnecessarily high operating expenses, were able to finance their growth simply through these sales.

This phenomenon is more common in the hi-tech industry, or in any business that lends itself to higher-than-normal gross margins. Operational efficiencies and tight management don’t seem to play as important a role as in other industries or in businesses with thinner gross margins, or companies where product or service demand is not as strong or requires higher-than-usual business development effort and expense.

Regardless of product demand, strong management and leadership and good planning, assisted by automation of the planning and budgeting process, and frequent analysis of actual results against the plan must exist in all organizations in all industries. Rapid sales growth and growing customer demand is all the more reason why you should carefully implement an effective business planning and budgeting system, one that can keep up with the growth. This blog is focused on the topic, and many of the articles here are meant to encourage financial managers and CFOs to embrace the next generation technology powering such systems.

However, no matter how great management is, insufficient sales cannot be mitigated through just maintaining or improving operations management, which your financial statements will clearly show. So, my priority in any struggling company is to first focus on sales while re-building the entire organization’s operations and other management functions.

There may be exceptions, but I’ve never seen a company that failed due to excessive sales or unusually high customer demand, which is why the common cure for many business failures and struggles is sales.

Business Logic and Accounting Rules Built into the Budget

If you’ve spent more than a few years preparing and presenting annual budgets, and perhaps participated in the periodic reviews and updates (re-forecasts) of these budgets you have certainly come to the realization that the budget outputs (e.g., forecasted financial statements and other reports) must be a result of your implemented model and a consolidation of inputs from several budget participants, such as departments or cost centers, and some logic built into this whole thing that takes into consideration the use of drivers, prior actual results and many more factors that contribute to what the budget is going to look like.

If your company uses spreadsheets to prepare its annual budget and do its re-forecasting work, you appreciate how much work went into the setup of these spreadsheets, the enormous complexity of the formulas, functions and links used, and the tedious maintenance required to keep the model up-to-date and relatively free from material errors, which is all you can usually hope for.

If your company has upgraded the process to a dedicated software solution for corporate budgeting, modeling and analytics, then many of the formulas used in the spreadsheet version must be programmed into this budgeting software and periodically reviewed and updated as the model changes.  Many additional links and other application-specific programming must also be performed before you can actually use the application.  This is not much different than using spreadsheets.

Neither of the above two approaches is ideal, because of the complexity of the model setup and the continual maintenance required to keep the plan and model functioning correctly and delivering the desired results.  Neither approach can ever deliver complete and accurate financial statements (with the exception of a forecasted income statement), due to their inherent limitations, the most obvious of which is not having a built-in general ledger (a G/L that operates like the actual accounting software or ERP G/L).  After a great deal of programming, you may be able to obtain a balance sheet and statement of cash flows, but these will be approximate and incomplete, at best.  Many forego these statements altogether.

To make a budget useful, you need to incorporate some business logic into it.  This is where the myriad of formulas and links among the many spreadsheets come into play.  They must represent the particular conditions that drive your business, and the many nuances unique to each of its operations.  You can’t just use a generic spreadsheet model or any of the various dedicated budgeting software solutions, right out of the box, and hope to be able to deliver a meaningful and useful annual budget.  Much preparation, and often expensive consulting and internal labor, must be employed first.

What you really need is a dedicated software solution that has business logic already built into it, a menu-driven environment with drop-down lists and tables that you select from within each budget area, for each budget line item, either globally or individually, plus the ability to select unique defaults, drivers and other logic.  The end result is a modular budget (revenue, expenses, assets, liabilities, etc.) with input from all business units.

You also need the system to have accounting rules built in.  This will ensure that every budget line will cause the values representing G/L account balances (ideally identical to your actual accounting G/L accounts) to update in every budget period, and then contribute to the generation of the forecasted financial statements and other operational reports.

Unfortunately, using the spreadsheet approach and most of the dedicated planning, budgeting and analysis software solutions, due to their inherent design, no accounting rules can reasonably be established, thus the lack of ability to create a reliable balance sheet and its companion statement of cash flows. It seems that the more work and money you invest in these approaches, the less productive you become, and the more ambiguous some of the results.

There is only one practical solution to this dilemma: Implementing a software application that has both business logic and accounting rules built right into the application itself.  So far, I have found only one such application – Budget Maestro from Centage Corporation.  Budget Maestro is designed to allow its users to tailor their plan and budget using built-in business logic, where they need only select items from drop-down menus and lists, and from either built-in or user-created defaults, none of which require formulas, links, or any other type of programming.  To complement that, the system automatically provides accounting rules used in viewing output, reports and financial statements.

I have covered these concepts in great detail in many of the blog posts on this site, for example: Budget Maestro’s Future Journal Entries, Two Key Principles in the Budget and Forecast Process, Why You Must Forecast Your Balance Sheet – Part 1 and Part 2.

In summary, built-in business logic is needed to allow building the plan or model which becomes the budget. Built-in accounting rules are needed to allow the system to automatically use the budget to generate forecasted financial statements and other reports, always synchronized to the plan and budget itself, and behaving like an actual accounting system.

Think of this as financial statements generated from accounting events that have not yet occurred, but are projected to occur based on the budget.  As the budget is updated, so are these projected accounting events.  The system automatically makes sure, using its built-in accounting rules, that the financial statements are delivered in the same format and fashion as their actual accounting system counterparts.

I think this is a brilliant approach, and expect more software applications to adopt these principles in the near future.

Planning, Budgeting, & Forecasting: Why Tradition May be Dangerous – Part 2

Be open minded and explore opportunities for change

In the first part of this blog article we looked at the traditional approach to planning and budgeting and recognized a number of flaws, regardless of how sophisticated some of the modeling capabilities of several of the leading solutions were.

This raises a fundamental question:

Is having an infinitely complex model with unlimited reporting capabilities but with high maintenance costs and dependence on outside consultants and with no ability to really gain insight into the future financial health of the organization superior to having a somewhat less capable modeling solution but one that is user maintained and with no modeling formulas, functions and links, one that automatically provides management with a Balance Sheet and Statement of Cash Flows that are always  synchronized in real time to the P&L and its underlying budget?

This is a very long question but in reality it is a very simple one.

  • What are management’s priorities?  
  • What is really important (or should be) to them?  

As the title of this article implies, relying on older, traditional methods can actually be dangerous to the company and its management since it can mislead them to make incorrect decisions when there is no real visibility into the company’s financial future.

Furthermore, the few applications that claim a forecasted Balance Sheet can be programmed may mislead users who desire such a report and perhaps even rely on it. As has already been discussed in this blog, in order to be able to deliver a complete and accurate Balance Sheet for all budgeted periods, the planning and budgeting software must have a built-in GL, just like its accounting software counterpart, Why have a General Ledger in a Budgeting Software?  To this date, I have not seen a planning / budgeting software solution that has such a GL by design, except for one application, Budget Maestro  from Centage Corporation.

System Generated Balance Sheets & Statement of Cash Flow

I cover a lot of my experiences with Budget Maestro in this blog. I feel very fortunate to have found a solution that is 100% user maintained, free from the worry of programming and managing endless sets of formulas and links, yet a solution able to reasonably model any type of business with very few exceptions. The real bonus I get with this software is the system generated Balance Sheet and Statement of Cash Flows that are automatically updated in real time with every change in the budget. With these capabilities come many additional noteworthy benefits as you can read in this blog, such as:

Forecast and Monitor your Key Financial RatiosForecast and Monitor your Loan Covenants ComplianceHow much of your credit line can you tap? and Generate Accurate Forecasted Financial Statements

Budget Maestro may not be the best fit for a Fortune 100 company, but it is certainly perfect for the many SMBs (small and medium businesses) in search for a way to better manage their organizations with greater insight into their financial future. I urge you to be open-minded and see how a traditional budget and analytics process can be transformed with this unique solution.

Planning, Budgeting, & Forecasting: Why Tradition May be Dangerous – Part 1

Be open minded and explore opportunities for change

Being part of a consulting firm in the area of accounting and finance I frequently get solicitations by phone and e-mail from vendors of accounting and finance software applications. These are vendors of accounting software, ERP applications, fixed assets management software, manufacturing MRP and other solutions, and of course vendors of corporate budgeting, planning and data analysis software, a category I like to associate with CPM (Corporate Performance Management) or EPM (Enterprise Performance Management) software, both of which generally used by the finance function working with company existing (actual) data and with forecasted or budgeted information in an attempt to arrive at an understanding of enterprise performance as measured against exiting goals and plans.

Planning, Budgeting, & Forecasting With CRM Software

Recently I had numerous contacts, both by phone and e-mail, with sales and sales support representatives from several well-known vendors of CRM software, specifically as pertaining to the functions of planning, budgeting, forecasting and analyzing data. I was intent on understanding why their solutions were beneficial to their customers and the real strengths of their product offerings in providing those benefits. I was also interested in learning how their approach allowed organizations to gain insight into their financial position, past, present and future and especially on how they were able to deliver future period forecasted financial statements and whether all statements were fully synchronized with each other and with the underlying budget.

As I expected, all of these applications were quite capable of setting up a corporate budget by importing static data from numerous reporting entities and by constructing a financial model that relied on historic data plus assumptions and application of a variety of formulas and functions, linking different worksheets, performing allocations and using drivers to arrive at a consolidated corporate budget.

A few of these applications were featured a large number of dimensions in modeling the business and its data, allowing a seemingly endless number of analysis options.

All of these software solutions either had a direct interface to the actual accounting GL (requiring custom programming) or indirectly via a two-step export-import process of actual accounting results, such as GL account balances and even detail transaction data.

CRM Systems Come Up Short on Planning, Budgeting, & Forecasting Tasks

All the presentations I watched and the marketing and technical material I received were very impressive and highly polished, but on further inquiry it was disclosed to me that each implementation required a varying amount of setup work, usually performed by vendor trained personnel or outside, independent consultants.

This implies additional, perhaps significant, costs and also longer implementation timelines. Changes to the model or any part of the implementation often requires contracting the original vendor or an authorized third party. Since very little can be done in-house, I imagine only a few changes and improvements to the implementation are actually done beyond the original setup. This does not encourage users to keep up with the ever-changing market and economic conditions. High costs may be another deterrent.

What struck me most was the fact that none of these software vendors provided complete and accurate financial statements beyond the traditional Income Statement. They all claimed they could program a forecasted Balance Sheet and a Statement of Cash Flows, but these statements were always going to be modeled, using high level formulas and assumptions and always requiring maintenance with every small change in the budget.

None of these statements are synchronized to the income statement and to the underlying budget for the simple reason that none of these software solutions have an integrated GL where budgeted transaction data can be processed in a manner similar to how an actual accounting GL operates.

In the second installment of this article we will explore this fundamental flaw and see a better approach to this challenge.

Do We Need Industry Specific CPM Applications?

Wouldn’t an already proven software solution in many industries be a better choice? Are “Vertical Market” budgeting software applications justified?

I recently attended the annual NAB convention in Las Vegas where we had three client companies exhibiting. This convention is geared toward broadcast professionals, in radio, TV and all other media production marketed to consumers and business organizations.

In passing by the many industry specific hardware and software companies, I came across a surprisingly large booth where a software publisher displayed budgeting and scheduling software, specifically designed for media producers and other companies in the industry.

The featured budgeting solution allowed its users to enter and consolidate multiple budget worksheets arranged by project or media production activity (or by business entity) and then consolidate them in various useful ways to arrive at the company’s annual budget, project budget or any other required set of outputs. The software package also included several other functions specific to the industry. It is only the financial application component I am writing about here.

There were two distinct issues with the budgeting component that I noticed:

  1. The software did not automatically provide the user with a set of forecasted standard financial statements beyond the Income Statement.
  2. There was nothing unique about this software that you could not get from a variety of corporate planning, budgeting and analysis software solutions.

The makers of this software claimed that it was designed specifically for the broadcast and media production industry and that it had all the features needed and used in that industry, including the budgeting piece I am referring to here. However, in using such a vertical application with a relatively low installed base and a small developer behind it with limited resources, I can’t see how users can properly benefit from it.

I’m not sure what the price point is but I can’t imagine this being less expensive per user than a broad market application that is designed essentially to do the same thing, is more robust and provides management with critical information they need for sound decision making. Of course, the user (and the vendor) can justify this by saying that for the price of the integrated package they are also getting a budgeting piece which they would have to license separately if it did not exist in this package. Is that a valid argument? I don’t think so.  Do you use a product just because it is “free” or comes bundled with something else you must have?

A question that immediately comes to mind is whether there is a need for an industry specific solution vs. implementing an already established and tested application, one already used in a variety of industries.

I’m sure that other vertical markets have their own “fine-tuned” set of software applications marketed specifically to those markets. But in a finance related software, is this a better approach than an application built on a solid foundation where any industry business model can be created and reports and financial statements can be generated and delivered to users and managers who will use it to make informed decisions? Is an industry specific program going to do a better job? It may have the industry specific terminology already set up and the default work flow may be more in line with what these industries’ finance departments are accustomed to, but is that enough reason to consider such a solution?

The planning, budgeting and analytics software category (I sometimes like to refer to this category as CPM – Corporate Performance Management) seems to be quite fragmented, although only several vendors stand out from the crowd. I respect the desire of software developers to market unique solutions to their target markets and of course their entrepreneurial spirit, but do we really need such a large variety of products?

I guess this product category is no different than the ERP software category, or any other consumer or business product for that matter.  In fact, it is not much different than in any industry with a new product category. The automobile industry was like that in the first 30-40 years of its existence and evolved from dozens or more manufacturers to a consolidated field of only a few.

If there isn’t going to be a major consolidation of products and vendors in the CPM software category, at a minimum I see only several leading vendors remaining, perhaps one dominant in each customer category, such as SMB, enterprise, etc.

End of Month Shipping Frenzy

Is it the customers’ product demand schedule or lack of planning foresight that has you in a shipping frenzy?

I spend a fair amount of time at various client companies, often in remote sites and plants in addition to their headquarters. I interview many people in numerous roles during our internal control engagements, internal audit consulting or whatever projects these companies ask us to work on. I also observe many activities, such as inventory receiving and inspection, work in process operations, construction of fixed assets, and how all these are recorded in the sub-ledgers and represented in financial statements.

A while ago I decided to develop an Aged Backlog Report for one client company since they were struggling with meeting customer ship date requests. I divided the report output into 10 columns: 5 future and 5 past. Each backlog item, as documented in sales orders now falls into one of these 10 columns. For example, a customer ordered item requested to be shipped on May 26, 2016, at this time of writing falls in the Next 30 Days column. If not shipped by the due date, it will automatically be moved to the Past 30 Days column and so on. The full range is Over 180 Days in both directions, future and past.  I testing I implemented the report at several other client companies.

In the process of developing this report and making it useful I was thinking of a phenomenon so many of the manufacturing companies I work with experience: Uneven distribution of product shipments throughout the month with a peak shipping day on the last day of the month or quarter.

I recently looked at several of these Aged Backlog Reports, all from different organizations, with different product lines and a different customer base each and noticed something very similar in all of them: The customer Requested Ship Dates (due dates on sales orders) were almost uniformly distributed throughout each accounting period.

I didn’t see a concentration of customers requesting their shipments to leave the warehouse on the last day of the month or the last week of the month; yet in all of these companies there seemed to be relatively less shipping activity going on during the month followed by a shipping frenzy toward the end of each accounting period, culminating with an almost epic effort to get as much stuff out as possible before the clock strikes midnight.

This was confirmed by examining sales journals in several accounting periods (assuming billing was not much delayed following actual shipments).

What causes this phenomenon? Or is it really a phenomenon given how common it is? I know for a fact that this is not driven by customer specific demand, as sales orders’ due dates clearly indicate. Is it lack of planning?  I don’t think so. Sales orders’ due dates are supposed to create the demand and drive purchasing of material, scheduling of machines and work centers and allocation of resources. If planning is not to blame, then it must be the actual results from these planning activities, or just not adhering to schedules.

Despite all this logic I think it all comes down to natural human behavior. We know that we have an inherent quality to procrastinate; we experience that with daily chores we are assigned to, filing our tax returns, and other activities, when we pretend that there is plenty of time to complete them and one more day won’t make any difference. There may be people exhibiting less, or even none of this behavior but the majority of us are impacted by this on some level.

I think this quality is carried over to the work place. The first few weeks of lighter shipping each month followed by a much more intense week and especially the last two days of the month or the quarter, seem to prove this theory.

Which brings up another question: If companies seem to exhibit such uneven shipping and fulfilment output throughout each accounting period, is that an indication that resources are underutilized? Are people taking their time much of the month, only to accelerate their activities (hence the increase in output) at the end of the period an indication of a higher utilization potential? Does that mean that with more effective management a company can grow by adding fewer employees proportional to the revenue growth? This sounds very optimistic and possibly only doable to a certain extent.

I’d love to hear your personal opinions and actual experience and observations in your own companies.

How Bad Results are Conveyed in Financial Reports

Learn to notice certain signals and what your finance CPM system is trying to tell you 

If you read external financial reports such as SEC FORM-10K and FORM-10Q you probably noticed an interesting phenomenon (or is it the norm?): Bad or negative financial results are communicated by using creative and carefully crafted language, giving plausible explanations and using purposely selected financial comparisons that seem to reduce the effect of the negative results, as communicated just by the numbers.

I was an SEC filer myself years ago and can certainly understand the motivation behind the language and explanations given in these reports. After all, the true numbers are there and the reader always has the opportunity to read, understand and make their own decisions based on the data. The minimum disclosures are also there for everyone to see. Management wants people to hold the security and trust them that the company is on the right track.

I also know well from experience that these filings have been fully reviewed by these companies’ legal departments or by outside counsel and the vast majority of them don’t have any disclosure issues, at least not from a legal standpoint. This is supported by a required framework of internal control over financial reporting, attested to by an external auditor (for annual filings) that ensure that financial statements and disclosures are free from material errors.

I interviewed many top executives in companies that are SEC filers and in privately held companies that are required to provide financial statements and other reports to various users of these statements.  Most seem to have difficulty admitting that their companies have not delivered the expected results; after all, the disclosures and explanations to filed financial statements and specific schedules do not show the results as being too negative; these, in fact, may look quite encouraging when someone outside the company bothers to read and understand the details conveyed in these filings.

Are these managers (CEO, CFO) in denial? Do they truly believe that their companies are doing just fine? Or maybe they don’t have the real picture surrounding their organizations’ financial well-being and especially their companies’ future financial outlook. This can be a serious problem because not knowing where the organization is headed financially and well in advance implies that certain signals will be ignored, decisions will not be based on solid data and mistakes are likely to occur.

Can finance be blamed for this? After all, they are the function that provides senior management with the data needed to make timely and informed decisions. As it turns out, finance, always pressured to deliver results, sometimes under unrealistic deadlines, and almost always understaffed, works with available tools, common methods and techniques. Their tools are not always state of the art and there is very little time for them to conduct research to see what new solutions are available to companies their size; so they are usually left to work with whatever tools and methods the company possesses and change is not something they look forward to.

However, this does not have to be that way. There are finance solutions (the names CPM, EPM, Planning / Budgeting plus Analytics are used interchangably) that are designed to make life easier in finance, and ultimately provide upper management with the data they need, when they need it.

One of the most pressing changes required is for companies to budget and periodically reforecast their balance sheets. The software must be able to do this using posted transactions driven by the budget and not a crude approximation via using some modeled formulas or global assumptions as some of the present day solutions are designed to do. These balance sheets are far from complete and accurate and may actually mislead their users. Only a general ledger based system incorporated into the CMP solution (totally independent but linked to the actual ERP GL) is going to be an acceptable solution to this challenge.  Fortunately, this technology is available now.

This is going to be a paradigm shift for many finance organizations, but those that already embraced it don’t ever look back.  I believe many more organizations are going to follow this trend in the next few years.

Balance Sheet Forecasting Demystified

A new and sensible approach to creating a forecasted balance sheet

Have you ever wondered why forecasting of the corporate balance sheet is something we seldom see or hear about? Or why many finance managers and professionals dismiss it as an unnecessary activity with no real benefit to the company? The answer, according to my interpretation and understanding, is that doing a good job of forecasting a complete and accurate balance sheet is very hard, probably impossible using conventional tools (traditional CPM tools, spreadsheets, etc.).

A lot has happened since the first attempts at forecasting a corporate balance sheet. In the early days of computerized planning and budgeting the main goal was to forecast the cash flow of the company; cash leaving and entering the company in various budgeting periods (months, quarters, etc.). The focus wasn’t really on generating a “future” balance sheet with all of its components clearly presented, but more on the general accounts, such as cash, and maybe receivables, inventory and payables.

With the available tools at the time, the cash flow forecast was usually not presented in a standard Statement of Cash Flow. Management was able to see how much cash would be required in each period and anticipated cash receipts during the budget year. The accuracy of such forecasts was always questionable, but at the time it was the only method known and used.

Those who have done cash forecasts know how hard it can be, especially if any degree of detail and accuracy is expected. The end result was often far from the actual results but it was a step in the right direction.

Can a Balance Sheet be accurately forecasted? That depends on the definition of accuracy. Under ideal circumstances a forecasted balance sheet can only be as accurate as the income statement forecast. You grossly overestimate your sales in certain budget periods and the forecasted balance sheet, assuming it perfectly tracks the forecasted P&L, will be off too.

Nevertheless, if the forecasted Balance Sheet and its Statement of Cash Flows companion are not synchronized to the P&L and to each other, any degree of accuracy and completeness can never be achieved. This is why most of the popular planning and budgeting software solution used today are not able to provide their users with an accurately synchronized set of financial statements.

In an earlier blog entry, Take Advantage of your Planning & Budgeting Software’s GL we saw that in order to achieve a meaningful set of synchronized forecasted financial statement the software must employ a general ledger at its core and automatically make journal entries in response to budget line forecasted activities (e.g., sales and expenses in budget periods, forecasted capital asset acquisitions, etc.).

Finance executives, finance managers and finance professionals now have a set of tools to deliver a forecasted Balance Sheet and a Statement of Cash Flow that perfectly track the budget and its forecasted Income Statement. These look exactly like the actual financial statements, only represent future budget periods instead of actual accounting periods’ performance.

While I perfectly understand why they did this with the existing tools and software architecture, company CFOs and other finance executives can no longer dismiss this radically new approach as irrelevant or unnecessary. It’s good to see technology innovations finally reaching corporate finance management and embraced by organizations’ leadership teams.

Maintain A More Accurate Budget Using Actual Data

I’ve been a user of Budget Maestro (www.centage.com) since 2002 and have gone through all the version upgrades and minor updates over the years. What I’m still surprised at is that I still learn new ways to use it and am able to continually improve the function and utility of this application.

I just discovered another way to contribute to the accuracy and completeness of the budget. This uses actual data available from the accounting (and more precisely, the company payroll system).

In most companies payroll is the highest operating expense. This includes salary and overtime pay, bonus pay, holiday pay, payroll taxes, benefits and other payroll related expenses. In manufacturing companies, most of this payroll expense is absorbed into inventory (capitalized as inventory is produced) and is expensed as products are sold.

Different industries experience different amounts of payroll and related expenses, but in all organizations, these expenses are substantial. This implies that budgeted payroll and related expenses are significant component of the overall budget.

What if there was a way to more accurately forecast and budget these expenses? Can the payroll budget be updated in real time, using the actual accounting payroll data?

Budget Maestro has a very comprehensive personnel budgeting module where company employees are entered either individually or in groups of similar work functions. Payroll related expenses are calculated regardless of whether the company has a calendar year or a fiscal year.The correct expenses are automatically posted to the budget and accounted for.

For example, expenses such as Social Security and Medicare (employer portion) stop accruing during the calendar year only to re-accrue at the beginning of the next calendar year. Companies that are on a fiscal year must correctly accrue these expenses and then stop accruing them according the calendar year rules, while reporting them in their particular fiscal year. Budget Maestro knows that from the company calendar setup and will correctly apply these expenses where they belong, no matter what the fiscal year-end is.

While some of the payroll is forecasted based on revenue forecasts by using drivers, there is a large portion of the budgeted payroll that consists of existing employees.

By adding and deleting employees as they are hired and leave the company or when actual salary changes go into effect and other changes take place, the output of the personnel module becomes more accurate and more aligned with the actual payroll expenses.

It is important to note that adding new employees in Budget Maestro following the actual additions into the company payroll system may require adjustments to forecasted employees (which is part of periodically maintaining the budget), however, at any given period in the life of the budget, the majority of the payroll and the related expenses will closely follow the actual payroll expenses with the balance of these expenses determined by assumptions and drivers, following growth or expansion forecasts.

The natural inclination of finance personnel tasked with maintaining the budget might be to dismiss these activities as unnecessary or time consuming, however, we must remember that the planning, budgeting and analytics processes are not just an exercise in numbers or an annual ritual that must be done through tradition or for other unknown reason. Those who follow the sequence of these blog entries surely realize by now that the benefits gained from a complete and accurate set of data and year-round maintenance and analysis are profound.

Only with having complete and accurate data, periodically updated using known data (e.g., from actual accounting trial balance account summaries or account transactional data), cans an organization gain insight into its current and future (forecasted) financial health.  Budget Maestro / Analytics is a tool that helps with these processes and the interpretation of data, but it is the users’ responsibility to make sure the data entered is accurate and complete.

This payroll expense forecasting is a good example of how a company can maintain and report a very large portion of their expense budget with confidence and accuracy.

Take Advantage of your Planning & Budgeting Software’s General Ledger

How to leverage the existence of a General Ledger in your planning & budgeting software

In a recent post I brought up the need for a GL (General Ledger), integrated into the planning and budgeting software and resembling an actual accounting software GL Why Have a General Ledger in a Budgeting Software?. We saw that the benefits are great and the entire budget process with the insight gained from its reports can transform the way companies value the budgeting process output in a profound way that enables managements to clearly see and understand the data, resulting in making sound decisions supported by this reliable and timely data.

Every accounting system, whether completely manual (anyone seen one of those lately?), or integrated into a complete ERP solution employs a General Ledger (GL) at its core. The GL is the last stop where data from the entire organization finds its way into pre-defined accounts, sorted into the various business units (reporting entities) where individual reports as well as consolidated, rolled-up reports can be produced. It is the GL that allows financial statements to be produced and distributed to users. These financial statements (Income Statement, Balance Sheet and Statement of Cash flows, plus other reports), deliver the performance of the organization during the reporting period as well as its financial position at the time the reports were published.

If actual accounting period financial statements are relied on to convey a story to their users, shouldn’t forecasted financial statements be available to company management to aid in making decisions that will help the organization achieve its strategic and operational goals? Here’s where a GL integrated into the planning and budgeting process can be invaluable.

In my work with planning and budgeting systems I have only seen one system that employs a GL at its core: Budget Maestro from Centage Corporation. I am certain that other software vendors are working on such an approach, since it is the only sensible way to be able to arrive at a complete set of future period financial statements, all synchronized with one another, where the Income Statements, the Balance Sheet and Statement of Cash Flows update in real time in response to changes in any component of the budget itself.

The secret to properly using the planning and budgeting software is to mirror your actual GL Chart of Accounts in your budgeting software, assuming it has a built in GL (similar to Budget Maestro’s GL mentioned above). Then, when you assign the appropriate GL accounts to the various budget records (e.g., Revenue, Cost, OpEx, Personnel, Assets, Debt, etc.) all activities projected through the budget process will cause transaction amounts to be included in system generated journal entries, using these GL account assignments. This is similar to the actual accounting system making journal entries in the GL in response to actual accounting transactions.

From experience I can say that all GL accounts must be present in the budgeting software. It is very frustrating to create a budget record, say, a sales forecast for a product and realize when you are asked to select a revenue account or any other needed account, that the account you are looking for is not on the dropdown list because it was not loaded into the GL when you set it up. So make sure all GL accounts are present and properly classified for reporting purposes.

In Budget Maestro, the setup of the Chart of Accounts and the grouping of all GL accounts into their proper groups and under the right reporting entities is very simple and intuitive. Most of the work can be done though uploads from company supplied templates. A good number of popular accounting system GL’s can be linked directly into Budget Maestro via Link Maestro, another Centage product.

Whether you are looking to upgrade from an existing planning & budgeting solution or starting from scratch, I strongly urge you to look at a solution that is GL based, one that mimics the operation of your actual accounting GL and with the ability to link it to the budgeting solution’s GL. The results will transform your budgeting process and allow management to receive complete and accurate forecasted financial statements, automatically derived from the budget. Analysis of actual results vs. budget can happen in almost real time.

I truly believe this is the future of the planning, budgeting and forecasting process and all indications are that progressive CFOs and finance managers are leaning in that direction.