Monthly Archives: May 2014

Do you Budget for Technology Spending?

An intelligent way to budget your information technology needs

I recently noticed an article in CPA Trendlines  (cpatrendlines.com) by Randolph Johnston, Leslie Garrett PhD, and Brian F. Tankersley, CPA.CITP, CGMA titled: “Tech Survey: 90% of Accounting Firms Fail to Budget Properly”.  This specifically makes reference to technology spending and how these firms do not budget their technology spending by employee.  The body of this article is made available to subscribers of this publication and it is based on The Accounting Firm Operations and Technology Survey, also available from CPA Trendlines.

I couldn’t help but ask a few questions:  What else do these accounting firms fail to budget?  Why are they not budgeting these expenses (capital expenditure) properly?  Is it an oversight? Is it too difficult and time consuming to do?  Do they not have the proper budgeting tools?  Are there any other reasons?

We all know that information technology spending has become a significant, hard to ignore expenditure, attributing to large depreciation expenses recognized by virtually all types of organizations.  This spending category is also a major contributor to increased cash and borrowing needs.  It would make perfect sense to properly budget for this expense and forecast its impact to the company’s balance sheet, yet surveys like the one mentioned above indicate that this is simply not done as it should be.  Why?

Experience in various industries shows that many organizations fail to properly budget because they either don’t have the proper budgeting tools and software applications or their existing systems are too complex to maintain in response to changes in the organization.  I guess accounting firms are no different, although I would expect them to set a good example for all the client companies they so diligently audit.
It is well known that many companies still use homegrown spreadsheets to administer and maintain the budgeting, forecasting and analysis processes, where every little change involves significant modifications to formulas, links and other programing and debugging tasks.  Many organizations simply do not care or are not able to make these changes.
Companies that decide to move away from spreadsheets into purpose designed budgeting software solutions quickly discover that they have not entirely gotten away from these formulas and links, another reason why changes to budget models are often not implemented.

In contrast, an application like Budget Maestro from Centage Corporation (www.centage.com), does not rely on user-supplied formulas, functions, links or any other programming.  Since a budget prepared with this application (or parts of this budget) can easily be based on user-defined drivers (e.g., headcount), the example of budgeting technology spending by employee becomes relatively trivial.  The software also has a dedicated Assets module (optional to use but included in the base system), where technology spending (capital expenditures) can be set up and properly budgeted and tracked.

An added bonus in the Assets module allows one to automatically post to the depreciation expense account, with data derived from the budgeted technology capital spending.
As with every piece of budget data in Budget Maestro, everything flows to the various financial statements, including a Balance Sheet and Statement of Cash Flows, all this without ever having to enter a single formula or link, or perform any programming.
Things just don’t get much better than this.

The Affordable Care Act and Your Budget

Is your annual budget process ready for these changes?

I just read an article by Michael Cohn, Editor in Chief, AccountingToday.com stating, according to a survey, that many small businesses are still not prepared for the changes imposed by the Affordable Care Act (click here for a link to the article).  A free registration is required to gain access to this article and other current and useful information on many topics.

According to the findings of this survey, only a little over half of small businesses understand and are prepared for the changes required by the Affordable Care Act.  The rest of these companies either do not understand it at all or only partially understand it and are not prepared to comply with its complex rules and regulations.  It is likely that many larger companies as well are confused or unsure about compliance issues associated with this Act.

This implies that budget activities (particularly additional potential costs and tax credits) that are supposed to reflect these major changes to our health care system are probably not performed.  Actual financial impact resulting from the changes will not have corresponding budget components and certain variances are likely to occur.

The Affordable Care Act example is a good reminder of the real challenge in incorporating changes to any budget or forecast, which is, being able to quickly and with little effort manage modifications to the process and its details.  Unless the budgeting system is open to modifications without having to perform programming or enter an array of new formulas and links to other worksheets or system modules, these modifications, assuming the company understands the changes to its required compliance, are unlikely to be made.
This reminds me of the Personnel module that every installation of Budget Maestro from Centage Corporation uses (www.centage.com).

With Budget Maestro, modifications in the personnel module are fairly simple and straightforward.  The power of driver based budgeting, one of the main features of this application, can be put to work almost immediately and all changes are reflected in the resulting budget in real time.

Here’s a simple example:  Since Budget Maestro allows for unlimited user assigned drivers, you can set up specific drivers to address employee health insurance costs such as: cost per hour worked, cost per $ of salary expense, etc.  These drivers will automatically affect personnel payroll related expenses, which are budget lines set up within the personnel module.  Expenses defined as payroll related expenses (e.g., health insurance costs) automatically change as the drivers and the actual budget lines for these expenses change.

The ultimate benefit here is that everything that occurs in the personnel module (and all other modules in Budget Maestro), for every budget expense line (including all above mentioned health insurance costs) automatically flows into the projected income statements with no user programming required, no formulas, links or functions, just like the actual financial statements coming out of the ERP or accounting system.
I have been using this application for over 10 years now but here again I was reminded how seemingly complex changes can be implemented with little effort and with the highest efficiency and accuracy.

A good example of implementing Budget Maestro with the Personnel Module as an important and integral function can be learned from Hames Corporation of Sitka, Alaska (a small regional retail chain).   I read the full case study here  and was able to completely relate to a statement made by the company CFO, Maxell Rule, saying:
“The ability to analyze and budget labor and related benefit costs has been invaluable, particularly in light of the unknowns and challenges related to
the Affordable Care Act. We can now accurately budget and monitor our healthcare costs, even down to the specifics of an individual employee’s health plan options,” This is not surprising, knowing the great practical use that many small and medium size organizations have found in Budget Maestro.

Like the Affordable Care Act, any major changes or new requirements and assumptions in a company’s budget should be straightforward to implement and immediately put to use without having to embark on a lengthy design, programming, testing and debugging project.

Those Debits and Credits

A budgeting system that actually does the thinking for you

I just finished working with a client on the year-end close, right in time for their external auditor to come in and do their work.  Either my memory was failing me or this year’s close was different than past years, I couldn’t help but notice the large number of journal entries that were required in order to bring the various accounts to their proper balances at year-end.  There were adjusting entries, reversing entries, allocation entries and other miscellaneous entries.

As I was reviewing the various entries for accuracy and completeness I reminded myself that fine art of accounting is nothing more than posting the correct amounts in the correct accounting periods and of course, using the right GL accounts.  As usual in situations like this, you have to carefully prepare the entries, making sure you use your debits and credits correctly, applying them to the right GL accounts and so on.  An edit list, additional reviews, approvals and finally the actual posting usually follow this.

Those who are closely involved in this process realize how several manual controls must be set up in order to make them as effective (in reality, they can never be as effective) as automated controls (e.g., posting subsidiary ledgers to the GL, usually under full automated controls).

This reminded me how in Budget Maestro (a budgeting, planning, forecasting and business intelligence software application from Centage Corporation, www.centage.com) the results of the projected financial statements and all other reports are accurately determined by an array of system generated journal entries.

Users of Budget Maestro don’t ever need to make any entries (with the exception of optional, user made adjusting manual entries).  They don’t need to remember account numbers, they don’t need to know whether to use a debit or a credit for a particular transaction; what they experience is complete automation as the system performs all these entries in the correct budget periods, in the right amounts and using the appropriate GL accounts, period after period.

I still remember the day I first fully understood the profound impact that this software architecture and design had on the final results and why it was possible to obtain these results, especially without any user programming or formula work.

This approach to designing and implementing a budgeting, forecasting and business intelligence solution completely eliminates many of the manual internal controls that must be in place in other similar applications.

In Budget Maestro there are no formulas to deal with, no user defined functions and links; every piece of data that participates in the budget model, either entered by users or automatically calculated by the many business rules and drivers available in the system, causes the right set of journal entries to be performed in the background.

It is these automated journal entries that make all the forecasted financial statements and all other user defined reports accurate and complete, and without worrying about transactions orientation (credits vs. debits).  This is in addition to not worrying about the budget period to post to and the account numbers.

With that in mind, I think I’ll take the activities involved in running Budget Maestro over traditional journal entries any time.

Will You Hit Your Budget Target?

How to increase the odds of achieving your budget goals

By Alan Hart, MBA

I just read an interesting article in CFO magazine by David McCann, titled: “Will You Meet Your Financial Commitment?  Be Sure by Midyear.

The insight gained here, which is based on an actual study, as described in detail in a report , is that early planning, including disagreements on expected results can usually result in a more accurate assessment of the probability of meeting financial commitments.

Conversely, leaving this to later in the process (e.g., mid-year or later), results are more likely to fall short of expectations, as the author states: “Divergence later in the process, on the other hand, can weaken the team environment and lead to an inability to deliver on commitments.”

The author further states that:  “The message for managers is to watch shifts in probability (of making accurate assessments), as declines by midyear can signal trouble for the entire year.”

As this also pertains to the planning and budgeting process, it teaches us that we must plan ahead and reach consensus early in the process (ideally prior to the beginning of the budget year).  We must also employ the best possible tools in this process and continually monitor the actual results against what we planned and budgeted.

When asked what software application to use in a particular industry, to employ in the planning, budgeting & monitoring process, I usually suggest acquiring an application that is functional almost out of the box, practical, and not too overwhelming.

In other words, something that you and your team will “want to use” and not “have to use”, an application that will produce real results that the organization can immediately benefit from and will be used year-round and not only during the months leading to a new budget year.

In the small to medium size business (SMB) I am very impressed with the results obtained with Budget Maestro and Analytics Maestro, published by Centage Corporation (www.centage.com).  I have written many articles and blog posts on budgeting and forecasting and many of them include elements that are addressed with great results by this application suite, in many industries and consistently, year after year.

After over 10 years of using this application, I still find new uses and renewed benefits each time I work with it.

One that is closely related to the topic of the article mentioned above is that with Budget Maestro a company can complete its budget early enough for it to be carefully assessed and thoroughly reviewed, before running into unrealistic deadlines.

Another is the ability to periodically (preferably monthly) analyze actual results against budget data and using the Analytics Maestro module, gain the ability to slice and dice through any amount of data across multiple business dimensions and with unlimited display and reporting options.  What can be seen, starting in the first budget period (month) can quickly lead to corrections that will move the company closer to its original financial goals.

Of course, there are many other benefits and unique capabilities that Budget Maestro offers its users, many which have already been mentioned in this blog.

As the article above points out, discovering deterioration in financial results mid-year can mean trouble for the entire year.

Don’t let that happen in your company.

I made a profit, where’s my cash?

How to get a better handle on projected cash balances and other valuable accounts 

I recently read an article in Inc. Magazine, titled “Don’t Run Out of Cash: 3 Growth-Company Case Studies” BY Jill Hamburg-Coplan

While this publication typically does not focus on mainstream enterprise finance, it has a tremendous amount of good material and insight that can be applied to all businesses and on all levels.

The essence of this article is that you must be able to forecast your cash flow since simply looking at your income statement (P&L) is no indication of cash shortages or needs.  You may be “making” money on paper and running into a serious cash crunch at the same time.

I like  Mr. Alan Knitowski’s quote in this article: “To survive, business owners have to view cash as their lifeline.”

The lesson to be learned here is that actual P&L statements and P&L forecasts can never reveal what the cash balance or cash needs of the company are going to be.  These Income Statements, compiled from actual revenue and expenses, or forecasted Income Statements, derived from projected revenue and expenses are generally done using the accrual method of accounting.

Looking at these statements you see actual or forecasted revenues and expenses, gross margins, operating profits and net profits (or losses), but there will be no indication of what cash balances currently are or going to be in future periods.

What is usually missing from the process is projecting a reliable Balance Sheet and then compiling a Statement of Cash Flows from the other two projected statements.  When you have that, you’ll have a projected cash balance in each forecasted period.  You will also get other key accounts’ projected balances such as Accounts Receivable, Accounts Payable and essentially every account that appears on a typical Balance Sheet.

Without a properly prepared forecasted Balance Sheet, you simply don’t have any visibility to the financial health of the organization.  This is one of the main reasons why so many companies run into temporary (or worse) financial trouble.

I find it odd that most budgeting and forecasting software vendors, especially those in the small and medium size (SMB) business space do not intuitively allow their users to obtain an accurate and complete forecasted Balance Sheet and its associated Statement of Cash Flows.

The few users who try to forecast their Balance Sheet using one of several available budgeting & forecasting commercial software packages quickly discover that it is very similar to using spreadsheets, the same spreadsheets they got away from when implementing a purpose designed budgeting and forecasting solution.

Those who succeed in putting together a Balance Sheet and a Statement of Cash Flows surely realize that it is a just a rough approximation of the forecasted balances (e.g., Cash, Accounts Receivable, Inventory, Accounts Payable, etc.).  Generally, these statements should not be relied on.

I frequently write about Budget Maestro from Centage Corporation (www.centage.com) in my blog posts.  One of the main reasons for this is that with Budget Maestro you can automatically obtain projected financial statements, including an Income Statement, a Balance Sheet and also a Statement of Cash Flows.

The most remarkable part is that you don’t need to program formulas and set up links.  The software automatically generates all the financial statements with great accuracy and completeness since it intelligently relies on your forecasted values, drivers and business rules, available in the various budget activity sections in the application (revenue, expenses, personnel, fixed assets and other areas).

Analyzing the forecasted Balance Sheet and Statement of Cash Flows produced by Budget Maestro (and its companion product Analytics Maestro) shows the projected cash balance at the end of each budget period (month, quarter, year) for the duration of your budget.  This was the main reason I started using this application shortly after it became available.

Here’s the way I see it:  Your accounting department prepares an accurate and complete Balance Sheet using actual accounting data, and also a Statement of Cash Flows.  Shouldn’t you also be able to produce an accurate and complete forecasted Balance Sheet and Statement of Cash Flows?

Imagine the added bonus of having an accurate forecasted cash balance for each of the periods participating in your budget plan.