Monthly Archives: June 2014

CEO – CFO Dysfunctional Relationship

An often-overlooked reason

Recently there was a question posted on www.Proformative.com (an online resource and professional network for senior finance, accounting and related professionals) on the often-dysfunctional relationship between CEOs and their CFOs, and trying to explore the underlying reasons for that and what can be done to prevent it. There were a lot of answers posted by Proformative.com contributors participating in the “Ask the Experts” feature of this website, including my own little input in an area I thought was important.

In my work I interact with company upper managements in a variety of industries.  I interview members of the executive team in each organization as part of my various professional engagements (e.g., corporate budget, internal audit process design, external financial reporting, SEC reporting and compliance, etc.).  From these interviews and other opinions expressed by managers and employees I noticed a pattern, which at first appeared to be coincidental and was actually unexpected.   The more experience I gained in working with corporate executives the more I was convinced that there was a fundamental reason contributing to the level of disconnect between a company CEO and his/her CFO.  This is certainly in addition to other, more obvious, reasons usually due to personality conflicts, incompatibility with the company or a specific industry and perhaps other reasons.  Of course, this is only true in companies where this phenomenon occurs; there are many organizations fortunate to have CEO / CFO teams who not only get along but also work as a team and are able to create a great work environment where teamwork is encouraged.

The little insight I gained has to do with the inability of a company to properly plan and then execute their financial plan, including making corrections to the plan and its execution, without taxing the business too much though bad decisions (or indecisions), uncertainties or other actions that aren’t directly derived from a solid decision making process.

A good example that demonstrates this is a company’s CEO expecting certain financial results, based on an incomplete plan or budget and only seeing actual data, which are usually short of the general expectations.  When a CFO is asked to defend the actual results, it appears that due to the lack of proper planning there are no reasonable explanations and suggestions that can initiate a decision making process, in response to the actual results. The CFO and his/her finance team will have certain opinions, usually not backed up by solid data and analysis, and the CEO will often make decisions that are based on intuition, past experience, or based on what other similar companies are doing.  This results with the CEO and CFO not working as a team, and with the company suffering the consequences.

Of course, there are several other reasons for a dysfunctional relationship here, which I have noticed but will not comment on in this blog.
In contrast, having a solid financial plan and discipline to monitor the actual results and compare them to the plan (budget and periodic updated forecasts) can remove this point of tension between the CEO and the CFO.  Expectations become clear and action can be taken immediately following a periodic analysis. In reality, achieving such processes requires, in addition to discipline and willingness to adhere to process execution, a solid and practical information technology that can be realistically implemented and continually used.  The output given by this system must be available to view and understand by all team members, with the CEO and CFO informed on the process and its results at all times.

One of the challenges in the corporate world is to implement such a practical system.  From what I’ve seen, most software solutions designed to help with budgeting, forecasting and business intelligence are not simple to implement, require a significant investment throughout the useful life of the system and are not always capable of providing the data that is really needed to maintain the organization on its planned course.  On the other hand, a unique solution from Centage Corporation (www.centage.com), titled Budget Maestro was designed precisely to give upper management the information they need, when they need it and in a format that they can quickly understand.  CEOs of small and medium sized companies using this solution can intuitively understand the real financial health of their organization and along with their CFO and other management team members can work together to explore solutions that will correct the course the organization is headed on.

As for personality conflicts between CEOs and CFOs – this is an area I will not attempt to comment on or speculate.  I think I’ll leave it to the experts in that field.

Automated Budgeting and Business Intelligence for Manufacturers

Are you ready to automate the budgeting process?

In my consulting practice I frequently work with small and medium size manufacturing companies.  While many of them have been able to fully automate their accounting systems, there is still a lot to be desired in the area of automated budgeting, forecasting and business intelligence.

Over the years I saw companies transition from partial or even complete manual accounting (yes, the system where you keep track of your inventory and other accounting data by using inventory cards, account ledger cards, etc.) to fully automated accounting and ERP software.

Nowadays, in a typical manufacturing company, it is common to see full automation in the area of inventory control, production control (e.g., shop floor control, scheduling, capacity planning) and of course the common functions of Sales Orders, Purchasing (with or without MRP), Accounts Receivable, Accounts Payable and General Ledger.
More and more manufacturers have implemented automated employee time collection at work centers or even at specific machines locations or production activities.  Cost accounting has become more automated and shop rates are periodically analyzed and corrected as required to arrive at a more precise product costing, more accurate cost absorption in inventory and more accurate and appropriate inventory valuation.
While all this is encouraging, there is one very important area in manufacturing finance that many companies still struggle with.  Not surprisingly, this is the much-dreaded process of budgeting, forecasting and analysis.

Some of the manufacturing companies I run into still use spreadsheets for their annual budgets.  They may consolidate several or many spreadsheets prepared by their various administrative and operations departments and some of them may have some logic built-in to aid the forecasting process.  Invariably, the end result is only a projected income statement (P&L) with one column for each budget period (e.g., month).  There is usually no further insight into the future financial health of the organization.
Another common behavior I see is the lack of ability or discipline to regularly analyze these forecasts against actual accounting data. The result of this behavior is the inability to make informed decisions and align the company operations with its goals.  In many situations this leads to financial deterioration and having to make drastic corrections, often as a result of overreacting to symptoms. Fortunately, this can be prevented, and relatively easily, by employing a robust approach to budgeting and by using the right software tools.

Today there are many budgeting, forecasting and business intelligence solutions available to manufacturing companies.  What I’ve learned through experience is that no matter what solution is implemented it must be practical to set up and use and most importantly, it must encourage users to embrace the process and welcome it; in other words, encourage people to use it because they “want to” and not because they “have to”.  In many cases, this will make the difference between a successful and failed implementation.
Other than the approach and attitude towards the solution there are, of course, certain technical requirements the system must meet in order to provide the expected benefits to these organizations.

Through using and evaluating various systems I’ve compiled a list of high level features and benefits that a budgeting, forecasting and business intelligence application should have.  This list can be seen at my “10 Must Have Features of a Budgeting & Business Intelligence System” blog.  When the selected system is able to deliver on all the 10 points listed, the organization will be afforded a much better insight into the future financial health of the company and without adding unnecessary burden to its finance and operations functions.

Experience gained by many organizations, manufacturers included, shows that a proper budgeting, forecasting and business intelligence solution that is practical to implement and use throughout the budget year can become the organization’s most trusted tool and will provide the insight and intelligence needed to drive the decision making process, quicker and with greater confidence.

10 Must Have Features of a Budgeting & BI Solution

Can your software do all that?

I work with companies of various sizes and in diverse industries who have all implemented computerized accounting or ERP software.  Some have integrated CRM, supply chain management, MRP or other software to address requirements peculiar to their industry or even their unique operation. One thing they all share in common is the need to maintain  periodic budgeting and able to monitor their actual results from operations so they can compare it with the pre-defined budget, make adjustments to that budget (re-forecast) or make adjustments to operations based on the actual results and the intelligence gained from monitoring the budget process throughout the fiscal year.

Do all companies adhere to these budgeting and performance monitoring principals?
My experience shows that all companies have at least a rudimentary system where income and expense items are budgeted and fundamental results, such as profit and loss are forecasted and then compared with actual financial results from the accounting system.
Some companies have committed additional resources and effort to implement a more “purpose built” system with greater security and other enterprise level characteristics, such as multi-user, multi-entity capability and additional features that cannot easily be accomplished with a basic, usually spreadsheet based, solution.
There are many solutions available today including several in the small to medium size market (SMB).  These systems fulfill some of the basic requirements but the majority of them fall short of providing their users with the most important tools and capabilities.  Others require extensive user programming or relying on outside consultants to build and maintain these systems.

Through experience gained from implementing budgeting systems and from actually using and evaluating various software solutions I’ve compiled a list of high level features and benefits that a budgeting, forecasting and business intelligence application should have.
Any company looking to implement a complete solution should be concerned with these top 10:

1. Must be delivered as a database application for better control and management.
2. Should have a system-generated integrated set of forecasted financial statements.
3. Must have a modular approach with a complete array of functions such as: revenue forecasting module with cost; operating expense module; personnel module; fixed assets module; loans and other debt module.
4. Must have driver-based forecasting, which is the ability to work with unlimited and varied types of drivers.
5. Must have the ability to allocate forecasted amounts to pre-defined accounts.
6. Its business intelligence and rules must be built-in and available to users to choose from and with no user programming required (formulas, links, etc.).
7. The application chosen must allow users to set up a chart of accounts representing the actual accounting system’s chart of accounts (or mirroring it).
8. There should be either a direct link or simple interface to the accounting or ERP software’s general ledger, where actual data can easily be populated in the budgeting software and immediately used in the analysis process, following the accounting period close.
9. Reports—both visual and alpha numeric—must be readily available and with minimal effort.  All budgeted financial statements (with a minimum of Income Statement, Balance Sheet and Statement of Cash Flows) should mimic their actual financial statements produced by the actual accounting software.
10. The budgeting, forecasting and business intelligence software application needs to act as an extension of the accounting software or ERP system’s actual financial data.

These 10 “Must Have” features are especially important in smaller or medium sized organizations where resources are limited, yet business intelligence is critical and the decision making process must rely on solid and reliable tools.
When looking to implement a budgeting, forecasting and business intelligence solution make sure you carefully evaluate each software application and verify it includes these 10 critical features.

The benefits from having these features cannot be overemphasized.  While some of these features are fundamental and expected, others are less common and will make the difference between properly performing the budgeting and analysis process or just getting through the process without really using the system for its true intended purpose.
Those who implement the right system know that their organization’s future financial health can greatly benefit from having these 10 features.