Monthly Archives: October 2014

Accounting and Business Data Come to Life

How a simple setup can empower your business decision-making process

I recall consulting to a small manufacturing company (about 350 employees) a few years ago where I was tasked with setting up a reporting system and some fundamental internal control and internal audit functions.  The first thing that struck me was the incredible amount of data flowing out of the accounting system.  Just about any data residing in the accounting software database was accessible, either through standard reports or custom database queries.   Typically I see this in larger organizations with more sophisticated IT systems, but here was an opportunity to do something meaningful with all that data.

My immediate reaction was, is anybody really able to make sense out of all this data?  Can they look at it and understand it in a meaningful way?  And finally, how often do they look at the data and are they able to make any informed decisions after analyzing what their system provides?

It became apparent that poring over columns of numbers and seemingly an endless number of sheets of paper was a chore no one at the company enjoyed doing, and usually resulted in the reports either being filed away or shredded.  No informed decisions could be made in the way the data was presented.  There was absolutely no value in continuing this pointless exercise.

The first thing we did was set up a financial dashboard with a graphic display of all key data.  The incoming data was selectively used to visually display (using MS-Excel’s comprehensive charting and graphic tools) charts of key financial ratios and key performance indicators.

Unfortunately, the raw data had to be manually keyed into certain Excel tables that drove the visual dashboard.  There was no automated link to accounting data or budget data and all reporting was two dimensional and could not take advantage of the multi-dimensional nature of certain business data, such as sales regions, product lines, customer classes, etc.  However, this was a giant step forward, in a journey of discovering additional automation opportunities.

We set up charts with monthly data points for all key sales data, gross margins, short and long term solvency ratios, turnover ratios, financial leverage ratios and several of their specific industry KPIs.  Key financial statements were also formatted using pre-designed templates.  Now everything was visually available to view and analyze.  An endless amount of meaningless raw data has finally come to life and encouraged management to seriously look at it from a perspective never available to them before.

For the first time they were able to see specific trends, strengthening and deterioration of certain financial ratios and KPIs.  The decision making process was finally starting to make sense.

The point here is that we all respond so much better to visual representation of data; data that our computer systems and software have little or no difficulty processing, but which we have such a hard time interpreting unless it is visually appealing and well organized.  With the right tools, this data can easily be translated into a colorful and engaging format, encouraging us to closely pay attention to it and respond quickly to what it is trying to tell us.

Fast-forward a couple of years.  I recently discovered a software solution that deals with all the shortcomings listed above and is fully integrated with a company’s business data.  The application is titled Analytics Maestro and published by Centage Corporation.  I already mentioned this software package in my blog entry titled “Better Analytics for everyone ”.

Within a few days of using Analytics Maestro I realized that I finally found a tool that not only can address the issues described in the example above, but can perform automatically and nearly effortlessly (no data entry needed) and with no errors, while utilizing the multidimensionality of the database.

In its most fundamental function, Analytics Maestro seamlessly connects to data cubes (multi dimensional data arrays), which store data from Budget Maestro (another remarkable software solution from Centage Corporation).  Budget Maestro collects data from accounting software packages or ERP solutions, as well as all of it’s own budgeting and forecasting data (see my other blog entries on this enterprise budgeting and forecasting solution).

When you set up display templates using Analytics Maestro, inside MS-Excel, data residing in data cubes create your specific charts, graphs and reports every time you connect to the data cube and with up-to-the-minute accuracy and detail.

It is remarkable to note that all of Excel’s graphic and charting capabilities are available to Analytics Maestro users.  Presentation quality financial reports are also available and will have the same appearance (i.e., format) each time you run them.  And like in Budget Maestro, no formulas and links are ever used or required in Analytics Maestro.  There is 100% automation and zero errors.  The source data will always be faithfully represented in Analytics Maestro.

As soon as closed accounting periods’ data is available, it automatically appears as a visual representation of the data in Analytics Maestro, once a connection to the data cube is made.  Any reports set up in the software will also automatically update.  Various dimensions can be used to display specific data.  With a click of a mouse, specific dimensions are selected and only data that pertains to these dimensions shows in the charts and reports.  Slicing and dicing data has never been this easy.

Of all the reports and charts I’ve already put together, I personally like to display graphs of critical financial ratios, both the forecasted versions and the actual ones.  With Analytics Maestro connected to Budget Maestro, this becomes a simple reality.  I can see in charts how actual current ratios change from period to period against their budgeted version (which is automatically derived from the Budget Maestro model).  Other ratios based on Balance Sheet or Income Statement data are very easy to display. What about the accuracy of forecasted Balance Sheet accounts required to produce accurate financial ratios?

You may realize by now that Budget Maestro is the only product of its kind to automatically calculate an accurate Balance Sheet (and a Statement of Cash Flows), using your budget line data input and Budget Maestro’s selected, built-in, business rules and drivers.  When you have a reliable and accurate forecasted Balance Sheet, you can display these key Financial Ratios with confidence using Analytics Maestro.  Of course, data coming from the actual and budgeted Income Statement (and all of its versions), and other reporting data defined in Budget Maestro can also be part of the Analytics Maestro display.

There is no limit to what you can do with this software.  The hard part is to restrain yourself to creating only the number of key reports, charts and visual displays that really need to be analyzed and monitored.  It is so easy to get carried away and create a multitude of colorful charts and reports that you may not be able to comfortably analyze and monitor periodically.  Usually, less is more, and you’ll soon know exactly what to focus on, especially when it’s so simple to create (and delete) elements in your display output.

The way I see it, with Analytics Maestro you’ll never look at your accounting and business data the same way again.  There is simply no substitute for accurate, reliable and timely delivery of key data in a way you can immediately see and understand.

A new way to look at IT budgeting

Let’s look at both costs and benefits

Of the many articles that are published on searchfinancialapplications.com, one particularly got me to think about a popular topic I’ve had to deal with quite a bit in last 10-15 years, namely, Information Technology Budgeting.  This article, titled “Keep an eye to value in the IT budgeting process”, and is authored by Rob Livingstone, Owner and Principal, Rob Livingstone Advisory.

The main point the author is trying to make is that while IT costs can be relatively easily forecasted and formally budgeted, the value that these costs will (and should) bring to the organization are not as simple to forecast.  However, value and benefit of these IT capital expenditures should be tied to the underlying expenses.  The author then goes on to recommend several key activities that will help the organization in tying these two pieces together.

This reminds me of how we can use KPIs (Key Performance Indicators) and drivers in our planning and budgeting process.  IT capital expenditure budgeting is a great example where KPIs and drivers should be used.

In my blog post “Do you Budget for Technology Spending?” dated May 30 2014 (link goes here), I touch on the topic of using drivers in the planning solution for IT budgeting.  KPIs are used to define these drivers and the appropriate expense results are dependent on these drivers.  For example: IT spending $s per FTE (Full Time Equivalent).

In that blog post I also made reference to a software solution titled Budget Maestro, published by Centage Corporation, where drivers (based on KPIs) can be easily placed without any programing, formulas, macros or links.  The output is directly driven by these values and always follows the pre-determined business rules established for them.

To take it one step further and in conjunction with the topic of the above referenced article, KPIs can be developed to establish drivers that will affect revenue streams in the revenue module of the planning application.  In Budget Maestro this is as simple as defining the driver and tying the revenue line to it.  As mentioned before, this step does not involve any programing or formula work, which is one of the features that stands out in Budget Maestro and makes it much more practical to implement and maintain by many organizations.

To use a simple example, a revenue line can be defined and tied to a driver based on IT capital expenditures.  This driver can be the number of outbound sales calls made based on equipment capacity budgeted for in IT capital expenditure.  That in turn, and using an established KPI called revenue per outbound call, will drive the forecasted revenue on that line, which becomes part of the organization’s budget and will roll up according to the enterprise structure in the system.

This is one of many examples that demonstrate how seemingly complex planning challenges (e.g., forecasting value derived from IT capital expenditure) can be overcome with use of KPIs and drivers.

Employing an advanced planning and budgeting software solution, such as Budget Maestro makes it logical and straightforward to employ these KPIs and drivers.  An obscure concept of forecasting and measuring value derived from use of technology becomes manageable and with useful and hopefully tangible results.

How Much of Your Credit Line Can You Tap?

Forecast your ability to borrow on your line of credit with accuracy and confidence

In a recent blog entry I tried to convey how important it is to be able to accurately and completely forecast a company’s balance sheet and the many benefits associated with it.  We saw that with a software solution such as Budget Maestro with Analytics Maestro, published by Centage Corporation (www.centage.com), this is an everyday reality for the companies that use the application.

We looked at one important benefit, the forecasting of meeting or breaching loan covenants and how properly planning and continuously analyzing (with Analytics Maestro) can show us in advance how the company is going to perform and what changes need to be made (hopefully well in advance) in order to eliminate or at least reduce negative results that can have severe consequences to the company.

Here is another great benefit of balance sheet forecasting:

Most small and medium size companies have a line of credit (LOC) established with their local bank or a financial institution.  In addition to LOC covenants that are in the LOC agreement, all banks have some restrictions imposed on the use of the credit line.

For example:  The bank establishes a LOC limit (e.g., 13.5 MM).  Then, if the LOC is secured by the company’s accounts receivable and inventory, the lender will almost always have restrictions on these two assets, which means that less than the full asset value can be used to secure the outstanding LOC balance.  In our example let’s assume that only 80% of all eligible accounts receivable can be used to calculate the maximum amount that can be borrowed and remain outstanding on the LOC.  We will further assume that only 50% of the inventory valuation (at each period end) can be used in the calculation.

In addition, the lender may stipulate in the LOC agreement that the maximum inventory value that can secure the LOC is $7.5 MM, regardless of the actual valuation.

Normally, without proper forecasting and analysis tools company managements are faced with the challenge of manually forecasting how much of the credit line amounts may be available to them during the plan or budget period (e.g., 12 month, 24 months, etc.).  In reality, many smaller companies are unable to do that or prefer to ignore it due to lack of proper technology tools.

This is in addition to the difficult task of forecasting cash flow and the cash account balance at each budget period end, unless the company’s balance sheet is accurately and completely forecasted.  In previous posts we saw that balance sheet forecasting is not only possible with Budget Maestro, it is a reality and is routinely used by the companies who use this application.

How would our LOC example work using Budget Maestro with Analytic Maestro?
First, we must complete our company financial plan and budget.  This is done in Budget Maestro and does not require programming or entering any formulas, links or macros.  We rely on using built in business rules and logic and can depend on drivers we enable, as well as other entered forecasted data and business specific assumptions.

The budget entered will automatically generate forecasted financial statements that cover every period included in the budget.  The obtained forecasted balance sheet will show us the forecasted cash, A/R and inventory balances (and all other balance sheet account balances).

Using Analytics Maestro, any data available in Budget Maestro can be displayed in any format we desire.  Since Analytics Maestro uses MS-Excel’s formatting and display capabilities we can customize reporting templates that will automatically pull data from Budget Maestro and display them exactly the way we want them to look.

A custom display showing the available LOC balance is set up using the Budget Maestro forecasted AR and Inventory account balances, in conjunction with the bank’s restrictions on these two accounts.

Using our above example (13.5MM LOC limit, 80% of AR eligible, 50% of Inventory eligible to a maximum of $7.5 MM) and with the following five ending balances:

Jan 2015    Feb 2015    Mar 2015    Apr 2015    May 2015
AR Bal(MM)    6.4              7.3                7.1                7.5              8.1
Inv Bal (MM)  13.6           14.4              15.1              15.7             16.2

we can see that in these forecasted periods the available LOC balances (how much we will be able to borrow on the LOC) are:

Jan 2015    Feb 2015    Mar 2015    Apr 2015    May 2015
LOC Avail.     11.9              13.0              13.2             13.5             13.5

A graphic representation of the forecasted available cash from our line of credit can be quickly set up and will display the above data as follows:

In this example we can clearly see from the display output that the company is limited in the first two months by the inventory credit limit component of the LOC and in the last two months of this example by the LOC total limit.  This data can be made visible for every period of the budget, for example 12 months, 24 months or longer.  It can easily be compared to current actual data as well as historical data.

As budget data and assumptions are changed, all financial statements are updated in real time.  The data used in our example will also be updated, showing the new results.  If you have more than one version of the budget set up in Budget Maestro, as well as actual and historical data, you can see all that as well.  With multiple LOC’s (in multiple entities) you can see each LOC data individually, globally or in any combination of entities.
With a forecasted balance sheet, using this example, not only can you project your cash balance and other balance sheet key account balances at each budget period-end, you can also clearly see the available cash from your line of credit, using the exact terms and restrictions imposed by the lender.

You can plan ahead to make this available LOC cash work better for the business and can also be better prepared to request changes (e.g., increases) to the LOC well in advance before you run into a cash crunch.  On the other hand, you can plan on reducing the LOC balance over time by better planning your inventory or production demand, better managing your vendors or supply chain, etc.

As is always the case with balance sheet forecasting, Budget Maestro with Analytics Maestro, takes the guess out of your forecasting through a clear and up to date presentation of key balance sheet numbers, financial ratios and other automatically calculated key performance indicators as well as provides a full set of forecasted financial statements just like your actual accounting system, except projected into future periods.

Are Data Scientists and Financial Analysts Becoming Obsolete?

Why data scientists are still needed in large organizations and how technology can offer great benefits to smaller companies.

I read an article by Nicole Laskowski, Senior News Writer, titled:  “Will the rise of self-service BI tools lead to the demise of the data scientists?”

The author questions whether readily available business intelligence tools used by non-technical company employees, without help from financial analysts and data scientists, may make the reliance on such corporate positions a thing of the past.

It’s true that with the help of some very advanced analytical tools, there is less need to perform intense data mining and other activities that extract valuable data out of corporate databases or data warehouses.  These tools are now available at lower than ever licensing and implementation costs and can be found even in small and medium sized organizations.

Of the many uses of such data analytics tools, business performance management comes to mind, along with analysis of financial statements, actual to budget variance analysis and of course various marketing oriented analyses that can tap vast amounts of information stored in multiple data warehouses around the globe.

As the above referenced article points out, data scientists or financial analysts are still going to be in demand, especially in large organizations where data analysis needs are complex and where the majority of data queries and reports are custom built for specific users or functions.  The tools and expertise required to extract and present the data far exceed the knowledge and experience of the average employee or manager and the conclusion of course is that these positions are here to stay and perhaps even expand.

What about small and medium sized businesses?  As it turns out, these are companies that never had a great number of financial and business analysts on staff and many still have few or even none.  With the availability of analytics software tools, some of which can interface with the company’s accounting or ERP software, many employees and managers in such companies can gain access to specific data and in a format meaningful to them.

A good example is the business intelligence gained from analysis of actual financial performance as evidenced by accounting data extracted from the accounting or ERP software for recently closed accounting periods or a series of historical periods (months, quarters, years).  This data is compared in the analytics software with similar data extracted from the planning and budgeting software, representing future accounting periods.

The result is a clear picture of how the company performed against its approved budget.  The analytics software can be set up to give its users key data in pre-defined formats, either graphical, tabular or both.  Users can slice and dice the data in any imaginable way in order to extract views of specific reporting entities, sales territories, product lines, customer classes, etc., for any desired time frame.

The information gained from this analysis, which can be performed as soon as an actual accounting period is closed, is intended to convey key data to management, who are tasked with making business decisions based on this data.  Since the analysis should never be delayed in a well-executed process, management can continually steer the organization in the right direction, while minimizing business errors and wrong decisions.

Since this process and its underlying software tools are now available to small and medium sized companies, the software and its users jointly become the “data scientists”.  As for large organizations and their much more complex needs, it looks like data scientists, business analysts and financial analysts will continue to enjoy job security.

Will you Breach Your Loan Covenants?

How technology can help in forecasting your debt covenants compliance

Having debt while running a business is common; in fact, most companies are never able to grow on their own unless they acquire some kind of debt, such as a bank line of credit, a long-term business loan, or factoring of accounts receivable.  In larger organizations, issuing corporate bonds is another way to secure financing in addition to equity financing.  Small and medium size organizations are almost always dependent on a line of credit and/or long-term loans, generally secured by their accounts receivable and inventory as well as other assets.

These business loans and lines of credit come with covenants, which are conditions that must be met on a periodic basis in order to continue to use these forms of financing.  Breaching these loan covenants can have serious consequences to the business.  If not cured, a covenant breach can cause a loan to be called based on the typical acceleration clause built into the loan agreement.

Loan covenants define what the borrowing company must do (e.g., maintain an insurance policy with minimum required limits) or not do (e.g., borrow additional funds from another lender) as well as maintain minimum financial results, such as certain levels of cash flow, or meet key financial ratios.

When planning and budgeting for the future (e.g., next 12 months, 24 months, etc.), companies forecast and budget their revenues and costs associated with these revenues and other expenses required to run the business.  Unfortunately, most organizations, especially smaller companies, do not or are unable to forecast their balance sheets for several reasons mentioned in some of the earlier articles in this series:  Forecasting a Balance Sheet in a Spreadsheet World  and Why Financial Ratios Should be part of Your Budget and Forecasts.

With the inability to clearly forecast the balance sheet, much of the insight into the future financial health of the organization is lost.  Other than the obvious lack of cash flow (and cash balance) forecast, other very important attributes of the company future financial health are not available.  These are typically key financial ratios (e.g., debt to equity ratio, current ratio) and other indicators critical in assisting management in making important decisions.

It just happens that banks and other financial institutions use certain key financial ratios when implementing and enforcing these loan covenants, which are stipulated in the loan agreement.  These banks expect the covenants (measured through financial ratios) to be met as agreed by their borrowers.  Typical financial ratios that are used in defining loan covenants might be debt to equity ratio, Debt Service Coverage Ratio and possibly others.

Reporting these ratios after an accounting period has been closed is not difficult.  When you do that, you immediately know whether or not your loan covenants have been met.  Wouldn’t it be good (actually crucial) to know that in advance, perhaps 12 or 24 months in advance (or longer)?

The good news is that if you are able to accurately and completely forecast your balance sheet, you’ll be able to know whether or not your loan covenants will be met, in every period included in your budget.

Since it is nearly impossible to predict the future, it is important to note that all financial forecasts are highly dependent on assumptions (e.g., revenue growth during the budget period, forecasted costs during the same period, forecasted operating expenses, etc.).  However, if your planning and budgeting follows a specific logic and a set of business rules, using fair assumptions, your forecast will be accurate.  Moreover, having the right software tools is critical in consistently getting the desired output.

I have already referenced Budget Maestro with Analytics Maestro from Centage (www.centage.com) many times.  One of its greatest strengths is its ability to automatically provide a complete and accurate forecasted balance sheet (and its derived statement of cash flows), using the planning and budgeting data and without any user programming or formula work.

What this implies, especially when it relates to loan covenants, is that using the Analytics Maestro module (essential component of this software solution), one can have a visual display (as well as in tabular format) of all key ratios used to determine whether or not loan covenants have been met (for actual current and historical data) or are likely or not to be met in future periods covered by the plan or budget.

In Analytics Maestro, a set of charts (as well as tables if needed) can be set up to automatically display forecasted financial ratios and actual ratios achieved, using automatically applied formatting.  For example, using conditional formatting, you can easily display actual and future loan covenant breaches in red.  Formatting and using your own custom templates is only limited to the formatting options found in MS-Excel, the display application employed by Analytics Maestro, which is used only for reporting purposes, with no reliance on formulas, functions or macros.

It becomes obvious that by using Analytics Maestro, you can have any imaginable display or presentation of your actual and forecasted data, as provided by Budget Maestro.  This can include presentation quality financial statements that can be filtered by a reporting entity or any other desired dimension.  Financial ratios used in conjunction with loan covenants are just an example of what can be done with the software.

To continue our example, glancing at the Loan Covenants section you set up in Analytics Maestro will show all historic values, how close you were to breaching these covenants in the past or how high you are above the threshold and most importantly, where you are headed with meeting these covenants in the future.

Knowing where your financial statements are headed is essential to the decision making process.  It’s like knowing where the curves in the road are so you can properly anticipate when to steer your vehicle.  Conversely, not having this data ahead of time is like driving blind and risking your vehicle going off the road at the slightest turn.