Monthly Archives: February 2015

Accurately Calculate the Total Cost of your Employees

How to best approach planning & budgeting of payroll and related expenses

A while ago there was a member question on the Proformative.com site about calculating total cost of employees.  This question has come up several times on this forum in recent years and clearly represents a challenge finance personnel and departmental managers face.

I personally remember struggling with calculating total employee costs at several companies I worked at or consulted to, especially when we had to fully absorb these costs in inventory, excluding non-production employees and those who were part time in production and part time in SG&A.

Some payroll systems I have worked with in the past could provide the straight time and overtime cost per employee in each accounting period, holiday and vacation time expense and bonus expense, but were not capable of clearly itemizing the additional expenses (known as payroll related expenses) in detail per employees.

These are expenses such as Social Security Tax (employer portion), Medicare (employer portion), Additional Medicare Tax (for certain employees over a certain earning threshold) and unemployment taxes (SUTA and FUTA).  To that you must add additional payroll related expenses such as 401K plan employer matching, health insurance portion covered by the employer and other expenses that must be tracked and budgeted for, such as cost of supplies per employee, cost of IT per employee, etc.

These payroll and related expenses can be calculated in a spreadsheet, knowing the various rates at the time of calculation and adding up all the expenses per employee, per department and so on.  What makes it difficult is the fact that some expenses go away during the calendar year and then start over in the beginning of the following calendar year.  Social Security tax and FUTA are good examples, and knowing the annual cap one can program this into the same spreadsheet and cause these expense to disappear once the annual cap has been reached.

Another challenge faces companies whose fiscal year end is not December 31st.  These companies must devise a clever way to track payroll expenses during their fiscal year while accounting for them (for reporting and compliance purposes) using the calendar year.  This is also possible using a spreadsheet, but like many other complex spreadsheets, it becomes exceedingly more difficult to maintain and audit for errors and omissions as the number of employees increases.

As in all complex spreadsheets, these spreadsheets will require careful placement of many formulas and functions, possibly even macros and other complex VBA code.  What makes it more challenging is the addition and deletion of employees during each calendar year, anticipated pay raises and bonuses based on projected performance and certain other changes, which make the maintenance of these worksheets very difficult.  In fact, without proper change management control and internal audit, these spreadsheets are more than likely to contain errors and omissions, some of which may be material.

It is the general consensus of many accounting and finance professionals that spreadsheets are not the right tool to use in a very complex environment with many linked worksheets, linked workbooks and consolidations, and having to endlessly maintain records in many of these worksheets. Payroll planning and budgeting is a good example where spreadsheets should not be used.

While I was thinking about this challenge I remembered how easy it was for me to maintain employees and payroll costs in a planning and budgeting solution with a dedicated Personnel Module.  The application is Budget Maestro, published by Centage Corporation where the Personnel Module is an integral piece of the application and can be deployed either standalone or in combination with any module within the system.

Budget Maestro’s Personnel Expense Module overcomes all the problems and challenges listed above.  It is driven by built-in business rules and payroll taxing authorities’ existing rates.  Regardless of your fiscal year-end date it knows precisely when to stop charging Social Security Tax expense, FUTA and any other payroll related expense that has a peculiar behavior during the payroll year.  This is in addition to applying the correct tax expense in each tax category, as posted to each applicable GL account in each planning period.

As employees’ salary or hourly rates increase (or decrease) during the planning period (a year, 18 months, 24 months or whatever your plan’s length is), the correct payroll tax expenses are properly posted in the right period.

With the unique feature of posting expenses to the planning period via a system of automated journal entries, payroll expenses become an integral component of the planning and budgeting process, which means they are completely and accurately reflected in all financial statements and reports automatically generated for each planning and budgeting period.

What I like about Budget Maestro’s Personnel Module is that you can plan in as much detail as you like (down to the individual employee in each business unit) or on a higher level in certain areas of the business.  This is very useful in manufacturing operations where you can have multiple employees in a certain department (e.g., fabrication), having similar pay rates and starting in the same planning period.

For example, you may add five fabrication employees in May of 2015 at a base rate of $18.50 per hour, then six more in the following period, and so on.  You don’t need to list each of these employees individually; just the position type with the number of employees, their start date, rate and any anticipated increases or decreases. The system will use the data you provided and using its built-in business rules will expense everything properly in the right planning GL accounts and in all the relevant planning periods.  Future period financial statements and all other reports will automatically reflect that.

I find a remarkable capability of the Personnel Module in not having to place any formulas, functions, macros and links anywhere in the program, which is also true for all the other Budget Maestro planning modules (revenue, fixed assets, debt, etc.).

Another great thing about the Personnel Module is that it is 100% included in the licensing fee of the Budget Maestro application.  Use it standalone or in combination with other modules as your needs dictate, or add your personnel planning data into an already existing plan.With the Budget Maestro Personnel Expense Module you will always have a complete view of your payroll and related expenses with clear and accurate reports, making your employees total cost part of the overall budget.

Why CFOs Need to Adopt Financial Analytics

And why they can’t continue to do their daily work without it

RK Paleru, Executive Director of the Systems, Analytics and & Insights Group at George Washington University recently authored the article “How can CFOs adopt Financial Analytics?”.  He touched on the reality facing the finance departments of so many organizations that are not adopting new technologies and therefore still relying on spreadsheets to deliver the results that support decision making.  While these departments know that these tools are flawed, they still continue to rely upon them.

In response to Paleru’s article, a great discussion ensued on Proformative’s website.  One member commented that accounting and finance departments are so wrapped up in the close process, financial statement consolidations, financial reporting generation and compliance activities, that there is hardly enough time to devote to analytics, especially with the inadequate tools many of these organizations possess.  I tried to reinforce the notion that upper management (the CEO, CFO and certain other management team members) must have timely, accurate and complete data in order to be able to make reasonably informed business decisions.  In addition, major changes have to be made in order for management teams to be able to see and understand their company data immediately, as actual data becomes available and in conjunction with existing and updated planning, budgeting and forecasting data.

My general observation is that many existing planning and analytics software solutions do not provide CFOs the data they need.  This is due to the fact that the majority of the software solutions today cannot produce accurate and complete future period financial statements, and especially the Balance Sheet and Statement of Cash Flows.

This is why I am excited by a new generation of Planning, Budgeting and Analytics software which I call:  “SmartBudget Driven Future Period Financial Statements and Analytics”.  I’m sure this definition will be refined as this software category matures but for right now the essence of it is:

Generating future period financial statements and other reports, driven by a smart budget, prepared using built-in drivers and system pre-defined business rules, automatically consolidated across the enterprise that provides the CFO (and the CEO) with the insight into the future financial health of their organization.

Using this type of software, all the traditional potential errors and omissions are completely eliminated or greatly reduced due to the fact that no spreadsheets are employed in this process and users are never asked to provide formulas, functions, links, macros or any other programming.

The software should also perform analytics in particular areas of interest such as sales and expenditures and respond to any other custom requirements the organization might have.

Another desirable feature is the ability to “drill back” into the source GL containing the actual accounting period results.  By pulling in any required detail data from the GL (as detailed as actual transactions, if the ERP software GL is set up to post into in detail), the analyst can examine specific variances and anomalies, not visible on the summary level.  The root cause of these variances or anomalies can be investigated and any found issues can be quickly remediated.  The CFO, equipped with this information will have the opportunity to make process changes, or make timely and informed decisions.

Analytics Maestro, used in conjunction with Budget Maestro can provide:

  • Sales analytics, using both actual and budgeted data
  • Expenditure analytics
  • Future period Balance Sheet for each budget period
  • Future period Income Statement for each budget period
  • Future period Statement of Cash Flows for each budget period
  • Many other specific reports, tailored to the company’s needs

The future period financial statements can be consolidated or filtered by any entity or level in the enterprise entity hierarchy.

With this data, CFOs can have a pretty good idea of what the financial health of the company is going to look like.  They can see the predicted cash balance, receivables, inventory, payables and other liabilities.  They can easily obtain forecasted future financial ratios determine whether the company will comply with loan covenants whether or not it will be able to utilize its credit lines, whether or not it will be able to retire debt and other obligations in future periods and more.

By using a software like Budget Maestro, CFOs can have a pretty good idea of what the financial health of the company is going to look like.  A CFO can perform his or her job with peak performance when relying on intelligent data in real time.  Not relying on analytics can be a costly mistake. Luckily, there is a new technology available that can change all that.

Closing the Books Faster

How an organization can benefit from a quicker period close process

There is an article on the TechTarget.com site titled: “Five steps to closing the books faster”, by Hyoun Park of DataHive Consulting.  Here, the author lists five steps that the finance department in conjunction with the accounting department can take in order to close an accounting period (e.g., month, quarter) quicker.

Closing accounting periods faster has been a popular discussion topic in recent years for several good reasons and is evidenced by company managements, lenders, shareholders, external auditors and other entities insisting on having financial results sooner.

In recent years, many publically traded companies had the filing deadlines of their annual and interim reports shortened.  For example, accelerated filers (generally larger companies) must file an annual report within 75 days of their fiscal year end, yet large accelerated filers only have 60 days to complete this filing (FORM 10-K).  Similarly, quarterly reports are only given 45 and 40 days from quarter end for the type of filers described above respectively.

This means that there is less time to perform an annual audit and quarterly reviews.  Other compliance activities, such as auditing of certain internal controls must be performed usually in conjunction with close activities and perhaps overlapping the external auditor’s work.

Non-SEC filers, like privately held companies and not-for-profit organizations, also are striving to shorten the close period.  Those who undergo an annual audit of their financial statements and quarterly reviews by an external auditor must be able to have all pertinent financial data and internally prepared financial statements ready for review or audit.

Although currently much less common, some financial and accounting systems make it easier to perform transactions in a new period when the previous period is closed.  Errors of posting to a previous, still open period, can be prevented, or at least minimized if the previous period only stays open for a short period of time.

In addition to the above-mentioned benefit examples there are other benefits and incentives to shorten the close process.  Among them:
1)    Management can receive and review financial statements sooner.
2)    Consolidations of financial statements, including inter-company eliminations can start earlier in the cycle, have better review and execution of internal controls over this process, and result in lower likelihood of misstatements.
3)    There is more time to review the financial data and prepare more complete and accurate financial statements with proper disclosures and footnotes.
4)    Less overall time and effort is spent by the accounting and finance departments each accounting period with a more streamlined process.

Then there is the benefit of having final, actual accounting data available to the finance group using planning software for analysis against an approved budget and periodic re-forecasts.  The quicker this data is available for analysis the quicker managements can review it and make timely and informed decisions.

Companies that use planning and budgeting solutions with integrated financial statements (including a complete and accurate Balance Sheet and Statement of Cash Flows) can benefit from having good insight into the future financial health of their organizations by comparing the forecasted statements with their actual counterparts, as soon as the accounting period is closed.

Closing the books faster can be a challenge for many organizations, however, the benefits are significant and with proper planning and discipline this is becoming a new norm, as many organizations have demonstrated in recent years.