Monthly Archives: October 2015

CFOs in the Spotlight

I’ve been getting a lot of e-mails from Proformative.com reminding me of the CFO Dimensions conference, held this year in New York City in Mid October and targeted at senior finance professionals from many industries. The focus of this year’s event, as listed on the Proformative.com website was: “The evolving role of technology and leadership in finance”, with the theme of this conference being “The CFO as Chief Future Officer”.

I didn’t plan on attending this event but can imagine that a good portion of the discussions was centered on why and how CFOs should pay careful attention to available data, using analytics, in order to arrive at reasonably accurate and reliable predictions of the future financial health of their organizations.

CFO Dimensions is just one recent example. There are many more activities, seminars, webinars, white papers and other information, mostly contributed through the Internet, informing readers of the important role CFOs have in leading their financial organizations and in partnering with their organizations’ CEOs and other executive management members, helping their companies navigate their charted course, at times through rough waters, but with confidence and decisiveness, only possible with access to and proper interpretation of reliable data.

I’ve been in finance and accounting for a long time now and don’t remember the use of the CFO title when I first started. In fact, none of the C-Suite titles, as they are known today, existed.  I was recently amused to learn about a technology company that had, in addition to its CEO, CFO, CTO, CIO and COO, also a Chief Talent Officer. I assume this is the head of Human Resources but not sure if it is also abbreviated CTO, or maybe CTO2?. The company also had a Chief Digital Officer (the Analog days must be over for good).

I suppose these C-Suite titles are only limited to one’s imagination, but there is an important message here: The creation of specific and defined organizational leadership roles in certain areas where the organization’s excellence as a whole is the combination of the levels of excellence of each of these areas with the “Chief” in charge defining and maintaining that excellence. The CFO’s office is such an area, arguably one of the most important in any organization.

I’ve been writing about the changing CFO role on this blog for a while now. The entries titled “CFO’s Revised Job Description“, “The Ideal CFO Skills”, “The CFO’s Big Picture” and “Why CFOs Need to Adopt Financial Analytics” are good examples and are reflections of the gradual change of the role from purely accounting to everything finance, accounting, reporting, legal and compliance. To that add HR and IT which also are starting to become the responsibility of the CFO and you’ll begin to realize how much a company is dependent on its CFO, his or her skills, experience and attitude toward the job.

As seen by our readers in prior blog entries, there is one area that CFOs must pay close attention to and do it continually and consistently: Analytics.

The information technology has advanced to a point that any data generated by the organization, in any areas of operation, plus all the data generated through the execution of a strategic plan, an operational plan and a budget, plus re-forecasting of that budget data, is available to be presented to the CFO in exactly the format and presentation style he or she desires. Now the CFO can have insight into past, present and the anticipated future performance of the company, and with that, also into the future financial health of the organization.

Modern day software solutions can provide such insight. Budget Maestro‘s Analytics solution, Analytics Maestro is such an application. By using and relying on such a solution, CFOs will certainly be in the spotlight.

Budgeting Best Practices Just Got Better

What is missing from traditional “Best Practices” and how to change that

 I recently read an article by Barry Wilderman on SearchFinancialApplications.com (which is part of TechTarget.com) titled “Buying Software? Budgeting best practices come first”.  The entire article is available here. If you are not already a member you will need to register for this free site which encompasses many areas of technology and finance.

In this article the author focuses on the need to establish a budget process that borrows from best practices in this area of finance. The points given in the article are valuable and useful, however, there are a couple more critical areas that when observed and practiced will greatly complement this set of budgeting process best practices.

The most important aspect of the budget process is the usefulness and application of the budget with its analytics results in steering the company on its planned course. I’ve seen more than several organizations, some fairly large, where decisions were not supported by solid data; this data simply didn’t exist or was inaccurate or incomplete. Managements were often forced to use their experience, best estimates, intuition or perhaps no logic at all. Some of these decisions resulted in serious judgment errors with severe consequences to these companies.

We all read about companies who miss analysts’ estimates or come short of their own expectations. Some of the poor financial results are due to bad or inadequate planning, some due to unanticipated changes in the economy or customer demand, and some to historical poor analysis of actual company performance as compared with forecasted performance.

One of the most critical “Budgeting Best Practices” should include a complete and accurate forecasted Balance Sheet and Statement of Cash flows, without which management can’t make a fair assessment of the future financial health of the company.  Another is an analytics process that uses historical, current and budget data and displays the results in a manner allowing managers to quickly see and understand the data. I have already discussed these concepts several times on this blog in such entries as: Why you Must Forecast your Balance Sheet, Part 1 and Part 2, Why CFOs Need to Adopt Financial Analytics.

I agree with the points conveyed in the TechTarget article mentioned above but regardless of how well thought out and executed your budgeting process is you must make sure that these “Best Practices” and the actual software application you use are able to assist management in gaining insight into the future financial health of the company and in making the right decisions timely and with confidence.

Are you Challenged Managing your Annual Software License Fees Renewals?

How you can have Budget Maestro manage this task with ease and accuracy

All organizations rely on software products in their daily operations across all departments and business segments. Enterprise software ranges from ERP, accounting and finance applications to engineering, CAD, CAM, marketing and sales automation and also includes the software I am using to write this blog article.

Most software vendors structure their revenue streams to charge for an initial perpetual license fee based on the number of users, number of sites, options licensed, and some use the gross revenue of the business as a basis for the licensing fee.  Then, on an annual basis they charge their customers an annual maintenance fee, usually in the range of 10% to 20% of the original perpetual license cost.  Software licensing sold using the SaaS (Software as a Service) model requires a subscription, usually billed annually in advance of the service period.

The perpetual license fees should be treated as a fixed asset with a certain life, usually 36 months which can be run through the dedicated Fixed Assets software.

What about annual renewal fees and subscription model expenses?

Here, again, one can use Budget Maestro to set up a special plan to track these expenses, amortize them over a 12 month period, and most importantly know exactly how much to charge the software licensing annual fee GL account in each period, while updating the prepaid license fees account.

I just set up a simple plan to test this idea and I’m happy to say that it works great.

Here’s how I did it:

I created a new plan and set the calendar to match my fiscal year calendar.  I set the number of years to the maximum allowed.  With the advanced version of Budget Maestro you can have up to 30 years, but even the standard version gives you enough years so you won’t have to set up another plan for quite some time.

I set up a handful of GL accounts useful (but not required) in Budget Maestro and linked them to account groups to help with proper reporting. The most important account here is the “Annual Software License Renewal” expense account which I linked to a Depreciation Account Group.  Then, I created an Asset Group (the only one needed in this plan).  I set up a Depreciation Method I named Software License Renewals, gave it a one year (12 months) life with a Straight Line amortization and linked it to the “Annual Software License Renewal” expense account.  This means that all new entries will be amortized over the next 12 months and each period will show a reduction of 1/12 of the prepaid annual amount for each asset.

Now, as software vendors submit invoices for the following year’s renewals, I enter new “Assets” in the Budget Maestro Capital Assets Module.  I have my default set up to automatically assign these “Assets” to the only Asset Group I have in this plan, as well as the only Depreciation Method.  All I have to do is enter a Name, a meaningful description, the cost (from the vendor’s invoice) and the “In Service” date which will determine in which periods this new pre-paid expense will be amortized.  Users of Budget Maestro will immediately recognize these simple steps I am describing here.

This becomes very useful when there are many software licenses that have recurring annual renewals, all at different dates during the year and at different (and varying from year to year) amounts.  Budget Maestro then perfectly allocates the prepaid amounts to the proper periods for every item in the plan.  With a simple report I can see exactly the amount I must charge to the Annual Software License Renewal account while reducing the pre-paid asset account and maintaining a correct account balance every period.

While this is the way I decided to do this, I don’t see a reason why you couldn’t incorporate this function into your regular Plan and Budget, however, with a standalone system, you do not have to reload the software renewal fee items each time a new annual budget is created.

Other long-lived, intangible assets (e.g., Patents) can be tracked in a similar fashion and provide the data needed in order to make the required entries into the actual company GL.

All of these activities can be performed in a standalone, dedicated fixed assets software solution.  However, to me, having already licensed Budget Maestro, I can get all the information I need from the Budget Maestro reports and achieve accuracy and completeness in all the accounting transactions derived from these software license renewal fees activities, as well as all other tangible and intangible assets.

Of course, this text is not meant to provide any accounting, tax or other professional advice, only an observation for another great use of Budget Maestro, using the already licensed product and the number of users already authorized to use the software.