Monthly Archives: November 2015

Is It Time to Switch from Spreadsheets to Business Budgeting Software?

Spreadsheets are common in the workplace and are the most used tool for preparing corporate budgets and forecasts mainly in small enterprises, but surprisingly also in larger organizations. With their familiar user interface, low cost of ownership and readily available functions and a powerful formula builder among the many tools these spreadsheets comprise, it is very tempting to use spreadsheets in the planning and budgeting process. This, however, becomes an increasingly more difficult task as companies grow larger, with more complex operations, more product and service lines, as well as more sophisticated reporting needs. CFOs and other finance executives and professionals soon discover that spreadsheets are not the right tool to use in this process for several compelling reasons. Among them are the inability to effectively scale the model without major redesign, the high risk of errors and omissions and of course the inability to generate complete and accurate financial statements such as a Balance Sheet and a Statement of Cash Flows. More and more CFOs are starting to realize that and switch to a software-based business budgeting solution.

Your Company Involves Many Departments

Even small and medium size organizations have multiple departments and often several or more locations, with distinct product or service lines, often organized in dozens or more business entities, departments and cost centers. Each reporting entity is expected to propose and maintain its own management approved budget, while a consolidation of all the individual budgets is performed in the finance organization according to the company hierarchy. This cannot be reasonably accomplished with a spreadsheet due to the numerous individual worksheets and workbooks linked together to accomplish the consolidation. As many finance professionals have experienced, the slightest change to any of these worksheets can wreak havoc in the budget consolidation, requiring tedious troubleshooting and repair of broken links, displaced formulas and functions and dealing with other issues. This can bring the entire budget process to a halt, usually when there is a process completion deadline on the near horizon.

Collaboration Requires Dealing with Multiple Time Zones

With different reporting entities located in different parts of the country or even in different foreign countries it becomes apparent that a centralized database must be used in conjunction with a dedicated planning and budgeting solution. Reliance on a spreadsheet is no longer an option even if there are only a few persons involved with accessing the data files.

Maintaining a Single Production Version

Maintaining document control for spreadsheets is a difficult task in any corporate environment even if there are only a few users of the master budget set of spreadsheet files. It is common to find that multiple persons are working on multiple versions of the same spreadsheet while there is no one file containing the latest data. It is much more preferable to use a database application to perform the planning and budgeting functions.  Purpose designed planning and budgeting applications can allow many users in many reporting entities to be in the same database while simultaneously update data. Review and approval of the budget by finance management is done using one set of data which is always the most current version.

Exceedingly Large Revenue and Expense Budget Lines

As companies grow their accounting and reporting needs become increasingly more sophisticated. An increase in the number of revenue and expense accounts usually dictates a similar increase in the number of revenue, cost and operating expense budget lines. Organizing a large number of budget lines across multiple reporting entities makes the use of spreadsheets impractical. The purpose designed budgeting software with its dedicated database can naturally hold and maintain a much larger amount of data with division of data into logical and functional modules such as revenue and cost, operating expenses, fixed assets, personnel, liabilities and others.

International Operations

International operations add additional challenges when using spreadsheets to create and maintain corporate budgets. One obvious challenge is maintaining and calculating currency translations from local currencies to the functional currency of the consolidated budget. This can be much easier handled in a corporate planning and budgeting software solution where all local currencies are defined and can easily be maintained as they change during the budget preparation period as well as during the forecast period. Other challenges such as multiple time zones, many reporting entities and large and increasing budget lines were mentioned above.

Numerous Product Offerings and Locations

The greater the number of company locations, divisions, departments and overall reporting entries, coupled with a large and increasing number of product or service lines the more difficult it becomes to prepare and maintain a corporate budget in a spreadsheet or a set of spreadsheets. This is a perfect example where finance executives must look for a dedicated budgeting solution with an underlying database, where multiple product lines, across multiple locations, and other data dimensions can be reliably set up and maintained without the worry of constantly updating and troubleshooting spreadsheets.

Government Regulators to Report to?

When a company is required to undergo an annual audit of its internal controls, end-user computing is one of the topics external auditors examine for proper design and effectiveness. Spreadsheets rarely have an internal control framework mitigating the inherit risks that they present. A change management process, as applies these spreadsheets, is very rare and often doesn’t exist which implies that the results produced by these spreadsheets cannot and should not be relied on. A dedicated planning, budgeting and analysis software solution with its built-in logic and pre-defined options and calculations is a much more robust alternative to the use of spreadsheets in this process.

Using business budgeting software such as Budget Maestro™ is inevitable as your business grows. The only question remaining is, how soon?

 Businesses of every description rely on the Budget Maestro™ family of software solutions by Centage Corporation to improve the efficiency and effectiveness of their business budgeting and planningfinancial forecastingfinancial consolidation and reporting processes. For more information, take a tour of Budget Maestrocontact Centage, or call 800-366-5111 now.

You Should Not Rely on Spreadsheets for Cash Flow Forecasts

Finance executives and professionals must rely on purpose-designed planning, budgeting and analysis software solutions that will deliver complete and accurate forecasted financial statements for all budgeted period. Use of spreadsheets or pure guessing of anticipated future results can never deliver this level of completeness and accuracy and any cash flow projections done in this manner will be a gross estimate that should not be relied on.

How is Cash Flow Affected When Your Company Records Revenue and Expenses?

Most companies use the accrual method of accounting. This means that all revenue is recorded in the period it was earned and all expenses are recorded in the period they were incurred. Both activities, however, do not usually coincide with cash receipts and cash disbursements due to varying payment terms extended to customers and received from suppliers. These can be 30, 60 or even 90 days and each customer or supplier may have different payment terms. This makes cash flow projections very difficult and actually impossible to implement. Use of spreadsheets for cash flow projections will typically produce results that are grossly inaccurate. The solution is to employ a planning and budgeting software application that has all the business logic built in where all payments and cash receipts are automatically applied in the correct budget periods. This will help generate a much more complete picture of all future cash receipts and cash disbursements.  The generated forecasted Balance Sheet and Statement of Cash Flows will allow finance executives and professional to evaluate future cash requirements or cash surplus.

Inventory and its Effect on Cash Flow Forecasting

Inventory purchases often represent the highest cash outflow in many businesses. Forecasting cash needed for inventory purchases can be a daunting task unless proper planning and budgeting tools are used. Each forecasted sales transaction will affect inventory levels and require the purchase (or making) of additional inventory, affecting the forecasting of cash needs. Sale of inventory will also create a future in-flow of cash that must be part of the cash flow analysis built into the planning and budgeting process.

Formulas, Functions and Links

Formulas, functions, links and other user programming done in a spreadsheet environment often results in undetected errors, broken links and other programming issues that can have an adverse effect on the integrity and accuracy of the work performed. Maintaining large and complex spreadsheet files used in corporate planning, budgeting, and especially scaling the models is often an exercise in futility. Cash flow forecasts that rely on these spreadsheets are usually unreliable, grossly inaccurate and can seriously mislead management into making wrong tactical and operational decisions.

Forecast as an Extension of Actual Period Accounting

Similar to financial statements of past accounting periods, a properly prepared plan and budget should  also include a Balance Sheet and a Statement of Cash Flows, in additional to the commonly seen forecasted Income Statement. Using a software solution (either In the Cloud or On Premises) that was specifically designed to be an extension of an organization’s actual accounting system will allow company managements to gain visibility into their organizations’ future financial health.

Don’t guess with spreadsheets. Upgrade to business budgeting software such as Budget Maestro™ instead.

Businesses of every description rely on the Budget Maestro™ family of software solutions by Centage Corporation to improve the efficiency and effectiveness of their business budgeting and planningfinancial forecastingfinancial consolidation and reporting processes. For more information, take a tour of Budget Maestrocontact Centage, or call 800-366-5111 now.

The last day of the accounting period phenomenon

Is shipping on the last day of the month that important and at any cost?

In my work in management consulting in the areas of accounting and finance I get involved with many client companies’ financial statement preparation, disclosure work and internal control (plus internal audit in several of the larger companies). What is common to all of these companies, regardless of size and industry, is the fact that in the last few days of any accounting period there is this frenzy of activities, mostly shipping, with several of these companies stuffing trailers with products until midnight of the last day of the fiscal period.

What seems odd to me, although I perfectly understand the motivation behind this, is that all of that hard work in shipping and accounting on that long Friday (or Saturday) night will only result in these trailers being hauled away by the common carriers the following Monday. I always questioned the fact that this behavior does not really comply with GAAP rules as to me the earning process is not complete if these trailers are left in the rain or snow to sit there for more than 48 hours while the customers who ordered the products hidden in these containers have no idea that ownership had already been transferred to them.

Besides, If I am the seller who recognizes revenue on the last day of the month, it is implied that my customer must recognize the inventory in transit as well as a liability to me on the same day (which may or not be the last day of their accounting period). Is that what the customer really wants? Probably not, unless their requested ship date happens to fall on the last day of the seller’s accounting period.

Of course, this assumes that revenue recognition can take place when products are shipped and there are no other conditions that must be met (such as installation, or training and acceptance by customers, among other things) before the seller of the goods can include these amounts in gross revenue for the period.

While I have no problem endorsing the fact that a “for-profit” business must make every effort to maximize financial results and increase the value of shareholders’ equity, I question this type of behavior as it implies that in the first two or three weeks of each month there is no urgency to get things done, or to follow customer delivery request dates that are captured on company sales orders that drive the entire manufacturing process. If there are approximately 22 working days per month, shouldn’t manufacturing and especially shipping activities be spread more evenly across those days?

So now that these last minute shipments have made it into the trailers, I don’t think there will be much left to do on Monday, the start of a new accounting period, and we will need to wait for finished goods to appear on the shipping docks, once again late in the month, for this process to only repeat itself.

As for billing these shipments, unless the earning process is really complete, I would wait for that to happen, and who knows, this might increase the real sales in the following period. What do you think?

I realize that management puts pressure on operations to perform in order to deliver the forecasted (and desirable) financial results, but I think that more important is to follow a strategic plan, coupled with a solid budget and meaningful analysis year round, while focusing on customer demand (including following the very important customer requested delivery dates) and not just on “how much more can we get out the door before the clock strikes midnight”.