Monthly Archives: May 2016

Do We Need Industry Specific CPM Applications?

Wouldn’t an already proven software solution in many industries be a better choice? Are “Vertical Market” budgeting software applications justified?

I recently attended the annual NAB convention in Las Vegas where we had three client companies exhibiting. This convention is geared toward broadcast professionals, in radio, TV and all other media production marketed to consumers and business organizations.

In passing by the many industry specific hardware and software companies, I came across a surprisingly large booth where a software publisher displayed budgeting and scheduling software, specifically designed for media producers and other companies in the industry.

The featured budgeting solution allowed its users to enter and consolidate multiple budget worksheets arranged by project or media production activity (or by business entity) and then consolidate them in various useful ways to arrive at the company’s annual budget, project budget or any other required set of outputs. The software package also included several other functions specific to the industry. It is only the financial application component I am writing about here.

There were two distinct issues with the budgeting component that I noticed:

  1. The software did not automatically provide the user with a set of forecasted standard financial statements beyond the Income Statement.
  2. There was nothing unique about this software that you could not get from a variety of corporate planning, budgeting and analysis software solutions.

The makers of this software claimed that it was designed specifically for the broadcast and media production industry and that it had all the features needed and used in that industry, including the budgeting piece I am referring to here. However, in using such a vertical application with a relatively low installed base and a small developer behind it with limited resources, I can’t see how users can properly benefit from it.

I’m not sure what the price point is but I can’t imagine this being less expensive per user than a broad market application that is designed essentially to do the same thing, is more robust and provides management with critical information they need for sound decision making. Of course, the user (and the vendor) can justify this by saying that for the price of the integrated package they are also getting a budgeting piece which they would have to license separately if it did not exist in this package. Is that a valid argument? I don’t think so.  Do you use a product just because it is “free” or comes bundled with something else you must have?

A question that immediately comes to mind is whether there is a need for an industry specific solution vs. implementing an already established and tested application, one already used in a variety of industries.

I’m sure that other vertical markets have their own “fine-tuned” set of software applications marketed specifically to those markets. But in a finance related software, is this a better approach than an application built on a solid foundation where any industry business model can be created and reports and financial statements can be generated and delivered to users and managers who will use it to make informed decisions? Is an industry specific program going to do a better job? It may have the industry specific terminology already set up and the default work flow may be more in line with what these industries’ finance departments are accustomed to, but is that enough reason to consider such a solution?

The planning, budgeting and analytics software category (I sometimes like to refer to this category as CPM – Corporate Performance Management) seems to be quite fragmented, although only several vendors stand out from the crowd. I respect the desire of software developers to market unique solutions to their target markets and of course their entrepreneurial spirit, but do we really need such a large variety of products?

I guess this product category is no different than the ERP software category, or any other consumer or business product for that matter.  In fact, it is not much different than in any industry with a new product category. The automobile industry was like that in the first 30-40 years of its existence and evolved from dozens or more manufacturers to a consolidated field of only a few.

If there isn’t going to be a major consolidation of products and vendors in the CPM software category, at a minimum I see only several leading vendors remaining, perhaps one dominant in each customer category, such as SMB, enterprise, etc.

End of Month Shipping Frenzy

Is it the customers’ product demand schedule or lack of planning foresight that has you in a shipping frenzy?

I spend a fair amount of time at various client companies, often in remote sites and plants in addition to their headquarters. I interview many people in numerous roles during our internal control engagements, internal audit consulting or whatever projects these companies ask us to work on. I also observe many activities, such as inventory receiving and inspection, work in process operations, construction of fixed assets, and how all these are recorded in the sub-ledgers and represented in financial statements.

A while ago I decided to develop an Aged Backlog Report for one client company since they were struggling with meeting customer ship date requests. I divided the report output into 10 columns: 5 future and 5 past. Each backlog item, as documented in sales orders now falls into one of these 10 columns. For example, a customer ordered item requested to be shipped on May 26, 2016, at this time of writing falls in the Next 30 Days column. If not shipped by the due date, it will automatically be moved to the Past 30 Days column and so on. The full range is Over 180 Days in both directions, future and past.  I testing I implemented the report at several other client companies.

In the process of developing this report and making it useful I was thinking of a phenomenon so many of the manufacturing companies I work with experience: Uneven distribution of product shipments throughout the month with a peak shipping day on the last day of the month or quarter.

I recently looked at several of these Aged Backlog Reports, all from different organizations, with different product lines and a different customer base each and noticed something very similar in all of them: The customer Requested Ship Dates (due dates on sales orders) were almost uniformly distributed throughout each accounting period.

I didn’t see a concentration of customers requesting their shipments to leave the warehouse on the last day of the month or the last week of the month; yet in all of these companies there seemed to be relatively less shipping activity going on during the month followed by a shipping frenzy toward the end of each accounting period, culminating with an almost epic effort to get as much stuff out as possible before the clock strikes midnight.

This was confirmed by examining sales journals in several accounting periods (assuming billing was not much delayed following actual shipments).

What causes this phenomenon? Or is it really a phenomenon given how common it is? I know for a fact that this is not driven by customer specific demand, as sales orders’ due dates clearly indicate. Is it lack of planning?  I don’t think so. Sales orders’ due dates are supposed to create the demand and drive purchasing of material, scheduling of machines and work centers and allocation of resources. If planning is not to blame, then it must be the actual results from these planning activities, or just not adhering to schedules.

Despite all this logic I think it all comes down to natural human behavior. We know that we have an inherent quality to procrastinate; we experience that with daily chores we are assigned to, filing our tax returns, and other activities, when we pretend that there is plenty of time to complete them and one more day won’t make any difference. There may be people exhibiting less, or even none of this behavior but the majority of us are impacted by this on some level.

I think this quality is carried over to the work place. The first few weeks of lighter shipping each month followed by a much more intense week and especially the last two days of the month or the quarter, seem to prove this theory.

Which brings up another question: If companies seem to exhibit such uneven shipping and fulfilment output throughout each accounting period, is that an indication that resources are underutilized? Are people taking their time much of the month, only to accelerate their activities (hence the increase in output) at the end of the period an indication of a higher utilization potential? Does that mean that with more effective management a company can grow by adding fewer employees proportional to the revenue growth? This sounds very optimistic and possibly only doable to a certain extent.

I’d love to hear your personal opinions and actual experience and observations in your own companies.

How Bad Results are Conveyed in Financial Reports

Learn to notice certain signals and what your finance CPM system is trying to tell you 

If you read external financial reports such as SEC FORM-10K and FORM-10Q you probably noticed an interesting phenomenon (or is it the norm?): Bad or negative financial results are communicated by using creative and carefully crafted language, giving plausible explanations and using purposely selected financial comparisons that seem to reduce the effect of the negative results, as communicated just by the numbers.

I was an SEC filer myself years ago and can certainly understand the motivation behind the language and explanations given in these reports. After all, the true numbers are there and the reader always has the opportunity to read, understand and make their own decisions based on the data. The minimum disclosures are also there for everyone to see. Management wants people to hold the security and trust them that the company is on the right track.

I also know well from experience that these filings have been fully reviewed by these companies’ legal departments or by outside counsel and the vast majority of them don’t have any disclosure issues, at least not from a legal standpoint. This is supported by a required framework of internal control over financial reporting, attested to by an external auditor (for annual filings) that ensure that financial statements and disclosures are free from material errors.

I interviewed many top executives in companies that are SEC filers and in privately held companies that are required to provide financial statements and other reports to various users of these statements.  Most seem to have difficulty admitting that their companies have not delivered the expected results; after all, the disclosures and explanations to filed financial statements and specific schedules do not show the results as being too negative; these, in fact, may look quite encouraging when someone outside the company bothers to read and understand the details conveyed in these filings.

Are these managers (CEO, CFO) in denial? Do they truly believe that their companies are doing just fine? Or maybe they don’t have the real picture surrounding their organizations’ financial well-being and especially their companies’ future financial outlook. This can be a serious problem because not knowing where the organization is headed financially and well in advance implies that certain signals will be ignored, decisions will not be based on solid data and mistakes are likely to occur.

Can finance be blamed for this? After all, they are the function that provides senior management with the data needed to make timely and informed decisions. As it turns out, finance, always pressured to deliver results, sometimes under unrealistic deadlines, and almost always understaffed, works with available tools, common methods and techniques. Their tools are not always state of the art and there is very little time for them to conduct research to see what new solutions are available to companies their size; so they are usually left to work with whatever tools and methods the company possesses and change is not something they look forward to.

However, this does not have to be that way. There are finance solutions (the names CPM, EPM, Planning / Budgeting plus Analytics are used interchangably) that are designed to make life easier in finance, and ultimately provide upper management with the data they need, when they need it.

One of the most pressing changes required is for companies to budget and periodically reforecast their balance sheets. The software must be able to do this using posted transactions driven by the budget and not a crude approximation via using some modeled formulas or global assumptions as some of the present day solutions are designed to do. These balance sheets are far from complete and accurate and may actually mislead their users. Only a general ledger based system incorporated into the CMP solution (totally independent but linked to the actual ERP GL) is going to be an acceptable solution to this challenge.  Fortunately, this technology is available now.

This is going to be a paradigm shift for many finance organizations, but those that already embraced it don’t ever look back.  I believe many more organizations are going to follow this trend in the next few years.

Balance Sheet Forecasting Demystified

A new and sensible approach to creating a forecasted balance sheet

Have you ever wondered why forecasting of the corporate balance sheet is something we seldom see or hear about? Or why many finance managers and professionals dismiss it as an unnecessary activity with no real benefit to the company? The answer, according to my interpretation and understanding, is that doing a good job of forecasting a complete and accurate balance sheet is very hard, probably impossible using conventional tools (traditional CPM tools, spreadsheets, etc.).

A lot has happened since the first attempts at forecasting a corporate balance sheet. In the early days of computerized planning and budgeting the main goal was to forecast the cash flow of the company; cash leaving and entering the company in various budgeting periods (months, quarters, etc.). The focus wasn’t really on generating a “future” balance sheet with all of its components clearly presented, but more on the general accounts, such as cash, and maybe receivables, inventory and payables.

With the available tools at the time, the cash flow forecast was usually not presented in a standard Statement of Cash Flow. Management was able to see how much cash would be required in each period and anticipated cash receipts during the budget year. The accuracy of such forecasts was always questionable, but at the time it was the only method known and used.

Those who have done cash forecasts know how hard it can be, especially if any degree of detail and accuracy is expected. The end result was often far from the actual results but it was a step in the right direction.

Can a Balance Sheet be accurately forecasted? That depends on the definition of accuracy. Under ideal circumstances a forecasted balance sheet can only be as accurate as the income statement forecast. You grossly overestimate your sales in certain budget periods and the forecasted balance sheet, assuming it perfectly tracks the forecasted P&L, will be off too.

Nevertheless, if the forecasted Balance Sheet and its Statement of Cash Flows companion are not synchronized to the P&L and to each other, any degree of accuracy and completeness can never be achieved. This is why most of the popular planning and budgeting software solution used today are not able to provide their users with an accurately synchronized set of financial statements.

In an earlier blog entry, Take Advantage of your Planning & Budgeting Software’s GL we saw that in order to achieve a meaningful set of synchronized forecasted financial statement the software must employ a general ledger at its core and automatically make journal entries in response to budget line forecasted activities (e.g., sales and expenses in budget periods, forecasted capital asset acquisitions, etc.).

Finance executives, finance managers and finance professionals now have a set of tools to deliver a forecasted Balance Sheet and a Statement of Cash Flow that perfectly track the budget and its forecasted Income Statement. These look exactly like the actual financial statements, only represent future budget periods instead of actual accounting periods’ performance.

While I perfectly understand why they did this with the existing tools and software architecture, company CFOs and other finance executives can no longer dismiss this radically new approach as irrelevant or unnecessary. It’s good to see technology innovations finally reaching corporate finance management and embraced by organizations’ leadership teams.

Maintain A More Accurate Budget Using Actual Data

I’ve been a user of Budget Maestro (www.centage.com) since 2002 and have gone through all the version upgrades and minor updates over the years. What I’m still surprised at is that I still learn new ways to use it and am able to continually improve the function and utility of this application.

I just discovered another way to contribute to the accuracy and completeness of the budget. This uses actual data available from the accounting (and more precisely, the company payroll system).

In most companies payroll is the highest operating expense. This includes salary and overtime pay, bonus pay, holiday pay, payroll taxes, benefits and other payroll related expenses. In manufacturing companies, most of this payroll expense is absorbed into inventory (capitalized as inventory is produced) and is expensed as products are sold.

Different industries experience different amounts of payroll and related expenses, but in all organizations, these expenses are substantial. This implies that budgeted payroll and related expenses are significant component of the overall budget.

What if there was a way to more accurately forecast and budget these expenses? Can the payroll budget be updated in real time, using the actual accounting payroll data?

Budget Maestro has a very comprehensive personnel budgeting module where company employees are entered either individually or in groups of similar work functions. Payroll related expenses are calculated regardless of whether the company has a calendar year or a fiscal year.The correct expenses are automatically posted to the budget and accounted for.

For example, expenses such as Social Security and Medicare (employer portion) stop accruing during the calendar year only to re-accrue at the beginning of the next calendar year. Companies that are on a fiscal year must correctly accrue these expenses and then stop accruing them according the calendar year rules, while reporting them in their particular fiscal year. Budget Maestro knows that from the company calendar setup and will correctly apply these expenses where they belong, no matter what the fiscal year-end is.

While some of the payroll is forecasted based on revenue forecasts by using drivers, there is a large portion of the budgeted payroll that consists of existing employees.

By adding and deleting employees as they are hired and leave the company or when actual salary changes go into effect and other changes take place, the output of the personnel module becomes more accurate and more aligned with the actual payroll expenses.

It is important to note that adding new employees in Budget Maestro following the actual additions into the company payroll system may require adjustments to forecasted employees (which is part of periodically maintaining the budget), however, at any given period in the life of the budget, the majority of the payroll and the related expenses will closely follow the actual payroll expenses with the balance of these expenses determined by assumptions and drivers, following growth or expansion forecasts.

The natural inclination of finance personnel tasked with maintaining the budget might be to dismiss these activities as unnecessary or time consuming, however, we must remember that the planning, budgeting and analytics processes are not just an exercise in numbers or an annual ritual that must be done through tradition or for other unknown reason. Those who follow the sequence of these blog entries surely realize by now that the benefits gained from a complete and accurate set of data and year-round maintenance and analysis are profound.

Only with having complete and accurate data, periodically updated using known data (e.g., from actual accounting trial balance account summaries or account transactional data), cans an organization gain insight into its current and future (forecasted) financial health.  Budget Maestro / Analytics is a tool that helps with these processes and the interpretation of data, but it is the users’ responsibility to make sure the data entered is accurate and complete.

This payroll expense forecasting is a good example of how a company can maintain and report a very large portion of their expense budget with confidence and accuracy.