Monthly Archives: July 2016

Planning, Budgeting, & Forecasting: Why Tradition May be Dangerous – Part 2

Be open minded and explore opportunities for change

In the first part of this blog article we looked at the traditional approach to planning and budgeting and recognized a number of flaws, regardless of how sophisticated some of the modeling capabilities of several of the leading solutions were.

This raises a fundamental question:

Is having an infinitely complex model with unlimited reporting capabilities but with high maintenance costs and dependence on outside consultants and with no ability to really gain insight into the future financial health of the organization superior to having a somewhat less capable modeling solution but one that is user maintained and with no modeling formulas, functions and links, one that automatically provides management with a Balance Sheet and Statement of Cash Flows that are always  synchronized in real time to the P&L and its underlying budget?

This is a very long question but in reality it is a very simple one.

  • What are management’s priorities?  
  • What is really important (or should be) to them?  

As the title of this article implies, relying on older, traditional methods can actually be dangerous to the company and its management since it can mislead them to make incorrect decisions when there is no real visibility into the company’s financial future.

Furthermore, the few applications that claim a forecasted Balance Sheet can be programmed may mislead users who desire such a report and perhaps even rely on it. As has already been discussed in this blog, in order to be able to deliver a complete and accurate Balance Sheet for all budgeted periods, the planning and budgeting software must have a built-in GL, just like its accounting software counterpart, Why have a General Ledger in a Budgeting Software?  To this date, I have not seen a planning / budgeting software solution that has such a GL by design, except for one application, Budget Maestro  from Centage Corporation.

System Generated Balance Sheets & Statement of Cash Flow

I cover a lot of my experiences with Budget Maestro in this blog. I feel very fortunate to have found a solution that is 100% user maintained, free from the worry of programming and managing endless sets of formulas and links, yet a solution able to reasonably model any type of business with very few exceptions. The real bonus I get with this software is the system generated Balance Sheet and Statement of Cash Flows that are automatically updated in real time with every change in the budget. With these capabilities come many additional noteworthy benefits as you can read in this blog, such as:

Forecast and Monitor your Key Financial RatiosForecast and Monitor your Loan Covenants ComplianceHow much of your credit line can you tap? and Generate Accurate Forecasted Financial Statements

Budget Maestro may not be the best fit for a Fortune 100 company, but it is certainly perfect for the many SMBs (small and medium businesses) in search for a way to better manage their organizations with greater insight into their financial future. I urge you to be open-minded and see how a traditional budget and analytics process can be transformed with this unique solution.

Planning, Budgeting, & Forecasting: Why Tradition May be Dangerous – Part 1

Be open minded and explore opportunities for change

Being part of a consulting firm in the area of accounting and finance I frequently get solicitations by phone and e-mail from vendors of accounting and finance software applications. These are vendors of accounting software, ERP applications, fixed assets management software, manufacturing MRP and other solutions, and of course vendors of corporate budgeting, planning and data analysis software, a category I like to associate with CPM (Corporate Performance Management) or EPM (Enterprise Performance Management) software, both of which generally used by the finance function working with company existing (actual) data and with forecasted or budgeted information in an attempt to arrive at an understanding of enterprise performance as measured against exiting goals and plans.

Planning, Budgeting, & Forecasting With CRM Software

Recently I had numerous contacts, both by phone and e-mail, with sales and sales support representatives from several well-known vendors of CRM software, specifically as pertaining to the functions of planning, budgeting, forecasting and analyzing data. I was intent on understanding why their solutions were beneficial to their customers and the real strengths of their product offerings in providing those benefits. I was also interested in learning how their approach allowed organizations to gain insight into their financial position, past, present and future and especially on how they were able to deliver future period forecasted financial statements and whether all statements were fully synchronized with each other and with the underlying budget.

As I expected, all of these applications were quite capable of setting up a corporate budget by importing static data from numerous reporting entities and by constructing a financial model that relied on historic data plus assumptions and application of a variety of formulas and functions, linking different worksheets, performing allocations and using drivers to arrive at a consolidated corporate budget.

A few of these applications were featured a large number of dimensions in modeling the business and its data, allowing a seemingly endless number of analysis options.

All of these software solutions either had a direct interface to the actual accounting GL (requiring custom programming) or indirectly via a two-step export-import process of actual accounting results, such as GL account balances and even detail transaction data.

CRM Systems Come Up Short on Planning, Budgeting, & Forecasting Tasks

All the presentations I watched and the marketing and technical material I received were very impressive and highly polished, but on further inquiry it was disclosed to me that each implementation required a varying amount of setup work, usually performed by vendor trained personnel or outside, independent consultants.

This implies additional, perhaps significant, costs and also longer implementation timelines. Changes to the model or any part of the implementation often requires contracting the original vendor or an authorized third party. Since very little can be done in-house, I imagine only a few changes and improvements to the implementation are actually done beyond the original setup. This does not encourage users to keep up with the ever-changing market and economic conditions. High costs may be another deterrent.

What struck me most was the fact that none of these software vendors provided complete and accurate financial statements beyond the traditional Income Statement. They all claimed they could program a forecasted Balance Sheet and a Statement of Cash Flows, but these statements were always going to be modeled, using high level formulas and assumptions and always requiring maintenance with every small change in the budget.

None of these statements are synchronized to the income statement and to the underlying budget for the simple reason that none of these software solutions have an integrated GL where budgeted transaction data can be processed in a manner similar to how an actual accounting GL operates.

In the second installment of this article we will explore this fundamental flaw and see a better approach to this challenge.