Probably not in the near future but your business can (its financial health that is)…
I just left my doctor’s office after completing my annual checkup. While everything seemed to be in order I had a quick discussion with him on whether or not it would be possible with the new advances in medicine to accurately predict one’s future physical and mental health based on their current health, family history and perhaps other factors.
Imagine a system where all your health history, current vital signs and other pertinent information was in a computer database and while performing certain tests, the additional information was added to the existing data and a forecast or prediction of your future health became available to read and analyze.
This seems rather futuristic and perhaps unattainable. Nonetheless, it is a very intriguing idea. What if we could start a preventive maintenance program in response to some prediction of a future health issue or disease? This would be in addition to using existing well-known methods of maintaining health through proper diet and exercise. Of course, some people may not want to know their future medical and mental health for various reasons but I think the majority of us will want that.
While we would have to wait for this technology to become available, we do have the ability today to predict and forecast a different kind of health. What I am referring to is the future financial health of a company. Unfortunately, many organizations are not aware of this, or are so wrapped up in their old financial processes that this hasn’t yet become reality.
Many companies that prepare their budgets and maintain them through re-forecasting often don’t fully benefit from these activities. Even if the budget does not remain static throughout the budget time horizon, the information obtained from this process is limited and sometimes misleading.
Here’s a good example:
A budget only generating a forecasted income statement (P&L) for each period in the budget does not even begin to tell the entire story. Without a budgeted balance sheet (and the derived statement of cash flows) you cannot forecast vital information such as available cash balances, cash needs, future receivables and inventory levels, future payables and other debt obligations, ability to meet loan covenants and many other crucial pieces of information.
You may have an insightful forecasted set of revenue lines and expenses. However, can you say with confidence that you’ll be able to achieve these revenues at the forecasted costs? Will you have sufficient cash to do that? What about maintaining debt covenants? Will your inventory levels and accounts receivable be sufficient for you to adequately draw on your line of credit?
The answer to these questions is no. With only a forecasted income statement you can’t possibly forecast the financial health of your company in future periods.
What about the available technology?
Observing advancements in finance software in the last 10-15 years, I see a new trend emerging: A complete planning, budgeting and analysis software solution that takes all user programming and formula work out of the process, while allowing users to collaborate on preparing a budget, using pre-defined system business rules, working with drivers and other allocation tools and automatically generating a complete set of future period financial statements.
Centage Corporation’s Budget Maestro with Analytics Maestro is a great example of such a system and several articles on this blog make reference to this software and the various benefits enjoyed by its users.
When you are able to gain insight into the future financial health of your company you are able to better plan for the future, make more intelligent decisions and avoid mistakes due to lack of data, or bad data.
Since we cannot yet predict our future physical and mental health let’s stay healthy doing what we know today but forecast the future financial health of our companies with the technology that is here now.