Category Archives: budgeting software

Do You Practice Lean Processes? How About Lean Accounting and Finance? – Part 2

lean accounting

In the first installment of this article, I wrote:

If every iteration of the budget requires many hours or even days of work to recompile the budget and its derived forecasted reports and financial statements, you are not practicing Lean Budgeting!

Here’s why:

If your budget model is overly complex and you’re using spreadsheets or even purpose designed software with spreadsheet-like modeling, every little change requires hours or days of programming, troubleshooting errors (those detected) is a major and frustrating, possibly futile undertaking and each time you need to produce a slightly different version of the budget or do a quick what-if analysis it takes hours or days to deliver – you need to implement a Lean Budget.  I’m willing to speculate that many organizations without proper planning and budgeting tools simply don’t perform the required number of iterations or what-if analyses for the reasons above.

Another characteristic of a “Non-Lean” budget process is the limited or lack of proper collaboration among budget preparation participants across the enterprise. This is where consolidation of disparate sets of budget data (worksheets) becomes cumbersome, time consuming and often error prone. This in turn discourages performing adequate iterations of the budgets and testing various scenarios using what-if analysis.

These companies must realize they need to transform this process or they will lose their competitive advantage and experience shrinking market share and deteriorating financial health. Sadly, some of them will ultimately fail.

Going Lean means that all waste must be identified and eliminated. This typically starts in manufacturing and other operational areas of the company but must extend to all functions of the enterprise, including marketing, sales, finance and accounting. We saw that Lean also very much applies to non-manufacturers and even companies that do not buy, store and sell inventory.

How can waste be eliminated?

To practice Lean Planning, Budgeting and Analytics, you should implement a process supported by a software solution designed for such lean and streamlined operations.

I’ve been fortunate to work with Budget Maestro from Centage Corporation. To me, this is the ultimate Lean Planning, Budgeting, Re-forecasting and Analysis system, especially appealing for SMBs (Small and Medium Size Businesses).

I particularly like that Budget Maestro is delivered (either on premises or in the Cloud) as a turn-key, self-serve solution. This means that all business logic and accounting rules are already built into the solution and there is absolutely no programming needed when implementing the system or when making changes to the budget model. With Budget Maestro there are:

  • No formulas
  • No links
  • No macros
  • No other custom programming
  • No expensive external consulting work

Not only can you implement this system in days or weeks instead of the usual months or years, you can maintain the system in house, and as stated above, with no or minimal help from outside consultants, while delivering the exact, up-to-date data that management needs, regularly, consistently and quickly.  This means that data can be immediately evaluated and decisions made in response to current financial events or anticipated results as communicated by future-period forecasted financial statements and other reports.

How Lean Accounting and Finance processes can support manufacturing or other company operations:

A Lean Accounting and Finance operation, once implemented, tested and perfected (recall that the Lean concept requires continual monitoring and improvement of processes in all areas implemented), must reduce waste in finance and accounting while more importantly supporting all other areas in the company and especially manufacturing.

Finance, freed from the tedious maintenance of a cumbersome planning and budgeting process, and with a robust analytics process, can finally focus on analysis without sacrificing quality or delivering key data to decision makers far behind the conclusion of business and accounting events.

Finance and accounting can now devote much-needed time to establishing metrics and KPIs (Key Performance Indicators) that must be used to measure current performance and establish future goals, communicated through an agile plan and budget. The ability to use such metrics and KPIs by employing Drivers, Based Upon Sources and Methods can make the difference between an effective plan/budget with integrated, real-time analytics, and a cumbersome, hard-to-maintain and error-riddled system, discouraging users and managers from making changes, trying different scenarios or experimenting with multiple sets of inputs.

Since analysis of actual accounting data versus budget can be performed as soon as an accounting period is closed and is very quick and simple to perform, this approach encourages finance to consistently monitor actual results and apply necessary changes or perform reforecasting, almost in real time. Management is now equipped with all the right data to make timely, informed decisions. These constant improvements are a very powerful concept of Lean and now can be practiced in finance using a software solution such as Budget Maestro.

And best of all, whether your organization is practicing Lean or is in the process of introducing these concepts, or perhaps not even contemplating Lean at this time, using a solution like Budget Maestro is a captivating example of how planning, budgeting and integrated analytics can become a streamlined, agile and effective process, without the common waste and limitations inherent in many other solutions.

To me, this is the ultimate Lean solution in the CPM (Corporate Performance Management) space for SMBs. You can use a fraction of the time previously spent on programming and troubleshooting to perfect your plan and budget and use the rest of your time to perform all the analytics you desire while supporting operations with the data and metrics they need to improve.

Who says that accounting and finance must always be overworked?

Do You Practice Lean Processes? How About Lean Accounting and Finance? – Part 1

lean accounting

See what Lean accounting and finance can do for your company

We’ve heard the buzzword “Lean” as it pertains to an organization’s transformation into a more efficient set of operations for a while now. Often perceived as radical, it promises great results and endless opportunities for incremental improvements.

The concepts originated in Japan, led by an extraordinary transformation at Toyota Motor Corporation, with its Toyota Production System (TPS), started in the mid-to-late sixties and perfected in the seventies.  The premise of TPS is continual improvement in all areas of the enterprise with the goal of increasing efficiencies and reducing waste while always maintaining respect for workers in all areas and on all organization levels.

While the Lean transformation lends itself best to manufacturing operations, its concepts apply to non-manufacturing industries as well, so if you aren’t a manufacturer, please don’t stop reading here.

The reality is that most companies in the US don’t practice Lean, at least not yet. The main reason is lack of discipline and proper direction from upper management, even though many US companies that implemented Lean report remarkable changes in all areas of the company, evidenced by improved financial statements and cash flow.

Another reason Lean transformations aren’t as popular as they should be, is that it really only works if you sustain the effort. Many of the failed attempts at Lean are attributed to not being able to maintain the Lean mindset and make it work consistently across the entire enterprise.

A popular goal sought with first Lean implementations is inventory reduction. The idea is to reduce inventory on hand and only bring in material and parts that are needed for customers’ orders or for a specific forecast, if the company makes products to stock. The result is higher inventory turns (I’ve heard of manufacturers achieving 15-20 inventory turns a year) and noticeable improvement in cash flow.

To make a Lean transformation effective, companies should also transform other areas in the organization, particularly their accounting and finance departments. Borrowing concepts from manufacturing, accounting and finance departments can also eliminate a lot of waste and focus only on value-added activities.

Each company should evaluate its own accounting and finance workflow. When activities that don’t add value are reduced or eliminated, accounting and finance personnel can focus on collecting and translating data into highly informative and useful reports that managers can really use—instead of the monthly or quarterly report packets (more like stacks of paper) that managers hardly even skim through without getting confused.

Of the many opportunities to transform accounting into a Lean organization, some companies find that doing away with vendor invoices for inventory purchases results in great savings in time and other resources. They simply rely on internal control over the purchase order process, and by using blanket POs with agreed-upon prices and release dates driven by true demand, they depend on the receiving process that automatically vouchers these receipts, which creates AP transactions that are paid according to vendor terms. The three-way match, vouchering and posting to AP of individual invoices is eliminated. Similarly, other areas in accounting can be streamlined in a Lean environment.

It’s hard to discuss Lean accounting and finance without mentioning the planning, budgeting and analysis processes, a core set of functions usually owned by finance. What is a Lean budget? Can that work even if the rest of the organization isn’t Lean? Can the process be called Lean Budgeting?

Erroneously, to the uninitiated in Lean concepts, when thinking of Lean Budgeting, the first thing that may come to mind is taking shortcuts in strategic and operational planning or perhaps reducing the number of budget iterations and their approval process. The truth, however, is that Lean Budgeting means only to reduce or eliminate wasted time and resources in the budget preparation and approval process. Of course, with reduced waste, certain pieces of the budget can be reduced while improving profitability and overall financial results.

Strategic and operational planning is the most important phase in the budget process and should never be compromised, even when transforming the company to a Lean environment. However, many existing planning and budgeting processes and their reliance on traditional technology promote much waste and complexity that can be eliminated or greatly reduced with a proper Lean implementation.

Waste in planning, budgeting and analytics processes may include:

  1. Spending an inordinate number of hours developing a model that requires programming of formulas, functions and links to other worksheets or workbooks files.
  2. Endless troubleshooting of budget models for errors resulting from bad or missing formulas, broken links or other issues which stem from unsuccessful changes or additions to the model.
  3. Excessive time spent by finance to create modified versions of the base budget or “what-if” versions in response to requests by management.
  4. Unnecessary wasted time in analytics, especially the monthly analysis of actual results against the approved budget for the period.
  5. Use of a “Zero-Based Budget” except for rare occasions where required and justified.
  6. Limited collaboration among budget participants using traditional, cumbersome solutions where consolidating the budget is extremely inefficient and time consuming.

If every iteration of the budget requires many hours or even days of work to recompile the budget and its derived forecasted reports and financial statements, you are not practicing Lean Budgeting!

In the next installment in this series we’ll learn how a company can achieve true Lean Budgeting while supporting manufacturing and other areas of the enterprise and providing real insight to management.

Impressions from the First Budget Maestro Annual User Conference

budget maestro

A memorable experience and confirmed realizations

I just got back home from the first Budget Maestro Annual User Conference. The event took place at the beautiful Hotel Marlowe in Cambridge Mass., overlooking the Charles River with the Boston skyline in the background. With a hot, but otherwise beautiful weather, the conference was off to a great start.

With customers, both veteran and new in attendance I recalled when I first became a Budget Maestro user.  It was a 1” display ad in CFO magazine that caught my eye. At that time, I was looking for a solution to assist me with the preparation of monthly forecasted balance sheets for a new venture capital opportunity in the hi-tech industry.

I needed to use my forecasted monthly P&L sheets and produce an accurate and complete set of balance sheets, one for each budget period. No software solution at that time could deliver that and relying on Lotus 123 (the go-to spreadsheet of that era) was not an option for many reasons that we all know now, Replace Excel with a Dedicated Planning, Budgeting and Analysis Solution and Is It Time to Switch from Spreadsheets to Business Budgeting Software?.

Budget Maestro delivered what I was looking for. While being rudimentary, with only a fraction of the features it has today and with no analytics module, it got the job done. It wasn’t called Smart Budget since the term didn’t exist back then but it had some of the elements of a Smart Budget with its built-in business logic and accounting rules.

At the time of my purchase I had no idea the company had only two employees.  Somehow, the person I talked to was able to communicate a message that eventually evolved into the message I now use both on this blog, Planning, Budgeting and Forecasting – Why Tradition May Be Dangerous – Part 1 and Part 2 and whenever I share it with customers or anyone in finance looking for a budgeting, forecasting and analytics software package.

The conference was packed with informative sessions, powerful customer stories and testimonials and new product announcements. There was a great deal of entertainment too and a good time was had by all.

There were, however, two major areas that left a strong impression on me. First, meeting many of the customers in attendance and listening to their stories and experiences with implementing and administering a budget solution in their companies validated that the Centage approach to budgeting, forecasting and analysis is correct and no other solution in the SMB space (Small & Medium size Business) can deliver what Budget Maestro can.

Customers shared their positive experience with Centage employees, including training, customer support and other personnel and how pleased they were with the overall implementation experience and putting the product to good use within a short period of time.

It was refreshing to learn that more customers are using the forecasted balance sheet and statement of cash flows, a lot more than in past years. I listened to customers discussing their needs and challenges in implementing Budget Maestro and what they were hoping to accomplish next with the software and offered suggestions and tips on how to best utilize this solution.

Second, I had the opportunity to meet new company employees and reconnected with people I already knew at Centage. They all shared their experiences of working at Centage and the common theme was always providing the best possible customer service and support experience while enjoying the work environment and connecting with their coworkers. It was apparent that the company has matured to a point where I believe it will be propelled to the forefront of its industry.

When making my initial purchase of the software license I had no idea it would all lead to such a great event and a maturing company with an outstanding product line. I was simply looking for a solution to a specific but big challenge I had at the time. All that has changed now and given what I see, Centage Corporation is poised for great success and is sure to become a force to be reckoned with.

Why Enter Notes in a Budgeting and Planning Software Application?

Business lady feels pressure working under control of her boss

The little time you spend entering notes and comments will pay generous dividends when you need to refer to these notes

I spent many years in the software industry.  I was not a programmer or software architect but was very close to many of the technical aspects of the business and got to observe some of the good and bad practices used.

One of the worst practices I recall was not entering comments next to program code lines, or not writing clear and sufficient notes to allow both the original developers and other people to fully understand the original code.

This became evident when we lost one of our best programmers, who left for another opportunity.  Although we owned the copyright to the code, every programmer who looked at it could not make sense out of it and although the code was near completion with initial testing of functionality underway, we had to scrap it and start from scratch.  We learned a very expensive lesson:  Enforce the practice of documenting all programming work and minimize the risk of losing your own intellectual property due to negligence and bad work habits.

Computer programming, design and engineering are good examples why notes must be kept, however, many other activities, both business and personal, can use this discipline.

As I gained experience in corporate accounting and finance I started to adopt this concept in my work and introduced a policy that all accounting transactions (e.g., journal entries into the GL) must be accompanied by notes or comments explaining the rationale behind them and anything that would help a reader understand the underlying events that required the entry.  Automated entries from sub-systems are pre-defined and repetitive with built-in comment codes and other data that explain the transactions, but manually entered transactions such as journal entries are not.

I often see journal entries made by clients without any explanations; not even the journal header notes or the one-line text per GL line, let alone the memo field where one can enter a free form text memo, add simple tables explaining the entry, etc.  This feature is available in all ERP and accounting software nowadays and the excuse that they only give you eight characters to record a comment (or file name) does not work anymore.

When you make such journal entries or other financial related data entry such as in putting together a corporate budget you have to ask yourself:  Will I be able to remember what I just did six months from now?  Will I be able to explain my work to managers, co-workers, or auditors?  Will I look at the transaction in a totally different way and maybe even suspect there are flaws in it?  Simple documentation, right next to the transaction will solve all that.  The common excuse that documenting your work will add extra work with no real benefits is not valid.

The real benefits are significant:  For a little extra work you gain confidence that the logic used during the transaction entry will still hold at any time in the future; that other employees and managers will be able to understand your work; that any internal or external auditor will have complete information on the audited transaction; and that your financial statements and internal control over financial reporting will be more robust due to this practice.

In Budget Maestro by Centage Corporation, every area of the software has a notes section, accessible through the Notes Tab on the upper right side of the screen.  Users can enter an unlimited number of individual notes for every budget line in every module (Revenue, OpExp, Personnel, Debt, etc.).  These notes can be filtered by user, date entered or description.

The notes can even contain copied and pasted simple Excel or Word tables.  Files that back up the logic or data used in establishing budget lines can be attached to each note within each budget line.  These files (e.g., Excel, Word) can be directly opened from the notes’ associated files area.  With very little effort you can reveal the data and logic used to create the budget line.

Since Budget Maestro allows users to create complex models using built in business logic, Business logic and accounting rules built into the budget, it is imperative, in my opinion, that these budget lines, many dependent on other data sources, with increases or decreases during the budget year plus other logic applied (e.g., Drivers, Based Upon) be clearly documented.  It will make your work easier and more productive.  You will be able to clearly explain the rationale behind choosing the various logic elements that Budget Maestro offers.  It will make the budget review a lot easier and you won’t get caught trying to figure out what you were thinking at the time these particular budget lines were created.

While it may seem an extra amount of time and effort to enter notes (in Budget Maestro or in any other software application), the benefits are going to be evident the first time you need to refer to one or more of these notes.  Budget Maestro makes it easy to enter notes and associated files everywhere in the application, so use this feature liberally.

Another Year: Time for a Budgeting Software Resolution?

Daily planner with the entry New Years Resolutions

Have you made the commitment to move to a dedicated, more automated business budgeting process?

I’m writing for this blog just before the end of another year and with a new year right around the corner. As we transition into the winter months in the Northern Hemisphere, those of us who are on a calendar year no doubt have just finished another annual budget cycle, hopefully less stressful than last year’s and with less iterations and a smoother review and approval process.

Those who are on a fiscal year, fast forward or rewind a number of months, but the annual budget process and the benefits it promises to bring are exactly the same.

Have you finally made the transition from a spreadsheet-based process to a dedicated budgeting software solution?

Have you implemented an analytics process whereby you are able to accurately monitor your actual results against your approved budget?  Are you able to set up any reporting format and automatically display the financial data specifically intended for certain managers’ reviews, in exactly the way that makes sense for your business?

Are you able to automatically connect with your ERP or accounting software GL and quickly and accurately retrieve the needed GL data (e.g., trial balance) immediately after an accounting period (e.g., month, quarter) is closed?

Those of you who have taken this major leap from manual processes, which are always riddled with errors, require a lot of manual data input and updates, and have significant limitations in producing accurate and timely reporting, undoubtedly realize how smart that move was.  I’m sure there was a certain learning curve, like with any implementation of new technology, maybe unfamiliar territory at first, but as you’ve become comfortable with your new setup, the new process became second nature, and you stopped looking back.

With each accounting period close, you became more familiar with your new CPM (corporate performance management) solution and found ways to improve the reporting presentation and the interpretation of the data the system provides.

The second annual budget you prepare with your new software will be much smoother. You’ll discover more ways to collect budget data from operational units. You’ll learn to better use the system’s built-in logic to create forecasts driven by data and applied logic to perfectly match your business model, and you’ll appreciate the software’s built-in accounting rules, which immediately result in more meaningful reports. And you’ll realize how simple it is to obtain a full set of forecasted financial statements, including forecasted income statements, balance sheets and statements of cash flows to match your actual financial statements.

If you have not yet made the transition to a dedicated budgeting software solution, it could be a perfect New Year’s resolution. It may be a little late to implement it for the new, 2017 calendar year but certainly not too early for the next year, whether calendar or fiscal.

For SMBs (small and medium-size businesses) I would highly recommend the solution I use: Budget Maestro from Centage Corporation. It does everything I mentioned above (and actually a lot more) and will become your CPM solution year round and not just for a couple of stressful months just before the beginning of a new year.

Sales Fix Everything

A common cure to an age-old ailment

If you spend enough time at a company, or if you’ve worked for several companies during your career, you’ll inevitably encounter slow periods, and financial hardship, and even occasionally company reorganization, liquidation, a buyout or simply shutting down operations altogether.

There are many reasons why companies fail or temporarily underperform. Among them are bad management decisions, lack of planning, lack of leadership in certain areas, diminishing customer demand, inventory or technology obsolescence, focus on the wrong product lines or service offerings, and more.

I’ve seen all of these occur at several organizations I was involved with or consulted to, and concluded that company failure was usually attributed to a combination of some of the reasons listed above.

There is, however, one common contributor to company failure or temporary hardship: Lower than expected or declining sales.

In recent years we’ve seen examples of companies that had bad or inexperienced management and lack of proper planning and other reasons that would normally cause a company to fail, or at least experience either a temporary or prolonged financial hardship, yet these companies seemed to thrive and grow rapidly despite many of the errors that good management skills should’ve prevented.

These companies had one thing in common: Sales. Customer demand was strong and increasing, and these companies, despite high inefficiencies and unnecessarily high operating expenses, were able to finance their growth simply through these sales.

This phenomenon is more common in the hi-tech industry, or in any business that lends itself to higher-than-normal gross margins. Operational efficiencies and tight management don’t seem to play as important a role as in other industries or in businesses with thinner gross margins, or companies where product or service demand is not as strong or requires higher-than-usual business development effort and expense.

Regardless of product demand, strong management and leadership and good planning, assisted by automation of the planning and budgeting process, and frequent analysis of actual results against the plan must exist in all organizations in all industries. Rapid sales growth and growing customer demand is all the more reason why you should carefully implement an effective business planning and budgeting system, one that can keep up with the growth. This blog is focused on the topic, and many of the articles here are meant to encourage financial managers and CFOs to embrace the next generation technology powering such systems.

However, no matter how great management is, insufficient sales cannot be mitigated through just maintaining or improving operations management, which your financial statements will clearly show. So, my priority in any struggling company is to first focus on sales while re-building the entire organization’s operations and other management functions.

There may be exceptions, but I’ve never seen a company that failed due to excessive sales or unusually high customer demand, which is why the common cure for many business failures and struggles is sales.

Business Logic and Accounting Rules Built into the Budget

If you’ve spent more than a few years preparing and presenting annual budgets, and perhaps participated in the periodic reviews and updates (re-forecasts) of these budgets you have certainly come to the realization that the budget outputs (e.g., forecasted financial statements and other reports) must be a result of your implemented model and a consolidation of inputs from several budget participants, such as departments or cost centers, and some logic built into this whole thing that takes into consideration the use of drivers, prior actual results and many more factors that contribute to what the budget is going to look like.

If your company uses spreadsheets to prepare its annual budget and do its re-forecasting work, you appreciate how much work went into the setup of these spreadsheets, the enormous complexity of the formulas, functions and links used, and the tedious maintenance required to keep the model up-to-date and relatively free from material errors, which is all you can usually hope for.

If your company has upgraded the process to a dedicated software solution for corporate budgeting, modeling and analytics, then many of the formulas used in the spreadsheet version must be programmed into this budgeting software and periodically reviewed and updated as the model changes.  Many additional links and other application-specific programming must also be performed before you can actually use the application.  This is not much different than using spreadsheets.

Neither of the above two approaches is ideal, because of the complexity of the model setup and the continual maintenance required to keep the plan and model functioning correctly and delivering the desired results.  Neither approach can ever deliver complete and accurate financial statements (with the exception of a forecasted income statement), due to their inherent limitations, the most obvious of which is not having a built-in general ledger (a G/L that operates like the actual accounting software or ERP G/L).  After a great deal of programming, you may be able to obtain a balance sheet and statement of cash flows, but these will be approximate and incomplete, at best.  Many forego these statements altogether.

To make a budget useful, you need to incorporate some business logic into it.  This is where the myriad of formulas and links among the many spreadsheets come into play.  They must represent the particular conditions that drive your business, and the many nuances unique to each of its operations.  You can’t just use a generic spreadsheet model or any of the various dedicated budgeting software solutions, right out of the box, and hope to be able to deliver a meaningful and useful annual budget.  Much preparation, and often expensive consulting and internal labor, must be employed first.

What you really need is a dedicated software solution that has business logic already built into it, a menu-driven environment with drop-down lists and tables that you select from within each budget area, for each budget line item, either globally or individually, plus the ability to select unique defaults, drivers and other logic.  The end result is a modular budget (revenue, expenses, assets, liabilities, etc.) with input from all business units.

You also need the system to have accounting rules built in.  This will ensure that every budget line will cause the values representing G/L account balances (ideally identical to your actual accounting G/L accounts) to update in every budget period, and then contribute to the generation of the forecasted financial statements and other operational reports.

Unfortunately, using the spreadsheet approach and most of the dedicated planning, budgeting and analysis software solutions, due to their inherent design, no accounting rules can reasonably be established, thus the lack of ability to create a reliable balance sheet and its companion statement of cash flows. It seems that the more work and money you invest in these approaches, the less productive you become, and the more ambiguous some of the results.

There is only one practical solution to this dilemma: Implementing a software application that has both business logic and accounting rules built right into the application itself.  So far, I have found only one such application – Budget Maestro from Centage Corporation.  Budget Maestro is designed to allow its users to tailor their plan and budget using built-in business logic, where they need only select items from drop-down menus and lists, and from either built-in or user-created defaults, none of which require formulas, links, or any other type of programming.  To complement that, the system automatically provides accounting rules used in viewing output, reports and financial statements.

I have covered these concepts in great detail in many of the blog posts on this site, for example: Budget Maestro’s Future Journal Entries, Two Key Principles in the Budget and Forecast Process, Why You Must Forecast Your Balance Sheet – Part 1 and Part 2.

In summary, built-in business logic is needed to allow building the plan or model which becomes the budget. Built-in accounting rules are needed to allow the system to automatically use the budget to generate forecasted financial statements and other reports, always synchronized to the plan and budget itself, and behaving like an actual accounting system.

Think of this as financial statements generated from accounting events that have not yet occurred, but are projected to occur based on the budget.  As the budget is updated, so are these projected accounting events.  The system automatically makes sure, using its built-in accounting rules, that the financial statements are delivered in the same format and fashion as their actual accounting system counterparts.

I think this is a brilliant approach, and expect more software applications to adopt these principles in the near future.

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.

Take Advantage of your Planning & Budgeting Software’s General Ledger

How to leverage the existence of a General Ledger in your planning & budgeting software

In a recent post I brought up the need for a GL (General Ledger), integrated into the planning and budgeting software and resembling an actual accounting software GL Why Have a General Ledger in a Budgeting Software?. We saw that the benefits are great and the entire budget process with the insight gained from its reports can transform the way companies value the budgeting process output in a profound way that enables managements to clearly see and understand the data, resulting in making sound decisions supported by this reliable and timely data.

Every accounting system, whether completely manual (anyone seen one of those lately?), or integrated into a complete ERP solution employs a General Ledger (GL) at its core. The GL is the last stop where data from the entire organization finds its way into pre-defined accounts, sorted into the various business units (reporting entities) where individual reports as well as consolidated, rolled-up reports can be produced. It is the GL that allows financial statements to be produced and distributed to users. These financial statements (Income Statement, Balance Sheet and Statement of Cash flows, plus other reports), deliver the performance of the organization during the reporting period as well as its financial position at the time the reports were published.

If actual accounting period financial statements are relied on to convey a story to their users, shouldn’t forecasted financial statements be available to company management to aid in making decisions that will help the organization achieve its strategic and operational goals? Here’s where a GL integrated into the planning and budgeting process can be invaluable.

In my work with planning and budgeting systems I have only seen one system that employs a GL at its core: Budget Maestro from Centage Corporation. I am certain that other software vendors are working on such an approach, since it is the only sensible way to be able to arrive at a complete set of future period financial statements, all synchronized with one another, where the Income Statements, the Balance Sheet and Statement of Cash Flows update in real time in response to changes in any component of the budget itself.

The secret to properly using the planning and budgeting software is to mirror your actual GL Chart of Accounts in your budgeting software, assuming it has a built in GL (similar to Budget Maestro’s GL mentioned above). Then, when you assign the appropriate GL accounts to the various budget records (e.g., Revenue, Cost, OpEx, Personnel, Assets, Debt, etc.) all activities projected through the budget process will cause transaction amounts to be included in system generated journal entries, using these GL account assignments. This is similar to the actual accounting system making journal entries in the GL in response to actual accounting transactions.

From experience I can say that all GL accounts must be present in the budgeting software. It is very frustrating to create a budget record, say, a sales forecast for a product and realize when you are asked to select a revenue account or any other needed account, that the account you are looking for is not on the dropdown list because it was not loaded into the GL when you set it up. So make sure all GL accounts are present and properly classified for reporting purposes.

In Budget Maestro, the setup of the Chart of Accounts and the grouping of all GL accounts into their proper groups and under the right reporting entities is very simple and intuitive. Most of the work can be done though uploads from company supplied templates. A good number of popular accounting system GL’s can be linked directly into Budget Maestro via Link Maestro, another Centage product.

Whether you are looking to upgrade from an existing planning & budgeting solution or starting from scratch, I strongly urge you to look at a solution that is GL based, one that mimics the operation of your actual accounting GL and with the ability to link it to the budgeting solution’s GL. The results will transform your budgeting process and allow management to receive complete and accurate forecasted financial statements, automatically derived from the budget. Analysis of actual results vs. budget can happen in almost real time.

I truly believe this is the future of the planning, budgeting and forecasting process and all indications are that progressive CFOs and finance managers are leaning in that direction.