Category Archives: cash flow

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.

Cash Flow Forecasting Best Practices

It is time to demystify existing misconceptions and practices

Earlier this year I participated in a discussion on the Proformative.com site, titled: Cash Flow Forecasting Best Practices. A Proformative member asked a question which is very common in many finance organizations: What are the best practices when it comes to developing a cash flow forecast model? The person indicated that it was for a large publicly held company with global operations and that they have a comprehensive P&L forecast but struggle with a large and cumbersome Excel model which must be tied to the budget (P&L). This person was looking to start from scratch and build a more robust and manageable model. It was clear that they needed help. Does that sound familiar?

  • Is your company struggling in forecasting its cash flow or is unable to forecast its Balance Sheet and the derived Statement of Cash Flows?
  • Are you using home grown spreadsheets you inherited from a person who is no longer with the company?
  • Have you noticed broken link messages and suspect that other errors may exist in these worksheets?
  • Are you unable to maintain these spreadsheets, or add records without introducing new errors?
  • Are these new additions properly linked into the model?
  • Most importantly, is the output from these worksheets meaningful and reliable?

If you answered yes to any of the first four questions and no to one or more of the last two you probably realize that you must make a change in this process. You also realize that you are not alone which explains why many people responded to this question on Proformative.com and why the topic of cash flow forecasting is popular on that site.

What surprised me was that a good number of the answers were focused on developing a more robust spreadsheet approach to solving this problem, convinced that the spreadsheet is the answer to this challenge; some claiming that they have a model that works and is able to provide a forecast of the cash going in and leaving the organization.

What about the sources of this cash, or the inflows and outflows of cash into and out of each of the three main categories and in each forecasted accounting period? And what about the one or two people who suggested that a cash flow projection can be easily obtained if you have a reliable forecasted Balance Sheet? But how do you reliably forecast a Balance Sheet, complete and accurate and always synchronized to your P&L forecast?  Do you use another home grown Excel model to do that?

As I have written before on this blog and in other forums, Excel is a fine application with a tremendous amount of power and features. One, however, must understand its limitations (and their own limitations in using this application) when using Excel in certain financial processes such as financial reporting, planning, budgeting and forecasting, processes that should always include a Balance Sheet and a Statement of Cash Flows. The blog post titled “Should Excel be Expelled” touches on this idea.

It seems to me that many finance professionals, greatly skilled in using and programming Excel, don’t realize that much of Excel’s apparent power and seemingly endless features may lead to a false sense of believing that anything can be done with the software. This results very often in gigantic models being developed, incorporating many workbooks containing many worksheets each. The risk of having material errors in these models increases exponentially as the complexity of the model increases. To that add the often lack of documentation and rarely used change management controls, even in large organizations, and you begin to see the magnitude of these unmitigated risks.

Even in a perfect world with perfect Excel programming, a robust internal control environment and other positive factors, a cash flow forecast, or more accurately, a forecasted Statement of Cash Flows cannot realistically be modeled in Excel because it requires a complete and accurate forecasted Balance Sheet, perfectly synchronized to the P&L budget model. My blog posts “Can you Really Forecast your Cash Flow?”, “Forecasting a Balance Sheet in a Spreadsheet World”, and “Why you Must Forecast your Balance Sheet(and Part 2), further explain these concepts.

To me it makes a lot more sense to implement a purpose designed solution to accomplish the tasks of planning, budgeting, forecasting and analytics. Many of the blog posts on this site cover this critical set of business processes. Before embarking on new, complex projects, we need to realize Excel’s strengths and limitations, and our own challenge of controlling our desire to solve any problem with this tool.

The Dreaded Statement of Cash Flows

How you can automatically generate an actual Statement of Cash Flows regardless of what ERP software you use

Those who have experienced the manual preparation of a Statement of Cash Flows using beginning and period end Balance Sheets plus a periodic Income Statement know that this can be a chore and can cause a little confusion along the way with figuring out how to place the different numbers in the designated sections of this statement.

Fundamentally, the preparation of a Statement of Cash Flows is not that complicated and you would expect all accounting and ERP software vendors to provide a working template with each installation. Many of the software solutions targeted at the small to medium size companies not only do not provide such a template but are not capable of programing this statement and as such, a Statement of Cash Flows is not available to users of these software packages. The result is that a Statement of Cash Flows is not produced in many small and even medium size organizations.

Many companies that are required to submit a periodic Statement of Cash Flows, either because they are SEC filers or their lender asks for it, must produce this statement manually for each required period.

I’ve talked to several ERP software vendors and their typical response was that their GL software was not designed to automatically produce a Statement of Cash Flows because there is no way to tag each GL account with the proper treatment for this statement (i.e., how to use each specific GL account activity or changing balance in the compilation of this statement). This confirms that users of these vendors’ software have to perform this chore manually; that is, if they care to do it at all.

I’ve devised a way to automatically produce an accurate and complete Statement of Cash Flows, in each required period, regardless of what ERP software is used and whether or not its GL can accommodate this statement. To do that I use Budget Maestro from Centage Corporation which is a planning, budgeting and analysis software, primarily designed for small and medium companies in a variety of industries, where actual and budgeted financial statements and various reports can be generated in almost real time from available actual accounting and operations data and existing budget and forecasting data.

Budget Maestro was designed to produce all three major financial statements: An Income Statement, a Balance Sheet and a Statement of Cash Flows for every period included in every version of the budget implemented at the company and consolidated across all business entities that make up the organization.

As such, these financial statements are also available in a special version of the data known as Actual Plan. Here, actual accounting data (e.g., period-end Trial Balance) populate this Actual Plan through an export from the ERP GL or via a direct link available for several of the more popular SMB ERP software.

If you transfer your closed period (e.g., month) GL account balances into the Actual Plan in Budget Maestro (something you really need to do to be able to perform analysis of Budget vs. Actual), you will automatically gain access to all three financial statements (plus many other reports you can set up in the system). The actual Statement of Cash Flows will automatically be generated and available to publish. It will be complete and accurate and you will have the choice between using the Direct Method or the Indirect Method.

The secret to accomplishing this in Budget Maestro is careful planning of the chart of accounts and reporting format. This should closely match the setup of your actual GL and its reporting hierarchy. From that point on it is only a matter of periodically performing the data transfer and updating Budget Maestro with any changes to the chart of accounts as they occur in the ERP GL.

Existing and new users of Budget Maestro now have a viable and practical option to generate an actual period Statement of  Cash Flows. This should no longer be a mystery to many accounting and finance managers and depriving company executives of vital information about the financial performance of their organizations should no longer exist.  Furthermore, by using Budget Maestro as an all-encompassing budget solution, The Benefits of an All-Encompassing Budget, company managements can finally gain real insight into the future financial health of their organizations.

The Benefits of an All-Encompassing Budget

Why using inadequate tools and approximating the balance of forecasted Balance Sheet accounts is a bad approach for budgeting

I recently had a discussion with a colleague who is a partner in a local management consulting firm about organizations’ attitude toward the planning and budgeting process and the benefits they reap from these activities. I expressed my views on how a proper budget should be prepared and why it is vital to budget the entire chart of accounts with the benefit of obtaining a complete set of future period financial statements. I further explained that all accounts that contribute to creating the Balance Sheet must have their balances updated throughout the budget period, performed through increases and decreases (debit and credits) which are derived from the forecast of revenue and expense accounts (Income Statement accounts).

The argument against doing this was (according to this person) that you can use a spreadsheet to forecast the ending balances of all critical Balance Sheet accounts using simple assumptions and the data from forecasted revenue and expense accounts. He recognized that this would be a rough approximation of  account balances but argued that since most budgets are not accurate anyway and companies almost never hit their revenue and expense targets, even if there was a way to accurately and completely forecast the Balance Sheet and Statement of Cash Flows, they would be inaccurate due to the inaccuracy of the revenue and expense account balances all due to bad assumptions, inaccurate budget data supplied by the various reporting entities and other reasons.

The reason I bring up this subject is that I have heard these arguments before from finance executives and professionals who were tasked with preparing their companies’ annual budgets but not given the appropriate tools to do so, added to old traditions, misconceptions and workloads only allowing these people to repeat traditional processes without taking the initiative to look for more advanced ways to obtain meaningful and useful results.

If you accept the fact that budgets are never accurate and therefore no additional effort should be put into forecasting what really matters (e.g., cash account balances, other assets and liability account balances, etc.) than you are left with repeating the same budget process chores year after year with little or no benefit to the company. With this attitude, how can we expect company managements to make solid business decisions, let alone have insight into the future financial health of their organizations?

It is true that advanced software solutions such as Budget Maestro by Centage Corporation can produce inaccurate budget period Balance Sheets as compared with the actual accounting Balance Sheets. Of course, the forecasted P&L will also be different than the actual period P&L. But these forecasted Balance Sheets and Statements of Cash Flows are always going to be accurate and true to their corresponding forecasted Income Statements through the built-in logic and automated journal entries that ensure that each Balance Sheet account’s balance is correct.

If you are approximating or grossly estimating the balances of your forecasted Balance Sheet accounts through use of spreadsheets or purpose designed Planning and Budgeting software solutions that behave like spreadsheets (e.g., require user supplied formals and links and with no built-in business logic and automated journal entries) your errors are likely to be compounded by the errors in the forecast of revenue and expenses.  Essentially, what you get is an inaccurate P&L forecast driving a flawed Balance Sheet forecast causing its account balances to be removed from reality; that is if the Balance Sheet is forecasted at all.

In contrast, if you use a solution that ensures your forecasted Balance Sheet and Statement of Cash Flows are systematically complete and accurate by the nature of the system logic and automated forecasted transaction processing, you can focus on good planning and budgeting with built-in tools and business logic that will allow your P&L forecast to be complete and reasonably accurate; as accurate as your assumptions. The accuracy and completeness of your forecasted Balance Sheet and Statement of Cash Flows will follow and match the accuracy of the Income Statement.

That is a giant leap from traditional budgeting approaches, those based on tradition, bad habits and inferior tools. I think it is time to evaluate the new alternatives.

Don’t Deprive your Company Management of Meaningful Financial Information

Why you must make sure financial information is periodically, timely and properly communicated to those who really need it 

There are many blog posts here that focus on how important accurate and complete data is in assessing the financial health of any organization, past, present and future. I’ve also written on more than several occasions on how critical it is to employ the right tools in analyzing financial data spanning historical periods, the current fiscal year and all future periods presented through a plan and budget.

All these data, when correctly used, can provide insight into the company’s performance and even project the financial direction it is headed in and influence the decisions that management must make along the way, such as:

  • Will the company be able to continue and sustain its growth (given that marketing and sales opportunities are executed according to plan)? Are specific changes needed to achieve that?
  • Will it have the cash required for this growth? Will it require additional financing? When? In what amount?
  • What additional employees are going to be needed? In what departments? When?

Or conversely:

  • Will the company have to restructure its operations anticipating a downturn in the economy? Will the workforce have to be reduced? How? When?
  • Will new financing be required in order to be able to weather this economic downturn?
  • Will selling of certain assets be required? When?
  • Is the company facing new competition? Will it need to change its strategic and operational plans?

There is little doubt that such important decisions must be supported by reliable facts; this is true both personally and in business. Simply relying just on experience, intuition or speculation usually does not work. We all see how even large organizations make poor choices and decisions (this is usually discovered months and sometimes years later). We witness badly executed acquisitions (or acquisitions that should not have been made in the first place) and expansions into new product lines and new territories without proper research and analysis of existing data and business intelligence. We observe decisions that were not based on facts or reliable data, or due to inability to properly read and understand that data because of lack of a structured analytics process or poorly chosen tools for this job.

Yet finance executives and professionals are tasked with providing management with this needed information, delivering presentations that are both complete and accurate and also easy to understand.

I’ve seen organizations that had the need and opportunity to set up financial tools that would achieve analysis and reporting excellence, but decided not to. They were simply too wrapped up in their daily work, period end closes and delivery of internal and external reporting. Added to that was tradition and taking the path of least resistance which was often doing the same thing they have always done and were comfortable doing.

This is when finance leadership, driven by a progressive CFO, Why CFOs Need to Adopt Financial Analytics) can make a tremendous difference. They must break the old pattern of doing what they have always done, usually limited to collecting and compiling budget data only pertaining to revenue and expense items, while frequently not even comparing it to actual results and certainly not in a timely manner. A much more progressive approach, which surprisingly does not take more time or resources to complete, yet affords management the right information they need: Why you Must Forecast your Balance Sheet Part 1 and Part 2, every accounting period and in concert with actual accounting results for each closed period and immediately after each close.

When company CEO’s are measured by their organizations’ results and often are replaced when expectations are not met, it is vital that those who lead the organization are given the best possible view of their organizations’ performance, through meaningful reports and presentations obtained from a comprehensive data delivery system, Analysis of Everything that draws from past, present and future (forecasted) data. With a proper system setup, there is no reason why company managements should be deprived of critical information needed for them to successfully lead their organizations.

Head in the clouds

Get Your Head in the Cloud

An easier approach to budgeting, planning, and forecasting

I recently started using Microsoft Office 365 with both on-premises and web based versions and cloud storage of data, accessible from any computer, anywhere as if the data were stored locally. I must say that after a few days and as my skepticism subsided I began to really like this approach (I have been exposed to web-based software solutions for several years now but only in large corporate environments). My experience with certain web based software applications was far from pleasant and with the not very intuitive user interface where hundreds or even thousands of menu items and options were scattered across many web pages I constantly ran into a serious navigation challenge each time I was logged into these applications.

When I found out that Centage Corporation was offering a Cloud version of Budget Maestro I decided to try it. I was assured that the user interface was identical to the desktop version, and all I needed was an Internet connection. I was sent an e-mail with the download link of the VMWare Client which I had to install on my desktop computer, or any device I wanted to be able to access Budget Maestro from. I downloaded the file and installed the VMWare client and within minutes I had access to the latest version of Budget Maestro that looked very familiar and ready to go.

Then, with a simple copy and paste function I moved all my plan files to the directory I chose on the network and from there I was able to restore each plan into Budget Maestro (Cloud Version). This whole process was easy as all I had to do was copy files in a familiar environment.

Then I installed the VMWare client on an additional computer, my MacBook Pro. Same great experience as before. This time I didn’t have to copy any plan files since everything was already there. Within minutes I was up and running.

Today, when I started Budget Maestro (Cloud Version) I had a pleasant surprise. I was prompted that my plan version was older than the application and whether I wanted the program to upgrade my plan file in order to make it compatible with the latest maintenance release of Budget Maestro. I replied with a yes and within a few seconds my plan was upgraded and I was able to enter it. I confirmed that the cloud version was higher than my desktop one and realized how great it is to always work with the latest release and have my data files always compatible with this release. Now I have to download the latest version to my desktop computer and reinstall the software, a slight inconvenience.

My next endeavor will be installing the client application on a tablet and maybe on my phone, although I can only imagine that using a phone to access Budget Maestro is mainly meant for viewing data and not for serious data entry and editing.

It’s been over a month now and I can’t speak highly enough of this software solution’s delivery method. Now I have the latest version of Budget Maestro always there and one set of data files – always the most recent versions. The user interface is identical to the desktop version – nothing new to learn. There are no IT issues to be concerned with and access is available globally, anywhere there is an Internet connection. I also verified that the software works great with slower Internet connections (lower bandwidth) which is occasionally the case when I travel.

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”.

CFOs in the Spotlight

I’ve been getting a lot of e-mails from Proformative.com reminding me of the CFO Dimensions conference, held this year in New York City in Mid October and targeted at senior finance professionals from many industries. The focus of this year’s event, as listed on the Proformative.com website was: “The evolving role of technology and leadership in finance”, with the theme of this conference being “The CFO as Chief Future Officer”.

I didn’t plan on attending this event but can imagine that a good portion of the discussions was centered on why and how CFOs should pay careful attention to available data, using analytics, in order to arrive at reasonably accurate and reliable predictions of the future financial health of their organizations.

CFO Dimensions is just one recent example. There are many more activities, seminars, webinars, white papers and other information, mostly contributed through the Internet, informing readers of the important role CFOs have in leading their financial organizations and in partnering with their organizations’ CEOs and other executive management members, helping their companies navigate their charted course, at times through rough waters, but with confidence and decisiveness, only possible with access to and proper interpretation of reliable data.

I’ve been in finance and accounting for a long time now and don’t remember the use of the CFO title when I first started. In fact, none of the C-Suite titles, as they are known today, existed.  I was recently amused to learn about a technology company that had, in addition to its CEO, CFO, CTO, CIO and COO, also a Chief Talent Officer. I assume this is the head of Human Resources but not sure if it is also abbreviated CTO, or maybe CTO2?. The company also had a Chief Digital Officer (the Analog days must be over for good).

I suppose these C-Suite titles are only limited to one’s imagination, but there is an important message here: The creation of specific and defined organizational leadership roles in certain areas where the organization’s excellence as a whole is the combination of the levels of excellence of each of these areas with the “Chief” in charge defining and maintaining that excellence. The CFO’s office is such an area, arguably one of the most important in any organization.

I’ve been writing about the changing CFO role on this blog for a while now. The entries titled “CFO’s Revised Job Description“, “The Ideal CFO Skills”, “The CFO’s Big Picture” and “Why CFOs Need to Adopt Financial Analytics” are good examples and are reflections of the gradual change of the role from purely accounting to everything finance, accounting, reporting, legal and compliance. To that add HR and IT which also are starting to become the responsibility of the CFO and you’ll begin to realize how much a company is dependent on its CFO, his or her skills, experience and attitude toward the job.

As seen by our readers in prior blog entries, there is one area that CFOs must pay close attention to and do it continually and consistently: Analytics.

The information technology has advanced to a point that any data generated by the organization, in any areas of operation, plus all the data generated through the execution of a strategic plan, an operational plan and a budget, plus re-forecasting of that budget data, is available to be presented to the CFO in exactly the format and presentation style he or she desires. Now the CFO can have insight into past, present and the anticipated future performance of the company, and with that, also into the future financial health of the organization.

Modern day software solutions can provide such insight. Budget Maestro‘s Analytics solution, Analytics Maestro is such an application. By using and relying on such a solution, CFOs will certainly be in the spotlight.