How a 500+-year-old Accounting Method is Automatically Employed to Create an Accurate set of Forecasted Financial Statements
By Alan Hart, MBA
In my post on how you can forecast your cash flow and all other balance sheet account balances, I was describing a breakthrough budgeting and forecasting technology, designed specifically to enable users to generate accurate forecasted financial statements, compiled from a forecast of their entire chart of accounts. In this installment, I’m going to show you how it is done.
This software application from Centage Corporation (www.centage.com), titled Budget Maestro, is like no other, and the best way I can describe it is: “A Future Extension of the Actual Accounting System”, since it uses a built-in general ledger, where every input of budget information causes the software to automatically make all required journal entries, in all the correct GL accounts, in the right amounts, and in exactly the right budget periods, just like a regular computerized double entry accounting software, except that Budget Maestro makes these entries in future periods.
Some of the main ingredients of this system are:
1) A chart of accounts representing the organization’s actual chart of accounts.
2) A set of business entities representing the organization’s structure and to which one can assign the required accounts used in the budget.
3) An extensive array of business rules represented in menu items and pull down lists that can be individually selected and tailored to every single budget item. These include, among many attributes, unlimited spread methods, based upon assumptions, seemingly unlimited number of drivers, recognition methods and payment methods (A/R, A/P payment terms).
When you have the GL accounts assigned to your business entities and enter your budget items (revenue, expenses, fixed assets, personnel, loans, etc.), you select the business rules that match your requirements, and the way your business operates. You can create additional rules and add them to the existing pull down list, all without entering a single formula, link or programming code.
One of the great features I find in this software is the ability to assign individual payment terms to all revenue and expense items as well as other forecasted items (e.g., fixed assets). For example, you forecast exactly how each individual sales item is going to be collected from its customers (in 30 days, 60 days, 90 days, etc.).
Similarly, you tell Budget Maestro exactly how you plan to pay for each budget item. For example, in 30 days, 60 days or any other payment schedule you find on the A/P payment drop down list. If you don’t see it there, you can create your own schedule, which is added to the list for later use.
As soon as you are done with selecting the business rules and finish working on an individual line, the entire model is updated. A set of journal entries is made into the Budget Maestro GL, and these entries immediately appear on all forecasted financial statements, ready to be displayed or printed, without any programming or formula work.
Here is the most remarkable part: These automated journal entries, which occur in response to every single budget item entry, use the standard double entry accounting method. All debits and credits are automatically made for you in all the right GL accounts, in all the budget periods where they belong and, of course, in precisely the right amounts, as driven by the forecast and business rules you chose for each individual budget item.
Since all the accounts that appear on financial statements and other reports get their balances updated just like an actual accounting system, the resulting financial statements (Income Statement, Balance Sheet and Statement of Cash Flows) and other reports, are as accurate as the budget data, assumptions and business rules you chose. There is no approximation of cash balances and other balance sheet account balances – you get forecasted financial statements just like your actual statements, all error-free, and without programming or troubleshooting.
Now you can finally focus on creating the budget and using it year-round for its intended purpose.
Alan can be reached at (310) 384-1453 or firstname.lastname@example.org.