Tag Archives: budget data

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.

Budgeting Best Practices Just Got Better

What is missing from traditional “Best Practices” and how to change that

 I recently read an article by Barry Wilderman on SearchFinancialApplications.com (which is part of TechTarget.com) titled “Buying Software? Budgeting best practices come first”.  The entire article is available here. If you are not already a member you will need to register for this free site which encompasses many areas of technology and finance.

In this article the author focuses on the need to establish a budget process that borrows from best practices in this area of finance. The points given in the article are valuable and useful, however, there are a couple more critical areas that when observed and practiced will greatly complement this set of budgeting process best practices.

The most important aspect of the budget process is the usefulness and application of the budget with its analytics results in steering the company on its planned course. I’ve seen more than several organizations, some fairly large, where decisions were not supported by solid data; this data simply didn’t exist or was inaccurate or incomplete. Managements were often forced to use their experience, best estimates, intuition or perhaps no logic at all. Some of these decisions resulted in serious judgment errors with severe consequences to these companies.

We all read about companies who miss analysts’ estimates or come short of their own expectations. Some of the poor financial results are due to bad or inadequate planning, some due to unanticipated changes in the economy or customer demand, and some to historical poor analysis of actual company performance as compared with forecasted performance.

One of the most critical “Budgeting Best Practices” should include a complete and accurate forecasted Balance Sheet and Statement of Cash flows, without which management can’t make a fair assessment of the future financial health of the company.  Another is an analytics process that uses historical, current and budget data and displays the results in a manner allowing managers to quickly see and understand the data. I have already discussed these concepts several times on this blog in such entries as: Why you Must Forecast your Balance Sheet, Part 1 and Part 2, Why CFOs Need to Adopt Financial Analytics.

I agree with the points conveyed in the TechTarget article mentioned above but regardless of how well thought out and executed your budgeting process is you must make sure that these “Best Practices” and the actual software application you use are able to assist management in gaining insight into the future financial health of the company and in making the right decisions timely and with confidence.

Are you Challenged Managing your Annual Software License Fees Renewals?

How you can have Budget Maestro manage this task with ease and accuracy

All organizations rely on software products in their daily operations across all departments and business segments. Enterprise software ranges from ERP, accounting and finance applications to engineering, CAD, CAM, marketing and sales automation and also includes the software I am using to write this blog article.

Most software vendors structure their revenue streams to charge for an initial perpetual license fee based on the number of users, number of sites, options licensed, and some use the gross revenue of the business as a basis for the licensing fee.  Then, on an annual basis they charge their customers an annual maintenance fee, usually in the range of 10% to 20% of the original perpetual license cost.  Software licensing sold using the SaaS (Software as a Service) model requires a subscription, usually billed annually in advance of the service period.

The perpetual license fees should be treated as a fixed asset with a certain life, usually 36 months which can be run through the dedicated Fixed Assets software.

What about annual renewal fees and subscription model expenses?

Here, again, one can use Budget Maestro to set up a special plan to track these expenses, amortize them over a 12 month period, and most importantly know exactly how much to charge the software licensing annual fee GL account in each period, while updating the prepaid license fees account.

I just set up a simple plan to test this idea and I’m happy to say that it works great.

Here’s how I did it:

I created a new plan and set the calendar to match my fiscal year calendar.  I set the number of years to the maximum allowed.  With the advanced version of Budget Maestro you can have up to 30 years, but even the standard version gives you enough years so you won’t have to set up another plan for quite some time.

I set up a handful of GL accounts useful (but not required) in Budget Maestro and linked them to account groups to help with proper reporting. The most important account here is the “Annual Software License Renewal” expense account which I linked to a Depreciation Account Group.  Then, I created an Asset Group (the only one needed in this plan).  I set up a Depreciation Method I named Software License Renewals, gave it a one year (12 months) life with a Straight Line amortization and linked it to the “Annual Software License Renewal” expense account.  This means that all new entries will be amortized over the next 12 months and each period will show a reduction of 1/12 of the prepaid annual amount for each asset.

Now, as software vendors submit invoices for the following year’s renewals, I enter new “Assets” in the Budget Maestro Capital Assets Module.  I have my default set up to automatically assign these “Assets” to the only Asset Group I have in this plan, as well as the only Depreciation Method.  All I have to do is enter a Name, a meaningful description, the cost (from the vendor’s invoice) and the “In Service” date which will determine in which periods this new pre-paid expense will be amortized.  Users of Budget Maestro will immediately recognize these simple steps I am describing here.

This becomes very useful when there are many software licenses that have recurring annual renewals, all at different dates during the year and at different (and varying from year to year) amounts.  Budget Maestro then perfectly allocates the prepaid amounts to the proper periods for every item in the plan.  With a simple report I can see exactly the amount I must charge to the Annual Software License Renewal account while reducing the pre-paid asset account and maintaining a correct account balance every period.

While this is the way I decided to do this, I don’t see a reason why you couldn’t incorporate this function into your regular Plan and Budget, however, with a standalone system, you do not have to reload the software renewal fee items each time a new annual budget is created.

Other long-lived, intangible assets (e.g., Patents) can be tracked in a similar fashion and provide the data needed in order to make the required entries into the actual company GL.

All of these activities can be performed in a standalone, dedicated fixed assets software solution.  However, to me, having already licensed Budget Maestro, I can get all the information I need from the Budget Maestro reports and achieve accuracy and completeness in all the accounting transactions derived from these software license renewal fees activities, as well as all other tangible and intangible assets.

Of course, this text is not meant to provide any accounting, tax or other professional advice, only an observation for another great use of Budget Maestro, using the already licensed product and the number of users already authorized to use the software.

Are you Still Forecasting Only your Revenue and Expenses? Part 2

Can you tell if the budget you just put together is achievable?

In part 1 of this series we saw why a forecasted Income Statement is insufficient when preparing a corporate plan and budget. In this installment we will learn how we can make this plan and budget complete and useful to management on all levels.

The real question is how to reliably and consistently forecast a Balance Sheet given all the difficulties associated with this task. By now I believe most readers of this blog realize that using a spreadsheet is the wrong approach to forecasting a Balance Sheet, see Forecasting a Balance Sheet in a Spreadsheet World. In fact, this effort will be futile, as many finance professionals have discovered. There are companies that have a rudimentary forecasted Balance Sheet done in a spreadsheet; however, all critical numbers are a rough approximation of budget period GL account balances, and should not be relied on.

Many dedicated planning and budgeting applications allow their users to construct a forecasted Balance Sheet, however, users are required to program formulas, functions and links just like in a regular spreadsheet, and the results are the same as what you would get from doing this in a spreadsheet application (e.g., Excel). It seems to me that allowing users to program their balance sheets was an afterthought by the designers of these planning and budgeting applications. The result here, however complex the model, will only show rough approximations of key account balances (e.g., Cash, A/R, A/P).

I’ve looked at many planning and budgeting software applications that claim to be a departure from spreadsheets. In many ways they are.  In other ways their functionality is just like using spreadsheets: Tedious and time consuming programming of formulas and links, troubleshooting of errors, and the inability to arrive at an accurate and complete set of future period financial statements.

There is one main reason why most planning and budgeting applications cannot deliver a complete and accurate Balance Sheet: They do not treat the budget as an extension of the actual accounting system into future periods and they cannot accomplish that due to design deficiencies. To be successful at delivering an accurate and complete Balance Sheet, the planning and budgeting solution must operate like an actual accounting system and have its own General Ledger and subsidiary ledgers (revenue, expenses, fixed assets, debt, equity, etc.).

This can only be accomplished by having the planning and budgeting software make journal entries in its own “General Ledger” in response to all budget line data that has accumulated from all business units. A more detailed explanation can be found here, Those Debits and Credits. This GL must be linked to the actual accounting GL and mirror its accounts.

With the forecasted Balance Sheet accounts updated in each budget period with debits and credits, automatically posted by the software and reflecting all activity as dictated by the budget, you consistently get a complete and accurate Balance sheet for each period defined in the budget. The Statement of Cash Flows will be just as accurate and complete since it is generated from the forecasted Balance Sheet and Income Statement.

When you work with Budget Maestro from Centage Corporation you realize why automatically obtaining forecasted Balance Sheet (and of course an Income Statement and a Statement of Cash Flows) is possible. It is the only software solution I am aware of that employs this future period automated journal entry approach to generating accurate and complete forecasted financial statements. And they do it by design and not as an afterthought.

Are you Still Forecasting Only your Revenue and Expenses? Part 1

Can you tell if the budget you just put together is achievable?

If you are still budgeting and then re-forecasting only your revenue and expenses you may have run into a well known, yet often ignored phenomenon: Missing budget revenue targets due to cash shortages, inadequate credit lines, poorly timed financing arrangements, etc. This is very common during periods of growth, where a company must forecast its revenues and expenses required to achieve these growth objectives during the duration of the strategic and budget plan.

Companies that are in high growth industries and even established enterprises that cannot achieve very high gross margins soon find out that they have the potential to become very profitable but invariably run into one or more cash crunches along the way.  In fact, many organizations will not be able to deliver the results outlined in their budget for that reason alone. Of course, there are other reasons why companies miss their budget numbers but this discussion only focuses on poor and incomplete planning and budgeting.

Forecasting revenue and expenses is relatively easy if you have a solid strategic and operational plan. You can even do it using a set of spreadsheets, although I strongly recommend against it for many reasons, see my article Should Excel be Expelled?. The end result will be a forecasted income statement with columns of numbers for all periods in your budget. The trouble is that this is using accrual based accounting, which means that in reality a good portion of the forecasted sales in a certain period will bring in cash in a future period (in 30, 60 days or however many days each customer has to pay their invoices).

To make things worse, in order to make these forecasted sales you have to have inventory (if you are a product based business). This inventory must be readily available to ship in the period you say in your plan you will be shipping it. This means that you most likely have to either buy or make that product in a period earlier than the period the sale takes place. Now this implies that you had to spend cash either on the purchase of the finished product or on raw material, labor and outside services, with each one of these components occurring prior to the period in which the sale took place and with their unique payment terms.

Now consider forecasting new products or services that have not yet been developed and tested. Research and development expense that is often necessary prior to introducing new products will most likely show on the forecasted income statement; however, judging by the Income Statement alone you won’t know whether or not you will have the cash to perform these activities. If you are unable to complete R&D, testing, and any required certifications, etc., your new product availability may be delayed or the entire new product line may be cancelled, which in reality will result in not achieving the sales forecast for this new product line. The conclusion here, again, is that you need to have visibility into your cash balance during the budget period.

Will your forecasted income statement tell you whether or not you will have the cash to accomplish all that? Of course not. To do that you need a forecasted Balance Sheet and a forecasted Statement of Cash Flows which will further clarify where and when this cash is coming from (in what amount, from what source and in which period). Furthermore, these two statements must be tightly linked to the Income Statement and dynamically change as budget items affecting the Income Statement change, or as various versions and budget scenarios are evaluated. A budgeted profit and loss statement that most companies prepare annually will never accomplish that.

By now I hope I have you convinced that you must also forecast your Balance Sheet: Why you must Forecast your Balance Sheet Part 1 and Part 2. If you have a complete and accurate forecasted Balance Sheet and a forecasted Income Statement you can relatively easily compile a forecasted Statements of Cash Flows. Now you can have an insight into the future financial health of the company, and particularly into your cash needs along the budget timeline.

In the next installment we will see how a company can practically forecast its Balance Sheet using modern forecasting tools.