Tag Archives: Budgeting and Forecasting Software

A Reasonable Approach to Headcount Forecasting

head count forecasting
Don’t make the process more complicated than it needs to be

A while ago I saw a discussion on Proformative.com centered around the topic of headcount forecasting and people looking for advice on implementing a super-powerful model (in Excel, of course) to allow their finance and HR departments to forecast the need for employees in various areas of the business and when those employees would be needed.

HR needs this information in order to plan their recruiting efforts; when to advertise for open positions, when to schedule interviews and several other activities that must be planned in advance in order to successfully hire the most qualified persons for all open positions.

Finance, on the other hand needs this forecast in order to budget payroll and payroll related expenses. These forecasted expenses, an integral part of every corporate budget, must be reasonably accurate and reflect growth and any changes contemplated and communicated through planning and budgeting.

Designing and implementing a headcount forecasting model is no trivial task using a common spreadsheet application such as Microsoft Excel. In addition to the many global assumptions and a myriad of formulas, functions and links, the model must be capable of expanding as needed and be sufficiently documented so any reasonably skilled Excel user can take over and continue to maintain it. Another requirement, hardly ever present in most companies, is periodic audit of the model plus the need for a set of internal controls, designed to mitigate potential risks to the model resulting from formula errors, broken links and other assumption related errors.

This is no different than using spreadsheets to build other pieces of the corporate plan and various budgets, but may actually be even more challenging due to the dependency of the headcount on other areas of the plan, such as revenues, inventory requirements, etc.

For example, in a manufacturing environment where the direct labor force represents a large percentage of the total headcount, the number of production employees is directly dependent on sales budgets, or more accurately the making of inventory in the budget periods driving sales revenue, since making of inventory is the activity that requires the labor force.

Is there a reasonable approach to forecasting headcount?

The only reasonable approach is to abandon the use of spreadsheets for all kinds of forecasts that are incorporated into corporate budgets. Many organizations, even SMBs (Small and Medium size Business) have already come to the realization that use of spreadsheets for budget work is a bad idea. This has been covered here in this blog in much greater detail Replace Excel with a Dedicated Planning, Budgeting and Analysis Solution and Forecasting a Balance Sheet in a Spreadsheet World.

Forecasting headcount is no different. You need a system with built-in business logic, giving you the ability to make the headcount dependent on other factors (e.g., sales forecasts and their dependent inventory requirements).

By using existing, company developed KPIs, such as production employees per unit of revenue (e.g., number of production FTEs per $1MM in gross sales of manufactured inventory, number of FTEs per $1MM of inventory (at cost), produced in a period, etc.), you can link your needed manufacturing headcount to the sales forecasts. If required, inventory production can be made dependent on sales forecasts, allowing you to have a forecast of production FTEs in each period of your budget.

A popular SMB software solution, Budget Maestro from Centage Corporation can accommodate all these needs and will allow even a small organization to forecast its employee headcount requirements with tight dependency on inventory production needs or any other drivers applicable to its business. Of-course, the entire corporate budget should be prepared using this software solution, and there is not a single formula or link that must be provided by the users since all business logic and accounting rules are already built-in and ready to use Business Logic and Accounting Rules Built into the Budget.

With such compelling reasons to abandon spreadsheets in favor of a dedicated solution in the preparation of a corporate headcount forecast and all other budget elements, the whole process can be moved into an environment specifically designed for this purpose.  Struggling to scale and maintain a set of unwieldy spreadsheets and with limited output usefulness will become a thing of the past.

Should I Forecast my Inventory Requirements?

Why having the ability to plan inventory needs is important.

Inventory is one of those things that you never seem to have the right quantity of.  You either have too many of certain items in stock, or you constantly get caught not having sufficient quantities of other items that for unknown reasons generate customer demand in inverse proportion to the stocking levels of these items. What to do…

Play it safe and keep higher stocking levels, usually done with increasing the minimum stock quantities or establishing safety levels for certain items, and you are unnecessarily tying up cash in inventory and using additional storage space that could be put to better use, both of which having a negative impact on finances and operations.

Only purchase minimum inventory levels that you know will be in demand and you will get caught in shortages of material, parts and other finished goods your customers may be looking for, often not accepting your proposed long lead times. The result is frequently losing sales to competitors who have a better optimized inventory system or perhaps more sophisticated purchasing rules and policies.

It’s been said by many people that maintaining the right inventory levels is more of an art than science. At a minimum it requires experience and tremendous discipline in managing, tracking and re-ordering inventory items. This is also true for in-house manufactured items.

Whether inventory control is an art or a science, it still requires a well designed and implemented inventory control system, usually incorporated into the company’s ERP software solution. A warehouse management software application can also be employed and be part of an integrated enterprise software.

MRP (Manufacturing Requirements Planning) is a very popular software application, also part of an ERP implementation, which looks at customer demand (as evidenced by entered sales orders) and recommends, using business rules and other system settings, when to replenish certain inventory items, how many to purchase; suggests vendors to purchase from and more. It can also suggest processing quantities of in-house made items, when to start production and what materials must be purchased for these proposed production work orders.

MRP alone cannot be the only tool to forecast inventory needs, as it only takes into consideration existing customer demand. With the assumption that an annual budget and periodic reforecasting of sales and expenses exists, the budgeted sales imply that certain inventory items, either purchased or manufactured, will be needed in certain periods of the budget year. These will require procurement of materials and finished goods as well as scheduling labor and work centers in order to meet the sales forecasts. The output of this budget and reforecasts can be an additional input to the MRP system where in-house sales orders can drive MRP to perform as if customer demand already existed. In this setup, products shown in the budget will drive the “make to stock” process, anticipating customer orders.

For those who use Budget Maestro published by Centage Corporation, and for anyone in SMB (Small and Medium size Business) who is looking to implement an all-encompassing budgeting and planning solution, the sales module provides a powerful inventory option where inventory needed to fulfill sales can be planned using revenue item forecasts.

If Inventory is enabled in the revenue line properties, one can enter the beginning unit quantity, indicate whether or not Budget Maestro will replenish the inventory required by the sales forecast and if so the Min / Max replenishment levels as well as the order quantity multiples. Another nice feature is the Lead Time attribute that can be set specific to each inventory item and will assist the system to automatically calculate when these items must be ordered.

Although this is not a true and complete extension of the MRP software into the budget periods, Budget Maestro allows its users to forecast their inventory needs based on forecasted revenue in the sales module. As these revenue forecasts are updated, the inventory requirements will follow these revenue forecast changes.

As is always the case in Budget Maestro, every change you make in the model will cause all system generated forecasted financial statements to change accordingly. For example, as revenue line amounts or spreads are adjusted, inventory valuations of all affected items will change on the balance sheet (i.e., total inventory valuation will reflect the specific changes in individual inventory items affected by the budget update). Of course, specific reports pertaining to revenue forecasts can be produced independently from financial statements and greater detail of revenue items can be displayed.

Inventory forecasting is hard to do but given the tools we have at our disposal I think it would be wise for every Budget Maestro user to take advantage of these features (available in the advanced version) and put them to good use. It will certainly take some of the guesswork out of the “art” part of inventory forecasting.

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 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.