Tag Archives: Budgeting Software

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

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

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

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

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

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

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

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

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

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

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

 

Has your Planning, Budgeting and Analysis Process Reached the Finish Line?

Why most planning, budgeting and analysis processes are incomplete and what you can do to change that

There is a common saying that doing the same thing over and over and expecting different results is the definition of insanity. We don’t know who came up with this saying, although Albert Einstein, among several other notable individuals have been credited with the origin of it.

I don’t entirely agree with this definition and imagine it is inaccurate from a clinical standpoint, but understand well that continually performing the same set of tasks and settling for a limited set of results may often be fruitless and in the case of finance operations a poor way to achieve certain goals and deliver meaningful results to management.

One example that really stands out is the planning and budget process that usually begins several months before the start of a new fiscal year and for many companies ends around the beginning of the new fiscal year. This is a mystery to me since I always believed that this process should be a year-round process, always incorporating periodic analysis of actual results vs. budget with periodic reforecasting as needed following the analysis, as well as a clear forecast of the future financial position of the company, derived from the budget and its periodic re-forecasts.

This means that the planning, budgeting and analysis process should be an integral part of finance operations and never stop when the annual budget is approved and the new fiscal year begins.

For some reason, perhaps more than one, this is not the case in many organizations. It’s like running a race and dropping out before reaching the finish line and not for any medical reason, like exhaustion, but simply because of not realizing that there is a finish line ahead. This analogy may seem strange but helps to illustrate this phenomenon.

I’ve seen more than a few very skilled financial analysts and finance departments equipped with powerful modelling and planning software solutions, spending an incredible amount of time developing elaborate revenue and expense models, with massive consolidations of dozens of business units’ budget worksheets. These were presented in a budget book for management to review and approve, at which time the budget process was complete, with the same type of activity repeating year after year. Some companies used their budgets year round to compare with the actual results but to my mind few of these organizations actually reached the finish line.

Where is the finish line in a finance department’s budget process, or more importantly, what is that finish line?

My view on this is that the traditional planning and budgeting process is only one piece, though essential, in the entire process The Benefits of an All Encompassing Budget. Adding periodic analysis of budget and actual data is the next logical step towards a complete and useful process, but one more very important step must exist in order for the finance department to be able to claim that they crossed the finish line.

That step is willing and actually being able to forecast the organization’s Balance Sheet and have that statement always synchronized to the forecasted Income Statement and all budget data and assumptions used in building the budget model. This is essential, and only by having an accurate and complete Balance Sheet for every period in the budget, can management asses the future financial position of their company.

With the forecasted Balance Sheet comes the benefit of having a complete and accurate forecasted Statement of Cash Flows, an indispensable tool that no business owner or manager should be without.

Most finance organizations don’t cross this finish line, at least not yet. Those that do, rely on the next generation of planning, budgeting and analysis software solutions that are becoming more available to even small and medium size companies. You must, however, be careful when selecting such a software solution, as you must choose an application that is an extension of your actual accounting GL, one that uses its own, independent GL Why Have a General Ledger in a Budgeting Software? where future budget period transactions are automatically made by the system, from your supplied budget data and company business rules entered in the software.

Other solutions that don’t have a built-in budget GL will never be able to achieve accuracy and completeness of the Balance Sheet and the Statement of Cash Flows. They may be able to arrive at a rough approximation of account balances through high level formulas but this should not be relied on for critical decision making.

By now you certainly realize that expecting different results from your current process is not going to happen unless you are willing to change your outlook about the process and acquire the right tools in order to be able to affect the change. Only when you do that, can management start to receive the data they urgently need to make more accurate and timely decisions. Only then, can you confidently say you have crossed the finish line.

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.