Tag Archives: Capital Assets

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.

Forecast and Monitor your Loan Covenants Compliance

How loan covenant compliance can be forecasted with Budget Maestro and Displayed by Analytics Maestro
There has been a recent series of blog posts on this site of why companies must regularly forecast their balance sheets Why you Must Forecast your Balance Sheet Part 2. There is also an older blog post on one of the benefits of doing that: Knowing whether or not the company will be able to meet its loan covenants imposed by their lender Will you breach your loan covenants?. In this post I would like to present a simple example demonstrating how Budget Maestro with Analytics (www.centage.com) can monitor both actual and budgeted loan covenants using Analytics Maestro with actual data collected by Budget Maestro from the ERP or accounting software and budget data provided by Budget Maestro from the budget plan(s).
The easiest way to explain this is by looking at a very common loan covenant that the majority of lenders use with lines of credit and other types of asset based lending. The typical language found in the loan agreement reads as follows:
“Borrower to maintain a Debt Service Coverage ratio of no less than 1.35 to 1 (this ratio can vary), evaluated quarterly. It is defined as the ratio of Cash Flow to Debt Service, where Cash Flow is defined as: The sum of net profit, income tax expense, depreciation, depletion, amortization and interest expense minus distributions, withdrawals and dividends. Debt Service is defined as: The current portion of long term debt plus interest expense.”
Using the above definition as expressed in the loan agreement we construct the following table using actual results from a fiscal year-end quarter ending on 3/31/2015 plus four budgeted quarters of the 2016 fiscal year: 
blog chart 7-27
The actual and four quarterly forecasted sets of numbers are derived from the Budget Maestro plan and presented by Analytics Maestro. Notice that the Current Portion of Long-Term Debt is derived directly from the forecasted Balance Sheet. Depreciation, Amortization and Interest are derived from the forecasted Income Statement but are dependent on activities occurring within the forecasted Balance Sheet that depend on asset acquisitions, sales and disposals, and changes in borrowings that affect the Interest Expense. These are part of the budget model and are entered through the Capital Assets and Financing modules in Budget Maestro.  As you can see, Budget Maestro handles all this automatically and all forecasted financial statements are seamlessly interlinked, just like in an actual accounting system.
Using Analytics Maestro, both actual and forecasted numbers can be represented in a template, similar to our example template, formatted any way you like, with charts, graphs and other custom formatting. Then, when an accounting period is closed, your actual data will display within this Budget Analytics template, along with all forecasted data. The table shown above is an example of data available in Budget Maestro and used by Analytics Maestro to display the actual and forecasted Debt Service Coverage ratio defining this loan covenant.
In our example, you can clearly detect a deterioration of the Debt Service Coverage ratio.  In the last forecasted fiscal quarter, ending on 3/31/2016 the ratio drops to 1.53, not much higher than the minimum required 1.35 ratio.  This is a concern since additional deterioration of this ratio can cause the company to breech its loan covenants and may result in the lender calling the loan or in other adverse consequences to the company.
However, with Analytics Maestro you see this well in advance.  Note that in this example you’ll be able to display this ratio monthly if that’s how you set up your plan in Budget Maestro (although in this example the lender only requires a quarter-end analysis of this ratio).  Now you can revisit your plan objectives, goals, assumptions and drivers, as well as all data supplied by business unit managers and other data used in building the budget. You can contemplate changes, rethink some of the initiatives and implement changes in the business that will result in maintaining a healthy ratio.  For example:  Maybe declaring a cash dividend for the next fiscal year (2016) is not such a good idea.  Removing the dividend will improve the ratio and create a higher safety margin. 
This approach is true for any changes that must be made in response to forecasted results of not just the P&L but the entire chart of accounts. As we have seen in many of the posts in this blog, real visibility into the future financial health of the company is greatly dependent on the ability to budget all balance sheet accounts and have a way (e.g., via Analytics Maestro) to properly display this forecasted data.
Another idea would be to use the what-if analysis feature available in Budget Maestro.  You can also have multiple plans created as part of the budget model, and applying each version can further assist you in analyzing how this loan covenant ratio behaves with each version of the plan.
The benefits gained through using Budget Maestro’s integrated financial statements, including a complete and accurate forecasted balance sheet cannot be over-emphasized.  Seeing and understanding your company’s future financial health in Analytics Maestro should be one of the most compelling reasons for implementing this software solution. The example in this blog post illustrates only one of the many uses of this software and how important it is to have the right tools at your disposal.