Tag Archives: ERP Software

Stop Programming Business Logic and Accounting Rules in Your FP&A Solution

FP&A

Your ERP software doesn’t ask you to do that—why should your financial planning and budgeting solution be different?

Every accountant I’ve met has admitted to me that he or she had difficulties with manual, double-entry accounting principles when they first started out: they struggled with what GL accounts to use for a particular transaction, and more importantly, the transaction’s correct orientation, i.e., assigning amounts as either debits or credits in journal entries.

If you’re like me, you’ve had your share of journal entries that posted in the opposite direction of what you expected, requiring a reversal of the original entry and redoing it the right way.  That is if you caught these errors. I’ll never know how many manual journal entries with these issues have gone undetected or hopefully were caught later in a review or audit.

To make my life easier when making journal entries, I came up with a ‘Universal Cheat Sheet’ many years ago to assist me with assigning the proper orientation to manual journal entries. It covered all possible journal entries in all areas and provided the correct debit/credit journal orientation. I just found an old graphic representation of it, and it looks like this:

Microsoft Word - Stop Programming Business Logic and Accounting

I remember using this cheat sheet when making manual entries and not having to rely on memory. With experience, I was able to abandon this tool, learning to assign proper credits and debits to all entries on my own.

Now all modern accounting and ERP systems with an integrated GL are internally set up to cause all possible system transactions (e.g., sales, purchases, payments to employees, sales of assets, etc.) to automatically post to the correct GL accounts using the correct debit/credit orientation. The accounting department still performs a handful of manual journal entries, but the quantity pales in comparison with the vast number of automated journal entries originating from all enterprise activities.

With today’s computerized accounting systems, automatic postings of all enterprise transactions to a consolidated GL with accuracy, consistency and precise adherence to GAAP rules is expected, regardless of company size and the solution employed. It follows that finance’s planning and budgeting software solutions, entrusted to produce forecasted financial statements and other forecasted reports, should follow the same principles.

However, at the time of this writing, most planning and budgeting applications still expect their users to build their model using formulas, functions and links (just like in spreadsheet modeling) and there are no internal accounting rules forcing budget data to affect forecasted financial statements the way their accounting system counterparts do.

But I see a new trend emerging, one where enterprise planning and budgeting software solutions employ accounting rules, some of which are shown on the cheat sheet displayed above. These rules are built right into the software, causing all budget activities to post to the software’s internal budget GL in every relevant budget period, in the correct amounts, and of course, in the proper debit/credit orientation.

In this software architecture, a full set of forecasted (future period) financial statements can be produced accurately and completely, just like the actual accounting financial statements, using the same format and familiar look.

Leading this software trend is Budget Maestro, published by Centage Corporation of Natick, Massachusetts.  I think this approach will forever change the way companies of all sizes do their planning, budgeting and analysis.

Why Out-of–the Box Implementation and Integration is Important for SMBs

ERP related concepts in word tag cloud isolated on black background

The solution should allow users to do most of their own implementation and setup with minimal outside help

Two of our larger clients went through system conversions in the last five years in the hope of implementing an all-encompassing enterprise ERP solution.  What was supposed to be a straight forward project with well-defined deliverables and a reasonable timeline turned out to be the exact opposite for both companies:  Major budget overruns, long delays in achieving practically every project milestone and seemingly endless amount of customization and software code modification in order to accommodate everyone’s needs.

One thing in common to both implementations was the fact that all planned integration of the new software with existing pieces of software and sub-systems still had issues after the implementation was complete and some still don’t work as expected to this date.

What was evident was the large number of outside consultants and the extra stress on company employees having to interact with the consultants and participate in testing and other project activities.

Even though our firm was not directly engaged in these implementations, our work in helping with consolidated financial statements and disclosures was greatly impacted as the data available to us to do our work was at times unreliable and insufficient due to poor integration and questionable report writer scripting.

I imagine many readers of this blog don’t find this experience particularly unusual.  Most people with enough experience in accounting or finance, working for even mid-sized organizations experience this from time to time, especially with company acquisitions, mergers and other drastic changes to their business organizations, where existing systems are determined to be insufficient or lacking in certain areas, or perhaps not able to deliver on the reporting requirements of management.

Unfortunately, such projects are not limited to only very large companies where there usually is a legitimate need to implement a better solution or perhaps more efficiently integrate existing systems with a centralized accounting and finance package. It is also not surprising that in smaller organizations this can be very taxing on the company and its employees (and indirectly customers and vendors) and will pose a long term financial burden at best.

Often, smaller companies get caught between legitimate needs to improve their information systems, streamline operations and improve reporting capabilities and delivery, and IT and software solution vendors and their partners / consultants who manage to give these prospective buyers bad advice. It usually ends up with the customer making purchase agreements and engaging the vendors in projects that at times seem will never end, all to the detriment of the customer. Once the software is implemented the customer is usually committed to it for a length of time (SaaS solutions) or is so involved in the new implementation and conversion of the old data that no reasonable changes are possible for a long time.

The costs sunk into such projects can be significant, even for a smaller company. In the case of ERP software implementations, I’ve seen consulting costs to fully implement a system exceed the initial perpetual license fee by 400%-500%. In the case of SaaS delivery, although there is no large up front licensing expense, consulting expenses can still be sizable and often exceed the original budget.

Planning, budgeting and analysis software is sometimes as difficult to implement as ERP solutions and the integration to the ERP software accounting GL can be difficult and almost always requires outside consulting.

SMBs should choose to go with a more reasonable approach and maximize the out-of-the-box installation experience, with minimal customization. When it comes to CPM class software for SMBs I really like Centage Corporation’s approach with its Budget Maestro suite. The entire package can be installed by the customer (on premise version) or is ready to implement and use immediately for the Cloud version. With a solid GL link like Link Maestro, many of the more popular actual accounting GLs are available to automatically link to the Budget Maestro built-in GL. The overall implementation time and expense are minimal and you can be up and running and productive within days or weeks and not months or years.

The best part is that users don’t have to give up functionality with this approach because the system was designed to be adapted to almost any business type. With its built-in business rules available to users in every budget area, and built-in, GAAP compliant accounting rules, you get a system that uses the budget to drive all required financial statements in perfect synchronization with one another.

To me this is the best of both worlds: Quick and inexpensive out of the box functionality and immediate integration with the actual accounting system (automatic for several popular GLs, or through an export-import step for all others). This quick, predictable and inexpensive implementation is something I think SMBs cannot afford to not consider.

The Dreaded Statement of Cash Flows

How you can automatically generate an actual Statement of Cash Flows regardless of what ERP software you use

Those who have experienced the manual preparation of a Statement of Cash Flows using beginning and period end Balance Sheets plus a periodic Income Statement know that this can be a chore and can cause a little confusion along the way with figuring out how to place the different numbers in the designated sections of this statement.

Fundamentally, the preparation of a Statement of Cash Flows is not that complicated and you would expect all accounting and ERP software vendors to provide a working template with each installation. Many of the software solutions targeted at the small to medium size companies not only do not provide such a template but are not capable of programing this statement and as such, a Statement of Cash Flows is not available to users of these software packages. The result is that a Statement of Cash Flows is not produced in many small and even medium size organizations.

Many companies that are required to submit a periodic Statement of Cash Flows, either because they are SEC filers or their lender asks for it, must produce this statement manually for each required period.

I’ve talked to several ERP software vendors and their typical response was that their GL software was not designed to automatically produce a Statement of Cash Flows because there is no way to tag each GL account with the proper treatment for this statement (i.e., how to use each specific GL account activity or changing balance in the compilation of this statement). This confirms that users of these vendors’ software have to perform this chore manually; that is, if they care to do it at all.

I’ve devised a way to automatically produce an accurate and complete Statement of Cash Flows, in each required period, regardless of what ERP software is used and whether or not its GL can accommodate this statement. To do that I use Budget Maestro from Centage Corporation which is a planning, budgeting and analysis software, primarily designed for small and medium companies in a variety of industries, where actual and budgeted financial statements and various reports can be generated in almost real time from available actual accounting and operations data and existing budget and forecasting data.

Budget Maestro was designed to produce all three major financial statements: An Income Statement, a Balance Sheet and a Statement of Cash Flows for every period included in every version of the budget implemented at the company and consolidated across all business entities that make up the organization.

As such, these financial statements are also available in a special version of the data known as Actual Plan. Here, actual accounting data (e.g., period-end Trial Balance) populate this Actual Plan through an export from the ERP GL or via a direct link available for several of the more popular SMB ERP software.

If you transfer your closed period (e.g., month) GL account balances into the Actual Plan in Budget Maestro (something you really need to do to be able to perform analysis of Budget vs. Actual), you will automatically gain access to all three financial statements (plus many other reports you can set up in the system). The actual Statement of Cash Flows will automatically be generated and available to publish. It will be complete and accurate and you will have the choice between using the Direct Method or the Indirect Method.

The secret to accomplishing this in Budget Maestro is careful planning of the chart of accounts and reporting format. This should closely match the setup of your actual GL and its reporting hierarchy. From that point on it is only a matter of periodically performing the data transfer and updating Budget Maestro with any changes to the chart of accounts as they occur in the ERP GL.

Existing and new users of Budget Maestro now have a viable and practical option to generate an actual period Statement of  Cash Flows. This should no longer be a mystery to many accounting and finance managers and depriving company executives of vital information about the financial performance of their organizations should no longer exist.  Furthermore, by using Budget Maestro as an all-encompassing budget solution, The Benefits of an All-Encompassing Budget, company managements can finally gain real insight into the future financial health of their organizations.

Why CFOs Need to Adopt Financial Analytics

And why they can’t continue to do their daily work without it

RK Paleru, Executive Director of the Systems, Analytics and & Insights Group at George Washington University recently authored the article “How can CFOs adopt Financial Analytics?”.  He touched on the reality facing the finance departments of so many organizations that are not adopting new technologies and therefore still relying on spreadsheets to deliver the results that support decision making.  While these departments know that these tools are flawed, they still continue to rely upon them.

In response to Paleru’s article, a great discussion ensued on Proformative’s website.  One member commented that accounting and finance departments are so wrapped up in the close process, financial statement consolidations, financial reporting generation and compliance activities, that there is hardly enough time to devote to analytics, especially with the inadequate tools many of these organizations possess.  I tried to reinforce the notion that upper management (the CEO, CFO and certain other management team members) must have timely, accurate and complete data in order to be able to make reasonably informed business decisions.  In addition, major changes have to be made in order for management teams to be able to see and understand their company data immediately, as actual data becomes available and in conjunction with existing and updated planning, budgeting and forecasting data.

My general observation is that many existing planning and analytics software solutions do not provide CFOs the data they need.  This is due to the fact that the majority of the software solutions today cannot produce accurate and complete future period financial statements, and especially the Balance Sheet and Statement of Cash Flows.

This is why I am excited by a new generation of Planning, Budgeting and Analytics software which I call:  “SmartBudget Driven Future Period Financial Statements and Analytics”.  I’m sure this definition will be refined as this software category matures but for right now the essence of it is:

Generating future period financial statements and other reports, driven by a smart budget, prepared using built-in drivers and system pre-defined business rules, automatically consolidated across the enterprise that provides the CFO (and the CEO) with the insight into the future financial health of their organization.

Using this type of software, all the traditional potential errors and omissions are completely eliminated or greatly reduced due to the fact that no spreadsheets are employed in this process and users are never asked to provide formulas, functions, links, macros or any other programming.

The software should also perform analytics in particular areas of interest such as sales and expenditures and respond to any other custom requirements the organization might have.

Another desirable feature is the ability to “drill back” into the source GL containing the actual accounting period results.  By pulling in any required detail data from the GL (as detailed as actual transactions, if the ERP software GL is set up to post into in detail), the analyst can examine specific variances and anomalies, not visible on the summary level.  The root cause of these variances or anomalies can be investigated and any found issues can be quickly remediated.  The CFO, equipped with this information will have the opportunity to make process changes, or make timely and informed decisions.

Analytics Maestro, used in conjunction with Budget Maestro can provide:

  • Sales analytics, using both actual and budgeted data
  • Expenditure analytics
  • Future period Balance Sheet for each budget period
  • Future period Income Statement for each budget period
  • Future period Statement of Cash Flows for each budget period
  • Many other specific reports, tailored to the company’s needs

The future period financial statements can be consolidated or filtered by any entity or level in the enterprise entity hierarchy.

With this data, CFOs can have a pretty good idea of what the financial health of the company is going to look like.  They can see the predicted cash balance, receivables, inventory, payables and other liabilities.  They can easily obtain forecasted future financial ratios determine whether the company will comply with loan covenants whether or not it will be able to utilize its credit lines, whether or not it will be able to retire debt and other obligations in future periods and more.

By using a software like Budget Maestro, CFOs can have a pretty good idea of what the financial health of the company is going to look like.  A CFO can perform his or her job with peak performance when relying on intelligent data in real time.  Not relying on analytics can be a costly mistake. Luckily, there is a new technology available that can change all that.