Tag Archives: financial reports

How Bad Results are Conveyed in Financial Reports

Learn to notice certain signals and what your finance CPM system is trying to tell you 

If you read external financial reports such as SEC FORM-10K and FORM-10Q you probably noticed an interesting phenomenon (or is it the norm?): Bad or negative financial results are communicated by using creative and carefully crafted language, giving plausible explanations and using purposely selected financial comparisons that seem to reduce the effect of the negative results, as communicated just by the numbers.

I was an SEC filer myself years ago and can certainly understand the motivation behind the language and explanations given in these reports. After all, the true numbers are there and the reader always has the opportunity to read, understand and make their own decisions based on the data. The minimum disclosures are also there for everyone to see. Management wants people to hold the security and trust them that the company is on the right track.

I also know well from experience that these filings have been fully reviewed by these companies’ legal departments or by outside counsel and the vast majority of them don’t have any disclosure issues, at least not from a legal standpoint. This is supported by a required framework of internal control over financial reporting, attested to by an external auditor (for annual filings) that ensure that financial statements and disclosures are free from material errors.

I interviewed many top executives in companies that are SEC filers and in privately held companies that are required to provide financial statements and other reports to various users of these statements.  Most seem to have difficulty admitting that their companies have not delivered the expected results; after all, the disclosures and explanations to filed financial statements and specific schedules do not show the results as being too negative; these, in fact, may look quite encouraging when someone outside the company bothers to read and understand the details conveyed in these filings.

Are these managers (CEO, CFO) in denial? Do they truly believe that their companies are doing just fine? Or maybe they don’t have the real picture surrounding their organizations’ financial well-being and especially their companies’ future financial outlook. This can be a serious problem because not knowing where the organization is headed financially and well in advance implies that certain signals will be ignored, decisions will not be based on solid data and mistakes are likely to occur.

Can finance be blamed for this? After all, they are the function that provides senior management with the data needed to make timely and informed decisions. As it turns out, finance, always pressured to deliver results, sometimes under unrealistic deadlines, and almost always understaffed, works with available tools, common methods and techniques. Their tools are not always state of the art and there is very little time for them to conduct research to see what new solutions are available to companies their size; so they are usually left to work with whatever tools and methods the company possesses and change is not something they look forward to.

However, this does not have to be that way. There are finance solutions (the names CPM, EPM, Planning / Budgeting plus Analytics are used interchangably) that are designed to make life easier in finance, and ultimately provide upper management with the data they need, when they need it.

One of the most pressing changes required is for companies to budget and periodically reforecast their balance sheets. The software must be able to do this using posted transactions driven by the budget and not a crude approximation via using some modeled formulas or global assumptions as some of the present day solutions are designed to do. These balance sheets are far from complete and accurate and may actually mislead their users. Only a general ledger based system incorporated into the CMP solution (totally independent but linked to the actual ERP GL) is going to be an acceptable solution to this challenge.  Fortunately, this technology is available now.

This is going to be a paradigm shift for many finance organizations, but those that already embraced it don’t ever look back.  I believe many more organizations are going to follow this trend in the next few years.

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.