Tag Archives: planning

Planning, Budgeting, & Forecasting: Why Tradition May be Dangerous – Part 1

Be open minded and explore opportunities for change

Being part of a consulting firm in the area of accounting and finance I frequently get solicitations by phone and e-mail from vendors of accounting and finance software applications. These are vendors of accounting software, ERP applications, fixed assets management software, manufacturing MRP and other solutions, and of course vendors of corporate budgeting, planning and data analysis software, a category I like to associate with CPM (Corporate Performance Management) or EPM (Enterprise Performance Management) software, both of which generally used by the finance function working with company existing (actual) data and with forecasted or budgeted information in an attempt to arrive at an understanding of enterprise performance as measured against exiting goals and plans.

Planning, Budgeting, & Forecasting With CRM Software

Recently I had numerous contacts, both by phone and e-mail, with sales and sales support representatives from several well-known vendors of CRM software, specifically as pertaining to the functions of planning, budgeting, forecasting and analyzing data. I was intent on understanding why their solutions were beneficial to their customers and the real strengths of their product offerings in providing those benefits. I was also interested in learning how their approach allowed organizations to gain insight into their financial position, past, present and future and especially on how they were able to deliver future period forecasted financial statements and whether all statements were fully synchronized with each other and with the underlying budget.

As I expected, all of these applications were quite capable of setting up a corporate budget by importing static data from numerous reporting entities and by constructing a financial model that relied on historic data plus assumptions and application of a variety of formulas and functions, linking different worksheets, performing allocations and using drivers to arrive at a consolidated corporate budget.

A few of these applications were featured a large number of dimensions in modeling the business and its data, allowing a seemingly endless number of analysis options.

All of these software solutions either had a direct interface to the actual accounting GL (requiring custom programming) or indirectly via a two-step export-import process of actual accounting results, such as GL account balances and even detail transaction data.

CRM Systems Come Up Short on Planning, Budgeting, & Forecasting Tasks

All the presentations I watched and the marketing and technical material I received were very impressive and highly polished, but on further inquiry it was disclosed to me that each implementation required a varying amount of setup work, usually performed by vendor trained personnel or outside, independent consultants.

This implies additional, perhaps significant, costs and also longer implementation timelines. Changes to the model or any part of the implementation often requires contracting the original vendor or an authorized third party. Since very little can be done in-house, I imagine only a few changes and improvements to the implementation are actually done beyond the original setup. This does not encourage users to keep up with the ever-changing market and economic conditions. High costs may be another deterrent.

What struck me most was the fact that none of these software vendors provided complete and accurate financial statements beyond the traditional Income Statement. They all claimed they could program a forecasted Balance Sheet and a Statement of Cash Flows, but these statements were always going to be modeled, using high level formulas and assumptions and always requiring maintenance with every small change in the budget.

None of these statements are synchronized to the income statement and to the underlying budget for the simple reason that none of these software solutions have an integrated GL where budgeted transaction data can be processed in a manner similar to how an actual accounting GL operates.

In the second installment of this article we will explore this fundamental flaw and see a better approach to this challenge.

The last day of the accounting period phenomenon

Is shipping on the last day of the month that important and at any cost?

In my work in management consulting in the areas of accounting and finance I get involved with many client companies’ financial statement preparation, disclosure work and internal control (plus internal audit in several of the larger companies). What is common to all of these companies, regardless of size and industry, is the fact that in the last few days of any accounting period there is this frenzy of activities, mostly shipping, with several of these companies stuffing trailers with products until midnight of the last day of the fiscal period.

What seems odd to me, although I perfectly understand the motivation behind this, is that all of that hard work in shipping and accounting on that long Friday (or Saturday) night will only result in these trailers being hauled away by the common carriers the following Monday. I always questioned the fact that this behavior does not really comply with GAAP rules as to me the earning process is not complete if these trailers are left in the rain or snow to sit there for more than 48 hours while the customers who ordered the products hidden in these containers have no idea that ownership had already been transferred to them.

Besides, If I am the seller who recognizes revenue on the last day of the month, it is implied that my customer must recognize the inventory in transit as well as a liability to me on the same day (which may or not be the last day of their accounting period). Is that what the customer really wants? Probably not, unless their requested ship date happens to fall on the last day of the seller’s accounting period.

Of course, this assumes that revenue recognition can take place when products are shipped and there are no other conditions that must be met (such as installation, or training and acceptance by customers, among other things) before the seller of the goods can include these amounts in gross revenue for the period.

While I have no problem endorsing the fact that a “for-profit” business must make every effort to maximize financial results and increase the value of shareholders’ equity, I question this type of behavior as it implies that in the first two or three weeks of each month there is no urgency to get things done, or to follow customer delivery request dates that are captured on company sales orders that drive the entire manufacturing process. If there are approximately 22 working days per month, shouldn’t manufacturing and especially shipping activities be spread more evenly across those days?

So now that these last minute shipments have made it into the trailers, I don’t think there will be much left to do on Monday, the start of a new accounting period, and we will need to wait for finished goods to appear on the shipping docks, once again late in the month, for this process to only repeat itself.

As for billing these shipments, unless the earning process is really complete, I would wait for that to happen, and who knows, this might increase the real sales in the following period. What do you think?

I realize that management puts pressure on operations to perform in order to deliver the forecasted (and desirable) financial results, but I think that more important is to follow a strategic plan, coupled with a solid budget and meaningful analysis year round, while focusing on customer demand (including following the very important customer requested delivery dates) and not just on “how much more can we get out the door before the clock strikes midnight”.

CFOs in the Spotlight

I’ve been getting a lot of e-mails from Proformative.com reminding me of the CFO Dimensions conference, held this year in New York City in Mid October and targeted at senior finance professionals from many industries. The focus of this year’s event, as listed on the Proformative.com website was: “The evolving role of technology and leadership in finance”, with the theme of this conference being “The CFO as Chief Future Officer”.

I didn’t plan on attending this event but can imagine that a good portion of the discussions was centered on why and how CFOs should pay careful attention to available data, using analytics, in order to arrive at reasonably accurate and reliable predictions of the future financial health of their organizations.

CFO Dimensions is just one recent example. There are many more activities, seminars, webinars, white papers and other information, mostly contributed through the Internet, informing readers of the important role CFOs have in leading their financial organizations and in partnering with their organizations’ CEOs and other executive management members, helping their companies navigate their charted course, at times through rough waters, but with confidence and decisiveness, only possible with access to and proper interpretation of reliable data.

I’ve been in finance and accounting for a long time now and don’t remember the use of the CFO title when I first started. In fact, none of the C-Suite titles, as they are known today, existed.  I was recently amused to learn about a technology company that had, in addition to its CEO, CFO, CTO, CIO and COO, also a Chief Talent Officer. I assume this is the head of Human Resources but not sure if it is also abbreviated CTO, or maybe CTO2?. The company also had a Chief Digital Officer (the Analog days must be over for good).

I suppose these C-Suite titles are only limited to one’s imagination, but there is an important message here: The creation of specific and defined organizational leadership roles in certain areas where the organization’s excellence as a whole is the combination of the levels of excellence of each of these areas with the “Chief” in charge defining and maintaining that excellence. The CFO’s office is such an area, arguably one of the most important in any organization.

I’ve been writing about the changing CFO role on this blog for a while now. The entries titled “CFO’s Revised Job Description“, “The Ideal CFO Skills”, “The CFO’s Big Picture” and “Why CFOs Need to Adopt Financial Analytics” are good examples and are reflections of the gradual change of the role from purely accounting to everything finance, accounting, reporting, legal and compliance. To that add HR and IT which also are starting to become the responsibility of the CFO and you’ll begin to realize how much a company is dependent on its CFO, his or her skills, experience and attitude toward the job.

As seen by our readers in prior blog entries, there is one area that CFOs must pay close attention to and do it continually and consistently: Analytics.

The information technology has advanced to a point that any data generated by the organization, in any areas of operation, plus all the data generated through the execution of a strategic plan, an operational plan and a budget, plus re-forecasting of that budget data, is available to be presented to the CFO in exactly the format and presentation style he or she desires. Now the CFO can have insight into past, present and the anticipated future performance of the company, and with that, also into the future financial health of the organization.

Modern day software solutions can provide such insight. Budget Maestro‘s Analytics solution, Analytics Maestro is such an application. By using and relying on such a solution, CFOs will certainly be in the spotlight.

Budgeting Best Practices Just Got Better

What is missing from traditional “Best Practices” and how to change that

 I recently read an article by Barry Wilderman on SearchFinancialApplications.com (which is part of TechTarget.com) titled “Buying Software? Budgeting best practices come first”.  The entire article is available here. If you are not already a member you will need to register for this free site which encompasses many areas of technology and finance.

In this article the author focuses on the need to establish a budget process that borrows from best practices in this area of finance. The points given in the article are valuable and useful, however, there are a couple more critical areas that when observed and practiced will greatly complement this set of budgeting process best practices.

The most important aspect of the budget process is the usefulness and application of the budget with its analytics results in steering the company on its planned course. I’ve seen more than several organizations, some fairly large, where decisions were not supported by solid data; this data simply didn’t exist or was inaccurate or incomplete. Managements were often forced to use their experience, best estimates, intuition or perhaps no logic at all. Some of these decisions resulted in serious judgment errors with severe consequences to these companies.

We all read about companies who miss analysts’ estimates or come short of their own expectations. Some of the poor financial results are due to bad or inadequate planning, some due to unanticipated changes in the economy or customer demand, and some to historical poor analysis of actual company performance as compared with forecasted performance.

One of the most critical “Budgeting Best Practices” should include a complete and accurate forecasted Balance Sheet and Statement of Cash flows, without which management can’t make a fair assessment of the future financial health of the company.  Another is an analytics process that uses historical, current and budget data and displays the results in a manner allowing managers to quickly see and understand the data. I have already discussed these concepts several times on this blog in such entries as: Why you Must Forecast your Balance Sheet, Part 1 and Part 2, Why CFOs Need to Adopt Financial Analytics.

I agree with the points conveyed in the TechTarget article mentioned above but regardless of how well thought out and executed your budgeting process is you must make sure that these “Best Practices” and the actual software application you use are able to assist management in gaining insight into the future financial health of the company and in making the right decisions timely and with confidence.

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.

Are you Still Forecasting Only your Revenue and Expenses? Part 2

Can you tell if the budget you just put together is achievable?

In part 1 of this series we saw why a forecasted Income Statement is insufficient when preparing a corporate plan and budget. In this installment we will learn how we can make this plan and budget complete and useful to management on all levels.

The real question is how to reliably and consistently forecast a Balance Sheet given all the difficulties associated with this task. By now I believe most readers of this blog realize that using a spreadsheet is the wrong approach to forecasting a Balance Sheet, see Forecasting a Balance Sheet in a Spreadsheet World. In fact, this effort will be futile, as many finance professionals have discovered. There are companies that have a rudimentary forecasted Balance Sheet done in a spreadsheet; however, all critical numbers are a rough approximation of budget period GL account balances, and should not be relied on.

Many dedicated planning and budgeting applications allow their users to construct a forecasted Balance Sheet, however, users are required to program formulas, functions and links just like in a regular spreadsheet, and the results are the same as what you would get from doing this in a spreadsheet application (e.g., Excel). It seems to me that allowing users to program their balance sheets was an afterthought by the designers of these planning and budgeting applications. The result here, however complex the model, will only show rough approximations of key account balances (e.g., Cash, A/R, A/P).

I’ve looked at many planning and budgeting software applications that claim to be a departure from spreadsheets. In many ways they are.  In other ways their functionality is just like using spreadsheets: Tedious and time consuming programming of formulas and links, troubleshooting of errors, and the inability to arrive at an accurate and complete set of future period financial statements.

There is one main reason why most planning and budgeting applications cannot deliver a complete and accurate Balance Sheet: They do not treat the budget as an extension of the actual accounting system into future periods and they cannot accomplish that due to design deficiencies. To be successful at delivering an accurate and complete Balance Sheet, the planning and budgeting solution must operate like an actual accounting system and have its own General Ledger and subsidiary ledgers (revenue, expenses, fixed assets, debt, equity, etc.).

This can only be accomplished by having the planning and budgeting software make journal entries in its own “General Ledger” in response to all budget line data that has accumulated from all business units. A more detailed explanation can be found here, Those Debits and Credits. This GL must be linked to the actual accounting GL and mirror its accounts.

With the forecasted Balance Sheet accounts updated in each budget period with debits and credits, automatically posted by the software and reflecting all activity as dictated by the budget, you consistently get a complete and accurate Balance sheet for each period defined in the budget. The Statement of Cash Flows will be just as accurate and complete since it is generated from the forecasted Balance Sheet and Income Statement.

When you work with Budget Maestro from Centage Corporation you realize why automatically obtaining forecasted Balance Sheet (and of course an Income Statement and a Statement of Cash Flows) is possible. It is the only software solution I am aware of that employs this future period automated journal entry approach to generating accurate and complete forecasted financial statements. And they do it by design and not as an afterthought.

Are you Still Forecasting Only your Revenue and Expenses? Part 1

Can you tell if the budget you just put together is achievable?

If you are still budgeting and then re-forecasting only your revenue and expenses you may have run into a well known, yet often ignored phenomenon: Missing budget revenue targets due to cash shortages, inadequate credit lines, poorly timed financing arrangements, etc. This is very common during periods of growth, where a company must forecast its revenues and expenses required to achieve these growth objectives during the duration of the strategic and budget plan.

Companies that are in high growth industries and even established enterprises that cannot achieve very high gross margins soon find out that they have the potential to become very profitable but invariably run into one or more cash crunches along the way.  In fact, many organizations will not be able to deliver the results outlined in their budget for that reason alone. Of course, there are other reasons why companies miss their budget numbers but this discussion only focuses on poor and incomplete planning and budgeting.

Forecasting revenue and expenses is relatively easy if you have a solid strategic and operational plan. You can even do it using a set of spreadsheets, although I strongly recommend against it for many reasons, see my article Should Excel be Expelled?. The end result will be a forecasted income statement with columns of numbers for all periods in your budget. The trouble is that this is using accrual based accounting, which means that in reality a good portion of the forecasted sales in a certain period will bring in cash in a future period (in 30, 60 days or however many days each customer has to pay their invoices).

To make things worse, in order to make these forecasted sales you have to have inventory (if you are a product based business). This inventory must be readily available to ship in the period you say in your plan you will be shipping it. This means that you most likely have to either buy or make that product in a period earlier than the period the sale takes place. Now this implies that you had to spend cash either on the purchase of the finished product or on raw material, labor and outside services, with each one of these components occurring prior to the period in which the sale took place and with their unique payment terms.

Now consider forecasting new products or services that have not yet been developed and tested. Research and development expense that is often necessary prior to introducing new products will most likely show on the forecasted income statement; however, judging by the Income Statement alone you won’t know whether or not you will have the cash to perform these activities. If you are unable to complete R&D, testing, and any required certifications, etc., your new product availability may be delayed or the entire new product line may be cancelled, which in reality will result in not achieving the sales forecast for this new product line. The conclusion here, again, is that you need to have visibility into your cash balance during the budget period.

Will your forecasted income statement tell you whether or not you will have the cash to accomplish all that? Of course not. To do that you need a forecasted Balance Sheet and a forecasted Statement of Cash Flows which will further clarify where and when this cash is coming from (in what amount, from what source and in which period). Furthermore, these two statements must be tightly linked to the Income Statement and dynamically change as budget items affecting the Income Statement change, or as various versions and budget scenarios are evaluated. A budgeted profit and loss statement that most companies prepare annually will never accomplish that.

By now I hope I have you convinced that you must also forecast your Balance Sheet: Why you must Forecast your Balance Sheet Part 1 and Part 2. If you have a complete and accurate forecasted Balance Sheet and a forecasted Income Statement you can relatively easily compile a forecasted Statements of Cash Flows. Now you can have an insight into the future financial health of the company, and particularly into your cash needs along the budget timeline.

In the next installment we will see how a company can practically forecast its Balance Sheet using modern forecasting tools.

Is Excel Reporting a Wise Choice?

That depends on where the data comes from.

I recently saw a comment by Randall Bolten to a Proformative webinar on Excel based reportingMr. Randall is author of the book “Painting with Numberswhich the author describes as “Presenting Financials and Other Numbers so People will Understand You”.

Seeing and understanding data is the outcome of effective communication of financial results to company management and users of financial statements (banks, investors, shareholders, etc.). These financial results can represent management reports of past performance, budget and forecast data, financial statements, the organization’s financial strategic and operational plan and more.

Microsoft Excel is the most widely used software application in the workplace.  You would be hard pressed to find a single person using a computer at work without at least occasionally opening an Excel workbook and using it for a variety of applications. In accounting and finance, Excel is used daily and can be found open on the computer desktop for as long as the user is logged in.

Financial reporting with Excel makes perfect sense as long as the user fully understands the benefits and limitations, and especially the pitfalls and risks involved, as we are about to discover here.

It still amazes me to see how companies, even large ones, depend on Excel for consolidations and compilations of financial statements, despite the fact that their ERP software or accounting applications are usually perfectly capable of producing such statements with the proper setup.

The main risk in using a spreadsheet in the preparation of corporate financial statements arises from the use of home-grown spreadsheets with user defined formulas, functions, macros and links, all of which can include errors and omissions, can be easily overwritten or manipulated, erased or lost. To that add the typical lack of periodic review of these spreadsheets for accuracy and completeness, and the risk for material errors in the financial statements increases considerably.

The same is true for corporate budget preparation and periodic re-forecasting done in Excel.  This is still common practice in many organizations and even well known, dedicated database based planning and budgeting solutions use a “spreadsheet like” approach having some of the pitfalls listed above, reasoning that users are already familiar with the Excel interface and use of its formulas, functions and links.

As we have seen in several of the blog entries on this site, this is a very dangerous and undesirable practice: Are You Still Consolidating Financial Statements in a Spreadsheet? and Forecasting a Balance Sheet in a Spreadsheet World.

There is however a set of compelling reasons why Excel can (and under the right conditions should) be used for presentations of financial results and other reporting. The principal example is when the financial data that needs to be communicated to users of these reports originates in a much more robust environment and is directly linked to the data source.

In the case of planning and budgeting applications, if Excel is only used for graphic and tabular presentation of data, without any significant formulas, functions, worksheet links and other user programming, there is a compelling reason to use this tool, for its rich set of formatting and graphical presentation options, and the robust and consistent data links established between the data source (e.g., Planning and Budgeting Software) and Excel.

A good example of using Excel to create presentation quality reports and analysis is Analytics Maestro from Centage Corporation. I have covered this application earlier in this blog: Accounting and Business Data Come to Life. This is a perfect situation where Excel does not directly participate in the creation of data through use of formulas, functions or any other programing. It merely is the recipient of data from Budget Maestro where all current and historical accounting data plus all budget versions reside. Through a seamless interface with Excel, raw data is completely and accurately transferred where Analytics Maestro Excel add-in takes over and displays it in the chosen format and includes the exact content needed for the particular presentation.

An application such as Analytics Maestro considerably reduces the risk of introducing material errors in reports. All presentation reports are as accurate as the raw data received from the actual accounting or ERP software and the data from the planning and budgeting solution. Since a link is directly established between these applications, there is no manual data entry required or any user interaction, hence the accuracy, completeness and error-free data transferred into Analytics Maestro.

Finally, changes to the source data (e.g., revision of budget data) will automatically update the information displayed in Analytics Maestro. Here again, no formulas, functions or links ever need to be created or updated in Excel. You get the outstanding display features of Excel with no risk to the integrity or accuracy of the reported information.

With this level of formatting and presentation capability, reporting and analysis with Excel becomes a sensible choice for users in many areas of the enterprise. Conversely, any use of Excel for planning and budget modeling or preparation of consolidated financial statements remains a risky endeavor and should be avoided.

Financial Planning & Analysis – Art or Science?

How technology reduces the “art” element in successful FP&A activities

This morning I received an e-mail from Proformative.com inviting me to a webinar titled “The Art (and some Science) of Great FP&A”.  I am glad to see a resurgence of such an important facet in any company’s finance department and the increasingly stronger endorsement of this function by executive management.

FP&A stands for Financial Planning and Analysis. This function is performed in the finance organization and consists of preparing financial plans and budgets based on strategic plans and historical data, gathering actual and current data and comparing with budgeted data and doing re-forecasting during the budget year. The analysis performed is used to provide upper management with information they need to make strategic and operational decisions.

Historically, and to a certain degree even today in many organizations, FP&A is only performed annually, during the so-called “Budget Season”, with little attention to analysis (the “A” in FP&A). There are several reasons for this:

a. The planning and budgeting processes are complex and very tedious. In the past, each iteration of the budget required an enormous amount of work to update data and correct newly discovered errors and omissions. By the time the budget was completed and approved, it was in many cases already obsolete.

b. The budget data had little or no correlation to the actual data. In fact, many budgets had a structure that did not tie directly to the actual accounting data structure; there was no 1 to 1 relationship between specific budget items and actual accounting general ledger accounts.

c. Due to existing technology, planning and budget data resided primarily in spreadsheets.  Eventually, this data found its way to more “purpose designed” applications, which initially borrowed from the spreadsheet model, albeit in a more robust database environment. The results were inaccurate, incomplete and often suffered from serious logical and computational errors stemming from the budget model as implemented using spreadsheets and other software.

The end result is often a budget that is not used for its intended purpose. Management does not get the benefit of having the insight into the company’s future financial health, due to the disconnect between the budget data and the actual results as produced by the accounting department. Often, bad business decisions are made, not supported by solid data, as intuition and prior experience, if available, play a major role in making these decisions, a risky behavior at best.

When true analysis is performed, all of the data used resides in the analysis module representing actual and budgeted data, with separate budget data for each version of the budget where applicable. The analysis system will then display the required data, either visually via graphs and charts or in tabular format, all of which can be printed or forwarded to a pre-defined distribution list.

The content and format of this data can be pre set according to management’s needs and for clarity, only the required data should be conveyed. In a properly set up environment, FP&A’s software solution is linked to the ERP software and data is automatically available as soon as an accounting period is closed. This allows the decision process to start sooner and since the data can include specific indicators about future period performance (e.g., forecasted financial ratios), management can make tactical and operational decision with greater confidence.

Today there is a lot more science and less art in FP&A activities. To me the “Art” in all this is having vision and recognizing what technology solutions are available and pairing the technology with company processes and existing systems. Once properly set up, the technology will do the rest, allowing FP&A to successfully do its job.

Should Finance Become an Analytics Powerhouse?

See why Finance finally has the right tools to excel in this function

Recently there was a discussion on the Proformative.com site whether finance should take over analytics and own the process, the advantages to the company and the steps required to do so. The following is the link to the discussion:  http://www.proformative.com/blogs/anders-liu-lindberg/2015/06/20/how-finance-can-become-analytics-powerhouse and I encourage all readers of this blog to become Proformative.com members as the site includes free membership and great resources and insight in all areas of accounting, finance, HR, corporate governance and more.

This is a great topic for discussion with many opinions and points of view, depending on which functional area of the company you visit. The general opinion in this particular Proformative discussion was that finance should own analytics and be tasked with providing management with the essential data that is necessary to run the company and steer it on its charted course.

Unfortunately, in many organizations today there is no central area where analytics is performed, along with reports, alerts and other research into variances anomalies. Many functional units (e.g., sales) do their own analysis of only the data produced by their business units or which are directly related to their area. With analytics being fragmented, and often incomplete and inaccurate, management cannot benefit from the real meaning of the data generated in their companies, validating the notion that there are many versions of the truth.  Centralized analytics is designed to change that.

What is analytics?

Analytics is the process of:

1)    Retrieving stored data from various company departments, divisions or business units, with historical as well as recent actual results of operations and financial data, plus the organization’s plan and budget data.

2)    Understanding the meaning of all relevant actual data collected and comparing to plan and budget data.

3)    Preparing reports using text and other visual aids to convey these data and their interpretations to individuals within management and other functional areas, supporting the decision making process.

When there is a plan and budget in place while monitoring the actual results and comparing with the anticipated results (as expressed by the budget and derived from the plan), meaningful information can be obtained when performing analytics.

The data used to perform analytics originates in several or many functional areas of the company. For example: Sales data, marketing data, accounting data of actual closed periods, etc.  It makes perfect sense to centralize the analytics process and have one owner over the process: The finance organization, reporting to the company CFO.

Information technology enables all data used in analytics to be retrieved by the analytics process owner and processed by the analytics software. The output, in turn, is a pre-defined set of reports and other visual aids (e.g., graphs, dashboards) designed to allow the user of these reports to quickly understand what these reports and visual displays are trying to communicate.

The CEO of a leading Planning, budgeting and Analytics software publisher defines this system as:

“A single source of accurate financial information- backward and forward looking- with the ability to integrate with Operations data- and that can be served up to end users for them to analyze themselves, and thus, allows them to contribute to the strategic and operational decisions and direction of the company in a timely (and informed) manner.”

The purpose of analytics is to give management the tools to be able to make timely and informed decisions with confidence. Having the right data reduces the risk of bad decisions, or decisions made long after the symptoms of trouble have actually appeared, when there is little that can be done to turn things around.

In a blog entry I recently made, titled “Why CFOs Should Adopt Financial Analytics”, I emphasize the need to have accurate, complete and timely information  that upper management can reasonably act on it, making decisions backed up by solid facts and not just intuition. It is the CFO’s responsibility (as the CEO’s second in command) to ensure that such data exists, is accurate and reliable, is available on a consistent basis and is presented in a manner that is simple to understand.

Since finance reports (or should report) to the CFO, it is finance that must develop the analytics process, acquire the right tools, implement them and use them on a regular basis, while communicating with the various business entities that generate the data.  Duplicating this effort in other departments, or having a fragmented system with incomplete or erroneous data is completely counterproductive, thus rightfully giving finance its status as an analytics powerhouse.