Tag Archives: software

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.

What Criteria do You Use to Select Your Planning, Budgeting and Analysis Software

Why the obvious solution may be your worst choice

About a year ago I was looking at various software solutions that assist companies with the planning, budgeting, forecasting and analysis processes. I was surprised to see how many choices were available, even in the SMB (Small & Medium Business) market. There was a mix of server based (on premises) and web based solutions and certain applications claimed to be suitable for larger enterprises. Cost of licensing, subscription and software renewal fees varied among the different products and labor and consulting fees to implement these systems also ranged from modest to very expensive.

What I also realized during this analysis was that the most common tool in corporate planning and budgeting is still the spreadsheet (more accurately a set of spreadsheets or workbooks). Microsoft Excel dominates this, and the level of sophistication ranges from simple revenue and expense worksheets with basic consolidations, to extremely intricate systems containing hundreds of workbooks and worksheets, linked together and having certain reporting capability.

I attribute use of spreadsheets for planning and budgeting to the early days of personal computers when dedicated budgeting software did not exist. Spreadsheets are also very common in the workplace and all finance and accounting personnel are familiar with them.

As dedicated software solutions became more available more and more finance managers and professionals began to realize that spreadsheets are not the right tool to use in these processes and for good reasons as explained in these blog posts: Replace Excel with a Dedicated Planning, Budgeting and Analysis Solution and Forecasting a Balance Sheet in a Spreadsheet World.

The strong arguments against use of spreadsheets are the main reason for the existence of dedicated, database-centered applications intended for implementation and maintenance of a corporate budget and analysis process. This approach has become quite popular even in smaller companies and there are a variety of applications available to choose from.

Unfortunately, in designing many of these budgeting software solutions, their designers, while doing away with use of traditional spreadsheets, and adding important security and workflow functions and controls, failed to realize that their users were still required to enter formulas, functions and links into their plan or budget models. In fact, many of the traditional drawbacks found in spreadsheets are also present in these budgeting software applications.

Those who implement these types of applications quickly discover that building and maintaining a budget is not much different than using a set of spreadsheets. The risk for errors creeping into the model is the same as in traditional spreadsheets; maintenance is just as hard, change management controls are mandatory and rather complex; adding drivers and allocations, and configuring the system to output even a rudimentary Balance Sheet and a Statement of Cash Flows requires much knowledge and experience, often resulting in significant consulting work, services gladly provided by the software vendors.

Fortunately, there is another approach, providing the best of both worlds: A complete departure from the spreadsheet environment, while allowing budget and finance managers to build a budget without using a single formula, function, macro or link. This approach employs built-in business logic and rules and the ability to employ an unlimited number of drivers, setup to suit the specific needs of every organization.

Of particular importance is the automatic system generation of all future period financial statements, including a Balance Sheet and a Statement of Cash Flows, besides an obvious P&L.

Examples and explanations of this approach can be found here: 10 Must Have Features of a Budgeting & BI Solution, Those Debits and Credits, or A Modular and Automated System for your Annual Budget Process.

It is good to know that there are several choices when it comes to selecting a planning and budgeting software application. It is, however, wise to realize that applications that seem natural for this function may not be the best choice and in the case of the most obvious solution, the spreadsheet, the worst possible one.

Are you Comfortable with Your Existing Budget Process?

Why it may be worthwhile to rethink the budget process and look for changes

From time to time I realize that certain tasks I perform, mostly personal and some professional, are harder to do and take longer than they should. It is, however, comforting to know that these familiar tasks will get done, albeit not in the most efficient and cost effective way. My logic is that next time, before I have to start working on one of these tasks again, I will first try to find a better solution. This seldom happens, although I’ve gotten better at it over the years.

Several years ago I was visiting a client, a mid-market direct marketing company on an internal control audit engagement. I noticed that the finance group employed three full time budget analysts and a budget manager. These four people dedicated almost 100% of their time to the budget preparation, consolidation and periodic maintenance. Their data for input was received from many department managers representing business units, divisions and locations.

Several other persons in the finance group also participated in the budget process, mostly during the review and approval phases. The finance VP was the process owner and the entire organization used Excel spreadsheets to compile the budget.  There were hundreds of them, many linked together and miraculously consolidating everything into a set of worksheets that once printed and bound became the official corporate budget.

When I interviewed the Finance VP about his internal controls I asked him how comfortable he was with the budget process, its accuracy and amount of time and effort it took to complete it. His reply was: “I’m not sure how accurate it is; I know there are errors in formulas and links and it is very hard to update, but this is what we have and we know the process well. It was designed years ago and we don’t feel we have the capacity right now to completely troubleshoot these Excel workbooks, or change the process”.

Coming from a finance department person, I was not surprised with his answer. It often seems easier and simpler to work harder and longer instead of taking the initiative and changing the way we do things by replacing the tools we use and the processes we employ.

You often hear that costs of new IT systems, software and other tools are what prevent organizations from optimizing their processes, achieve higher efficiencies, etc., while at the same time, the reality is that not incurring these costs and putting off making the additional effort to design an improved process is often much more expensive (especially long term) than the cost of the proposed process change.

To use this budget process as an example, most finance managers know that using spreadsheets is not the right way, which is why there are specific software solutions designed to remove spreadsheets from the process. Yet they continue to do it the hard way, while their organizations do not get the benefit from using available new technology.

As often is the case, change must be instilled by management with vision and focus on company objectives. Lower level managers are less likely to initiate or suggest change, even though they may realize its ultimate benefits.

In our example here it should be the company CFO who must initiate this change as we see in several of the blog entries on this site. A good example is “Become your Company’s Chief Future Officer”.

As for me, personally, I would like to think that I am more motivated now than before to find better ways to perform some of my tasks, even though I realize I might step into new territory and perhaps encounter temporary difficulties. What I do know is that changes well planned are worth making.

Accurately Calculate the Total Cost of your Employees

How to best approach planning & budgeting of payroll and related expenses

A while ago there was a member question on the Proformative.com site about calculating total cost of employees.  This question has come up several times on this forum in recent years and clearly represents a challenge finance personnel and departmental managers face.

I personally remember struggling with calculating total employee costs at several companies I worked at or consulted to, especially when we had to fully absorb these costs in inventory, excluding non-production employees and those who were part time in production and part time in SG&A.

Some payroll systems I have worked with in the past could provide the straight time and overtime cost per employee in each accounting period, holiday and vacation time expense and bonus expense, but were not capable of clearly itemizing the additional expenses (known as payroll related expenses) in detail per employees.

These are expenses such as Social Security Tax (employer portion), Medicare (employer portion), Additional Medicare Tax (for certain employees over a certain earning threshold) and unemployment taxes (SUTA and FUTA).  To that you must add additional payroll related expenses such as 401K plan employer matching, health insurance portion covered by the employer and other expenses that must be tracked and budgeted for, such as cost of supplies per employee, cost of IT per employee, etc.

These payroll and related expenses can be calculated in a spreadsheet, knowing the various rates at the time of calculation and adding up all the expenses per employee, per department and so on.  What makes it difficult is the fact that some expenses go away during the calendar year and then start over in the beginning of the following calendar year.  Social Security tax and FUTA are good examples, and knowing the annual cap one can program this into the same spreadsheet and cause these expense to disappear once the annual cap has been reached.

Another challenge faces companies whose fiscal year end is not December 31st.  These companies must devise a clever way to track payroll expenses during their fiscal year while accounting for them (for reporting and compliance purposes) using the calendar year.  This is also possible using a spreadsheet, but like many other complex spreadsheets, it becomes exceedingly more difficult to maintain and audit for errors and omissions as the number of employees increases.

As in all complex spreadsheets, these spreadsheets will require careful placement of many formulas and functions, possibly even macros and other complex VBA code.  What makes it more challenging is the addition and deletion of employees during each calendar year, anticipated pay raises and bonuses based on projected performance and certain other changes, which make the maintenance of these worksheets very difficult.  In fact, without proper change management control and internal audit, these spreadsheets are more than likely to contain errors and omissions, some of which may be material.

It is the general consensus of many accounting and finance professionals that spreadsheets are not the right tool to use in a very complex environment with many linked worksheets, linked workbooks and consolidations, and having to endlessly maintain records in many of these worksheets. Payroll planning and budgeting is a good example where spreadsheets should not be used.

While I was thinking about this challenge I remembered how easy it was for me to maintain employees and payroll costs in a planning and budgeting solution with a dedicated Personnel Module.  The application is Budget Maestro, published by Centage Corporation where the Personnel Module is an integral piece of the application and can be deployed either standalone or in combination with any module within the system.

Budget Maestro’s Personnel Expense Module overcomes all the problems and challenges listed above.  It is driven by built-in business rules and payroll taxing authorities’ existing rates.  Regardless of your fiscal year-end date it knows precisely when to stop charging Social Security Tax expense, FUTA and any other payroll related expense that has a peculiar behavior during the payroll year.  This is in addition to applying the correct tax expense in each tax category, as posted to each applicable GL account in each planning period.

As employees’ salary or hourly rates increase (or decrease) during the planning period (a year, 18 months, 24 months or whatever your plan’s length is), the correct payroll tax expenses are properly posted in the right period.

With the unique feature of posting expenses to the planning period via a system of automated journal entries, payroll expenses become an integral component of the planning and budgeting process, which means they are completely and accurately reflected in all financial statements and reports automatically generated for each planning and budgeting period.

What I like about Budget Maestro’s Personnel Module is that you can plan in as much detail as you like (down to the individual employee in each business unit) or on a higher level in certain areas of the business.  This is very useful in manufacturing operations where you can have multiple employees in a certain department (e.g., fabrication), having similar pay rates and starting in the same planning period.

For example, you may add five fabrication employees in May of 2015 at a base rate of $18.50 per hour, then six more in the following period, and so on.  You don’t need to list each of these employees individually; just the position type with the number of employees, their start date, rate and any anticipated increases or decreases. The system will use the data you provided and using its built-in business rules will expense everything properly in the right planning GL accounts and in all the relevant planning periods.  Future period financial statements and all other reports will automatically reflect that.

I find a remarkable capability of the Personnel Module in not having to place any formulas, functions, macros and links anywhere in the program, which is also true for all the other Budget Maestro planning modules (revenue, fixed assets, debt, etc.).

Another great thing about the Personnel Module is that it is 100% included in the licensing fee of the Budget Maestro application.  Use it standalone or in combination with other modules as your needs dictate, or add your personnel planning data into an already existing plan.With the Budget Maestro Personnel Expense Module you will always have a complete view of your payroll and related expenses with clear and accurate reports, making your employees total cost part of the overall budget.