Two Key Principles in the Budget and Forecast Process

Observe these principles and you will help steer your organization in the right direction

It was a great revelation when I realized that there are just two key principles in the budgeting & forecasting process, regardless of the size of the organization:

1)      Budgeting and periodic re-forecasting of the entire chart of accounts and not just the income statement (P&L).

2)      Periodically and timely analyzing actual financial performance against the budget and understanding the data so it can be effectively conveyed to management for informed and confident decision making.

These two key principles, when properly observed, can make the difference between business success and business failure.  This is especially critical for small and medium size organizations where cash flow and other balance sheet accounts are often impossible to forecast while periodic and timely analysis is seldom or inconsistently done.

Despite these challenges, observing these two principals is extremely important for these organizations and this is why:

  • If you only forecast your income statement accounts (generally using the accrual method of accounting) you will not have visibility into key balance sheet accounts (e.g., Cash, A/R, A/P); you will not be able to forecast key financial ratios and you will not have a complete understanding of the future financial health of the company.
  • If you do not periodically, and timely (i.e., right after your actual accounting period is closed) analyze the actual results against the budget, you will not be able to quickly react (or not at all) to significant variances of actual results versus expected results, your budget.  Your organization may be headed in a wrong (and often dangerous) direction and since management may not be aware of that, no corrective action will take place, often further causing the situation to deteriorate.  Exceeding budget expectation in one or more areas may not be noticed and focus may not be placed on these areas.

In order for you to consistently and accurately observe these two principles, you need to have the right tools and the commitment to properly use them.  From my experience, using a popular tool such as a spreadsheet (e.g., MS-Excel) is not going to address these challenges, especially in forecasting a reliable balance sheet, achieving error free results and performing a meaningful analysis.  You will need a more dedicated software solution that is designed specifically to perform these tasks.

If you have never forecasted a balance sheet because it was time consuming, very complicated and error prone, please realize that most organizations don’t do that for these very reasons.  Would they forecast their balance sheet if they had the right tools and at the right cost?  Of course they would.  The benefits are just too great not to do it.

One software solution that comes to mind, offering these great benefits, especially for small and medium size organizations, is Budget Maestro from Centage Corporation (www.centage.com).   It was designed and programmed to address these two principles.

Fulfilling Principle #1: With Budget Maestro you have the ability to forecast all of your G/L accounts.  This works by having each budget line (revenue, expense, etc.) linked to a G/L account in the Budget Maestro application.  The software then, based on your assumptions and other settings, will post all necessary amounts to all affected accounts, including all participating balance sheet accounts.

The forecasted balance sheet (and the derived forecasted Statement of Cash Flows) will reflect accurate balances, only relying on your data input and assumptions without any user provided formulas and links – everything is automatically done in the software.  Read my blog entry “Generate Accurate Forecasted Financial Statements as your Budget”  for more detail on how this really works.  For those of you who have built complex financial models using spreadsheets, there is absolutely no programing of formulas, functions and links in Budget Maestro, so fulfilling Principle #1 becomes a reality, even for a small organization with limited resources.

Fulfilling Principle #2:  Budget Maestro is designed to allow you to quickly and effortlessly extract data from your actual accounting G/L at each period end.  This is available for many of the more popular accounting and ERP software, and in those cases where there is no direct link, Budget Maestro easily allows the importing of trial balance numbers at each period end.

As soon as you have the actual data, you can see where you are, right after an accounting period is closed, and with no additional delays, intelligent and informed decisions can be made.  For the ultimate data analysis experience, Centage Corporation offers their Analytics Maestro software module, which seamlessly connects to Budget Maestro data to give you the ultimate analysis tool where you will truly understand your data, through tabular and graphic representation customized by you to precisely suit your needs.  Perform the analysis periodically, and you will have fulfilled Principle #2.

Regardless of what tools you use, you must make an effort to observe these key principles and from my experience in many industries, there are no shortcuts here.  Harnessing the power and intelligence of Budget Maestro with its companion product Analytics Maestro, you will obey these two principles and help navigate your business through each budget period.

Doing anything less is too much of a compromise and can never mitigate financial risks inherent in every business enterprise.

As seen on Centage’s Budgeting and Forecasting Experts Blog

Leave a Reply

Your email address will not be published. Required fields are marked *