The Budgeting and Forecasting Experts Blog

Are you Ready for the New Revenue Recognition Rules?

The deadline may seem far away but in reality it’s right around the corner

A popular and hot topic these days is the newly issued revenue recognition rules, a result of a decade long effort by a collaboration of FASB and IASB.  These rules are being phased in in the near future and will affect a variety of business enterprises, primarily those who have contracts and special delivery arrangements with their customers.

Revenue recognition is an accounting topic familiar to many companies who are engaged in providing goods and services to their customers.  It deals with the rules on when to recognize revenue for various products shipped or delivered, or services provided, and in what amounts in each accounting period.  It requires deferring revenues when applicable and then recognizing them in future periods, following specific rules issued by FASB.

The new rules, issued in May of 2014, require companies to examine their customer contracts and determine for each sales invoice what amounts can be recognized in the period of delivery and what must be deferred to future periods.  These new rules will become effective for reporting as early as 2017 with tracking of revenue transactions as early as 2015 with an adoption method either full retrospective or modified retrospective.  Generally, it makes recognizing revenues, both for products and services under more conservative guidelines.

What this implies is that accounting for revenue must be done according to the revised rules, which makes companies affected by these rule changes dependent on their ERP or accounting software to help them manage these revenue recognition transactions.  In addition to the accounting and finance functions, the new revenue recognition rules will affect the legal department, tasked with creating, reviewing and interpreting customer contracts, sales, and IT.

As of this writing many ERP and accounting software vendors are working on implementing these new rules into their existing software.  Other, vertical market software vendors, will be offering revenue recognition software that will be interfaced with existing ERP software to provide the needed functionality and allow for both internal and external audit of revenue recognition.

Similar to actual accounting software, companies who implemented a dedicated planning, budgeting and analysis solution are going to have to re-think the revenue recognition planning and budgeting process in a similar fashion to actual accounting in order to make their analysis meaningful.

This is particularly true for companies who use their planning, budgeting and analysis software as an extension of their actual accounting software.  Budget Maestro with Analytics Maestro, which is an extension of the actual accounting system into future periods allows its users to adapt any accounting change rules and match its core structure to the General Ledger of its linked accounting software.

Although it appears that there is plenty of time left to make the switch to the newly adopted revenue recognition rules, prudent accounting and finance managements realize that now is the time to start working towards implementing the changes, including acquiring additional IT tools and modifying existing systems in order to comply with these new rules.

Tags: budgeting, budgeting and forecasting software, budgeting and planning, scenario planning

The Power of Self-Serve Analytics and Reporting

I recently visited a company and the CFO complained about how long it takes his department to close the books each month. The problem was not due to his staff’s inability to book closing entries on time. It was due to his department’s inability to generate the reports required to validate and explain the results. ERP systems are great at collecting data but weak at pushing the information to business users for analysis. The CFO then described his dream scenario, where his department is able to dynamically generate a variety of visually appealing reports, during the close cycle, to explain the results behind the numbers. His comment to me was: “If I want to change the layout of an existing report, I need to prepare a work order, submit it to IT and then wait a week or two before the report is on my desk”.

This problem exists in many financial departments, namely the inability to generate the reports they need when they need them. Because ERP tools are not designed for dynamic reporting and analysis, reporting tends to be owned by the IT department. This means, business users require the support of IT for reporting. The “IT as gatekeeper of all information” mind-set still exists in many organizations, leaving non-technical business users waiting days or weeks for reports.  The other option is to assemble reports manually from disparate sources of information.

More progressive companies have enabled and empowered business users to get the information that they need when they need it.  Easy-to-use, self-serve analytics and reporting tools are placed in the hands of business users so that decision makers can report and investigate data that stands out.  These systems empower business users to dynamically build reports, create charts and graphs and investigate the meaning behind the numbers, in real-time by themselves.  Just to be clear, self-serve business intelligence does not imply that business users manually key-in data into an Excel spreadsheet.  Rather, self-serve Analytics solutions connect business users to the meaningful data contained in the ERP and back office systems, with tools that require no technical expertise.  This enables and empowers business users to build reports, analyze numbers and glean knowledge and insights from valuable data.

Analytics Maestro by Centage Corporation is a true self-serve reporting and analytics solution.  With dynamic report building and editing, users are constantly interacting with their Budget Maestro data (which contains actual, plan and forecast financials) or alternatively their trusted ERP or CRM data. With Analytics Maestro, users don’t need to manually download data, recreate and reformat reports in Excel for different iterations of the report or, wait for IT to prepare reports. Reports are built once (by the business user), and saved for future use and refreshed as needed.  The end result is that business users have access to critical information, at the right time and in the right format for full comprehension.

Analytics Maestro makes reporting and analysis easy (and fun). It is user friendly because it does not require knowledge of the underlying database structure.  Users only need to visualize what they want on a report and then drag-and-drop dimensions onto a report layout.  Then, through a series of double-click actions to drill-down and filter, users build reports exactly as desired.  Further, because Analytics Maestro is integrated with Excel, users can play with all of Excel’s formatting, graphing and charting capabilities, to generate final presentation style reports.

In addition to summary level information, Analytics Maestro quickly drills-through to transactional level detail.  For example, if users want to see the specific invoice numbers, journal entry numbers or description that makes-up the sales to a specific customer, all one needs to do is double-click on the sales number and the detail is presented immediately.

In addition to presentation style reports, Analytics Maestro allows for powerful analytics on the information.  With its slice-and-dice functionality, business users can get down to the underlying issues or opportunities:
•    Why was my revenue below plan in the Eastern division?
•    Who are my top 5 customers, what did they buy and when?
•    Who are my top sales people, what are they selling and to whom?
•    How do I compare to plan, forecast, prior month or prior year?

Analytics Maestro arranges data in a sophisticated structure that allows for end user manipulation. It allows users to change around the rows and columns as well as to perform multi-level filtering. Simply put, users can arrange the information however they like by dragging and dropping any item such as, Product in the row, and Time in the column, and Revenue as a page filter- then instantly see revenue for all products across all times — a product revenue report. Add Region as another page filter, and the revenue for all products across all time by region shows up. This multi-dimensional structure facilitates rapid analysis of large volumes of data, allowing the user to slice-and-dice information as needed.

The way I see it, numbers should be a servant not a master. Running a business without a self-serve financial analytics tool and relying solely on static IT driven reports, is like playing golf with your eyes closed. In most cases, these reports aren’t telling you what you need to know to manage and improve your business, and senior management is not gaining the insight they need to properly make decisions.

Tags: analysis

Is Planning, Budgeting and Business Intelligence Software Right for Me?

Why every company can and should use these applications

I’ve run into many companies over the years who have invested considerable amounts and effort into implementing sophisticated ERP or accounting software, some with integrated CRM and other functions that are designed to increase automation, productivity, accuracy and everything else associated with relegating mundane tasks and complex data processing to an automated system.

In fact, you’d be hard-pressed to find a business that doesn’t employ information technology products, both hardware and software, in their daily operations.  Even the smallest of the smallest companies rely on computer and software applications.  Gone are the days of typewriters, inventory card files, post binder ledgers and other tools so common in the workplace prior to the computer revolution.

Of all the many business software categories, Planning, Budgeting and Business Intelligence software deserves special attention.

I can’t imagine a business owner, corporate manager, board of directors member or anyone who directly influences business decisions agreeing that planning, budgeting and then analysis of data from both actual operations and plan is a bad idea and therefore does not belong in their organization.

What I do see is that the majority of organizations, including many small businesses do have some kind of a planning process where a budget is formed, usually once a year, then maintained by some companies throughout the year with or without analysis of actual results as time goes by.

What differentiates a great planning, budgeting and BI process from one that is mediocre or worse is both the attitude toward this process while understanding the clear benefits, and the level of sophistication of the tools used in the process and its associated tasks.

Those who employ a common, but clearly deficient method of using spreadsheets or even purpose designed applications mimicking spreadsheets with all their shortcomings, are simply unable to fully achieve what the process was intended for, which is:

1)    Create a comprehensive plan, custom tailored to the organization with pre-defined business rules and drivers, and the ability to easily maintain and update this plan.
2)    Obtain accurate and complete forecasted financial statements, including a balance sheet and statement of cash flows, as well as a meaningful set of KPIs and Financial Ratios.
3)    Allow management to completely and accurately see and understand the forecasted future financial health of the organization, which will lead to making reasonable and error-free decisions.

Companies using a deficient process and set of tools may be able to forecast their income statement and especially the revenue and expense components of the income statement, but nothing else with any degree of accuracy or completeness.

On the other hand, organizations who implement more progressive methods and tools to perform the planning, budgeting and gathering and analysis of business intelligence, and who continually monitor their actual results against their plan data, continually reap the many benefits associated with using these tools and methods.

Even if you are a small or medium size company there are affordable technology tools to assist you with this important process.  The answer to the question whether planning, budgeting and business intelligence is right for you is a resounding yes.

Applications such as Budget Maestro with Analytics Maestro, which I have mentioned many times in this blog, were designed exactly to answer the question used in the title of this article, to be practically adopted by a large variety of organizations and industries and to go to work for them within days or weeks, not months or years.

As for the attitude component I mentioned above, it is my hope that more company managements will be willing to make the commitment to such technology and especially its continual use throughout the budget year.  Those who do will never regret it.

Tags: budget software, budgeting, budgeting and forecasting software, budgeting and planning, budgeting software, business budgeting software

The CFO’s Revised Job Description

How the CFO’s position is evolving and why IT must be his or her responsibility

Tradition dictates that a CFO is someone tasked with managing all finance and accounting functions.  I remember not too long ago that one often had to be a Certified Public Accountant to be considered for the job.  That has all changed in the last 15 or so years.

The CFO position, which still stands for “Chief Financial Officer” (although I have heard references to “Chief Future Officer” and a couple more I can’t remember) has a different scope and meaning these days.

A while ago I wrote a blog article titled “CFO’s Big Picture”  about how the CFO can leverage available data and technology to help the management team steer the organization on its planned course, minimizing costly mistakes that frequently occur due to lack of data, bad data, or often ill-timed data.

I recently read an article on TechTarget, titled  “Should the CFO sit at the top of the IT Reporting Structure?” authored by Rob Livingstone of Rob Livingstone Advisory.  In this article, the author explores why IT departments in many organizations still report to finance and not directly to the CFO.  His conclusion is that in organizations where IT systems and technology are critical to the daily operation of the business and are pervasive throughout the company, IT reporting to finance may no longer be appropriate.

My observation is that Information Technology is rapidly becoming the backbone of nearly every organization, regardless of industry, company size, company culture, or geographic location.  I don’t know of many business transactions, marketing activities, sales operations, manufacturing, or inventory and product fulfillment that do not involve IT.   In fact, turn the IT infrastructure off and you will paralyze even the smallest company.

Since Information Technology can be innovative (when allowed by management and properly managed) and is crucial to the success of any organization, it is upper management that must be directly responsible for this function and the CFO is the position it must report to, and in my opinion not just in companies where IT is pervasive.

Areas such as Planning and Budgeting, Business Performance Management / Business Intelligence, Enterprise Resource Planning, Manufacturing Automation, Advanced Planning and Scheduling, Supply Chain Management, Human Resources and several others are now 100% dependent on Information Technology.

It is the CFO who should, through vision and a close partnership with the CEO, define the IT policy and drive the organization to excellence through embracing the right technologies and solutions to closely match the organization’s needs.

Tags: budget maestro, budgeting, budgeting and forecasting software, budgeting and planning

Internal Controls and Your Budget

Why having internal control over the budget process does not automatically mean it is done correctly.

I just finished my portion of work in a recurring, annual audit and certification of internal control over financial reporting in a large, publicly held manufacturing company.  This is an engagement designed to assist management in their assessment of design and effectiveness of various internal controls over financial reporting, mandated by the Sarbanes-Oxley Act of 2002 for most publicly traded companies.

Among the many functions in accounting, finance and operations, this company had a small set of controls surrounding the area of budgeting and forecasting.  Although these controls do not directly affect financial statements, evidence of their performance is an indication of effective finance policies, attention to detail and management’s commitment to execute its entity level controls.  The annual budget internal controls usually are concerned with the existence of an annual plan, its review and approval by management and the review and approval of changes to the budget throughout the process.

One of the activities I am always involved in when testing controls over the annual budget includes reviewing the budget itself.  As is common with very large organizations, this company’s  budget consisted of a compilation of many worksheets prepared and submitted by regional divisions and operating units, and entry into the corporate finance management software.

To my surprise, the first time I worked on this engagement, there was no budget of the corporation’s balance sheet.  There was only an income statement, by region, by operating division and by business unit and product line.  When I asked one of the finance managers why they were not budgeting the balance sheet his response was: “we never do that”.  Since I knew the real reason from experiencing the same phenomenon in other organizations I accepted his response.

Anyone who works in the administration of large enterprise financial management software knows how difficult and costly it is to properly implement and maintain the software across a large organization.  Creating a model that will project a complete and accurate balance sheet is not a trivial task.

In fact, unless the planning software incorporates (by design) transaction based forecasting technology, the forecasting of a balance sheet with all of its accounts across the budget period is going to be a rough approximation of these account balances.  I have already explained this concept in earlier blog posts such as: “Those Debits and Credits”.

This manufacturing company passed its internal audit of the budget process controls.  There was evidence of the existence of an annual budget, evidence of review and approval of this budget, and evidence of review and approval of changes to the budget and its periodic re-forecasts.

While there were no compliance issues, I kept asking myself whether this organization could really obtain complete benefits from their existing budget process, without budgeting the balance sheet.  My conclusion was that without the proper tools and employing a lot of hard work and constant review and troubleshooting, this company, like many other similar organizations, will simply continue to ignore this important component of the budget and will dismiss it as “unimportant” or something that traditionally has never been done.

I couldn’t help but remind myself how Budget Maestro, delivers the benefits finance and corporate managements truly need.  This software automatically, completely and accurately forecasts the balance sheet (and its derived statement of cash flows) without any user-supplied formulas, macros or links.

In contrast to the manufacturing company example above, companies that use an application like Budget Maestro, whether or not they employ a formal set of internal controls over the process, benefit from an accurate set of forecasted financial statements and other business intelligence, gaining better insight into the future financial health of their organizations.

While Budget Maestro may not directly fit into very large and complex organizations like the one described here, it is well suited for small and medium size or even mid-market companies that understand that the budget process and its companion analysis process  should be used for their intended purpose.

I only hope that as time goes by, many more organizations will come to the realization that just having good control over the budget process is not enough in getting the true benefits from it.

Tags: budget maestro, budgeting, budgeting and planning, business budgeting software, cash flow reporting

Cash comes first

How forecasting cash should not be a difficult chore with the right technology

I recently came across an article in Accounting Today titled:  “Art of Accounting: Start with the Cash”, authored by Edward Mendlowitz, CPA, a partner at WithumSmith+Brown, PC, CPAs.

In this article the author tells a story of an audit he once performed with an assistant where the author decided to perform the cash accounts audit by himself, a task usually delegated to junior accountants and regarded more of a “chore” than “serious” audit work.

As the author of this article points out, cash is one of the most important accounts on a company’s balance sheet and is at the top of the chart of accounts and the first line on the balance sheet, being the most liquid asset.  By auditing cash first and with its many in and out transactions, one can learn a great deal about the business under audit.

I can personally relate to this story as I have seen on more than one occasion how cash accounts were given to entry level or junior accountants, especially in larger accounting firms.  The reason was usually:  “They need to start somewhere”, and “doing a lot of grunt work in auditing cash accounts is a good place to start”, something senior auditors may regard as “unimportant” or perhaps a “chore better left to junior accountants”.

There is sometimes a similar mentality when it comes to cash planning and budgeting or forecasting the company’s cash flow.  The focus is often on the P&L (Income Statement) and achieving a desirable net income.  Cash and other balance sheet accounts are often not part of the budget preparation process.

To make things worse, those who decide to plan and budget their cash quickly realize that cash is very difficult to forecast.  Unlike its actual counterpart, though tedious to review or audit because of the numerous transactions flowing through this account, forecasting cash account balances with any degree of accuracy and completeness is not feasible using common planning methods and tools (e.g., spreadsheets or other purpose designed software tools that behave like spreadsheets).

In order to be able to successfully forecast cash we need to use a completely different approach.  We need to have the beginning cash balance (taken from the closing cash account balance in the accounting or ERP system) and consider all cash transactions resulting from all forecasted activities in our plan or budget.  What this means is that every item we forecast (sales, inventory costs, operating expenses, personnel expenses, buying and selling of fixed assets, borrowing activities and repayments, etc.) must be considered in order to arrive at a forecasted balance for each of the budget periods in our plan.

This cannot realistically be accomplished using a spreadsheet or even specific budgeting and forecasting software applications that use a “spreadsheet” like approach (with formulas, functions, data links, etc.).

Thankfully, there is a radically different way to do this, which is why I always recommend taking a serious and close look at Budget Maestro.  This is because the application uses the above-mentioned approach of transaction based forecasting.  To me, this software is a clear innovator and quite possibly a game changer.

Using this software, cash, always the company’s lifeline, can be forecasted with a greater degree of confidence, way in advance of cash crunches or other crises, allowing corrective measures and important decisions to be made when there is still time to rationally make them.

As the author of the above referenced article says, cash audit work should be left to senior personnel because of its great importance.  Using our Budget Maestro software example, forecasting of cash (and all other balance sheet accounts) should only be done by purpose build software, specifically designed to do that.

An added bonus, among many other things, is the fact that forecasting cash does not involve any grunt work.   With Budget Maestro, these tasks are performed quickly, automatically, completely and accurately.

Tags: budget maestro, budget software, budgeting, budgeting and forecasting software, cash flow, cash flow analysis, cash flow budgeting, cash flow reporting

Accounting and Business Data Come to Life

How a simple setup can empower your business decision-making process

I recall consulting to a small manufacturing company (about 350 employees) a few years ago where I was tasked with setting up a reporting system and some fundamental internal control and internal audit functions.  The first thing that struck me was the incredible amount of data flowing out of the accounting system.  Just about any data residing in the accounting software database was accessible, either through standard reports or custom database queries.   Typically I see this in larger organizations with more sophisticated IT systems, but here was an opportunity to do something meaningful with all that data.

My immediate reaction was, is anybody really able to make sense out of all this data?  Can they look at it and understand it in a meaningful way?  And finally, how often do they look at the data and are they able to make any informed decisions after analyzing what their system provides?

It became apparent that poring over columns of numbers and seemingly an endless number of sheets of paper was a chore no one at the company enjoyed doing, and usually resulted in the reports either being filed away or shredded.  No informed decisions could be made in the way the data was presented.  There was absolutely no value in continuing this pointless exercise.

The first thing we did was set up a financial dashboard with a graphic display of all key data.  The incoming data was selectively used to visually display (using MS-Excel’s comprehensive charting and graphic tools) charts of key financial ratios and key performance indicators.

Unfortunately, the raw data had to be manually keyed into certain Excel tables that drove the visual dashboard.  There was no automated link to accounting data or budget data and all reporting was two dimensional and could not take advantage of the multi-dimensional nature of certain business data, such as sales regions, product lines, customer classes, etc.  However, this was a giant step forward, in a journey of discovering additional automation opportunities.

We set up charts with monthly data points for all key sales data, gross margins, short and long term solvency ratios, turnover ratios, financial leverage ratios and several of their specific industry KPIs.  Key financial statements were also formatted using pre-designed templates.  Now everything was visually available to view and analyze.  An endless amount of meaningless raw data has finally come to life and encouraged management to seriously look at it from a perspective never available to them before.

For the first time they were able to see specific trends, strengthening and deterioration of certain financial ratios and KPIs.  The decision making process was finally starting to make sense.

The point here is that we all respond so much better to visual representation of data; data that our computer systems and software have little or no difficulty processing, but which we have such a hard time interpreting unless it is visually appealing and well organized.  With the right tools, this data can easily be translated into a colorful and engaging format, encouraging us to closely pay attention to it and respond quickly to what it is trying to tell us.

Fast-forward a couple of years.  I recently discovered a software solution that deals with all the shortcomings listed above and is fully integrated with a company’s business data.  Analytics Maestro mentioned in my blog entry titled “Better Analytics for everyone ” .

Within a few days of using Analytics Maestro I realized that I finally found a tool that not only can address the issues described in the example above, but can perform automatically and nearly effortlessly (no data entry needed) and with no errors, while utilizing the multidimensionality of the database.

In its most fundamental function, Analytics Maestro seamlessly connects to data cubes (multi dimensional data arrays), which store data from my automated budgeting and forecasting solution, Budget Maestro, also made by Centage Corporation.  Budget Maestro collects data from accounting software packages or ERP solutions, as well as all of it’s own budgeting and forecasting data (see my other blog entries on this enterprise budgeting and forecasting solution).

When you set up display templates using Analytics Maestro, inside MS-Excel, data residing in data cubes create your specific charts, graphs and reports every time you connect to the data cube and with up-to-the-minute accuracy and detail.

It is remarkable to note that all of Excel’s graphic and charting capabilities are available to Analytics Maestro users.  Presentation quality financial reports are also available and will have the same appearance (i.e., format) each time you run them.  And like in Budget Maestro, no formulas and links are ever used or required in Analytics Maestro.  There is 100% automation and zero errors.  The source data will always be faithfully represented in Analytics Maestro.

As soon as closed accounting periods’ data is available, it automatically appears as a visual representation of the data in Analytics Maestro, once a connection to the data cube is made.  Any reports set up in the software will also automatically update.  Various dimensions can be used to display specific data.  With a click of a mouse, specific dimensions are selected and only data that pertains to these dimensions shows in the charts and reports.  Slicing and dicing data has never been this easy.

Of all the reports and charts I’ve already put together, I personally like to display graphs of critical financial ratios, both the forecasted versions and the actual ones.  With Analytics Maestro connected to Budget Maestro, this becomes a simple reality.  I can see in charts how actual current ratios change from period to period against their budgeted version (which is automatically derived from the Budget Maestro model).  Other ratios based on Balance Sheet or Income Statement data are very easy to display. What about the accuracy of forecasted Balance Sheet accounts required to produce accurate financial ratios?

You may realize by now that Budget Maestro is the only product of its kind to automatically calculate an accurate Balance Sheet (and a Statement of Cash Flows), using your budget line data input and Budget Maestro’s selected, built-in, business rules and drivers.  When you have a reliable and accurate forecasted Balance Sheet, you can display these key Financial Ratios with confidence using Analytics Maestro.  Of course, data coming from the actual and budgeted Income Statement (and all of its versions), and other reporting data defined in Budget Maestro can also be part of the Analytics Maestro display.

There is no limit to what you can do with this software.  The hard part is to restrain yourself to creating only the number of key reports, charts and visual displays that really need to be analyzed and monitored.  It is so easy to get carried away and create a multitude of colorful charts and reports that you may not be able to comfortably analyze and monitor periodically.  Usually, less is more, and you’ll soon know exactly what to focus on, especially when it’s so simple to create (and delete) elements in your display output.

The way I see it, with Analytics Maestro you’ll never look at your accounting and business data the same way again.  There is simply no substitute for accurate, reliable and timely delivery of key data in a way you can immediately see and understand.

Tags: budget maestro, budgeting, budgeting and planning

A new way to look at IT budgeting

Let’s look at both costs and benefits

Of the many articles that are published on, one particularly got me to think about a popular topic I’ve had to deal with quite a bit in last 10-15 years, namely, Information Technology Budgeting.  This article, titled “Keep an eye to value in the IT budgeting process”, and is authored by Rob Livingstone, Owner and Principal, Rob Livingstone Advisory.

The main point the author is trying to make is that while IT costs can be relatively easily forecasted and formally budgeted, the value that these costs will (and should) bring to the organization are not as simple to forecast.  However, value and benefit of these IT capital expenditures should be tied to the underlying expenses.  The author then goes on to recommend several key activities that will help the organization in tying these two pieces together.

This reminds me of how we can use KPIs (Key Performance Indicators) and drivers in our planning and budgeting process.  IT capital expenditure budgeting is a great example where KPIs and drivers should be used.

In my blog post “Do you Budget for Technology Spending?” , I touch on the topic of using drivers in the planning solution for IT budgeting.  KPIs are used to define these drivers and the appropriate expense results are dependent on these drivers.  For example: IT spending $s per FTE (Full Time Equivalent).

In that blog post I also made reference to Budget Maestro, where drivers (based on KPIs) can be easily placed without any programing, formulas, macros or links.  The output is directly driven by these values and always follows the pre-determined business rules established for them.

To take it one step further and in conjunction with the topic of the above referenced article, KPIs can be developed to establish drivers that will affect revenue streams in the revenue module of the planning application.  In Budget Maestro this is as simple as defining the driver and tying the revenue line to it.  As mentioned before, this step does not involve any programing or formula work, which is one of the features that stands out in Budget Maestro and makes it much more practical to implement and maintain by many organizations.

To use a simple example, a revenue line can be defined and tied to a driver based on IT capital expenditures.  This driver can be the number of outbound sales calls made based on equipment capacity budgeted for in IT capital expenditure.  That in turn, and using an established KPI called revenue per outbound call, will drive the forecasted revenue on that line, which becomes part of the organization’s budget and will roll up according to the enterprise structure in the system.

This is one of many examples that demonstrate how seemingly complex planning challenges (e.g., forecasting value derived from IT capital expenditure) can be overcome with use of KPIs and drivers.

Employing an advanced planning and budgeting software solution, such as Budget Maestro makes it logical and straightforward to employ these KPIs and drivers.  An obscure concept of forecasting and measuring value derived from use of technology becomes manageable and with useful and hopefully tangible results.

Tags: budget maestro, budget software, budgeting, budgeting and forecasting software, budgeting and planning

How Much of Your Credit Line Can You Tap?

Forecast your ability to borrow on your line of credit with accuracy and confidence

In a recent blog entry I tried to convey how important it is to be able to accurately and completely forecast a company’s balance sheet and the many benefits associated with it.  For many Budget Maestro customers  who also use Analytics Maestro, this is an everyday reality.

We looked at one important benefit, the forecasting of meeting or breaching loan covenants and how properly planning and continuously analyzing (with Analytics Maestro) can show us in advance how the company is going to perform and what changes need to be made (hopefully well in advance) in order to eliminate or at least reduce negative results that can have severe consequences to the company.

Here is another great benefit of balance sheet forecasting:

Most small and medium size companies have a line of credit (LOC) established with their local bank or a financial institution.  In addition to LOC covenants that are in the LOC agreement, all banks have some restrictions imposed on the use of the credit line.

For example:  The bank establishes a LOC limit (e.g., 13.5 MM).  Then, if the LOC is secured by the company’s accounts receivable and inventory, the lender will almost always have restrictions on these two assets, which means that less than the full asset value can be used to secure the outstanding LOC balance.  In our example let’s assume that only 80% of all eligible accounts receivable can be used to calculate the maximum amount that can be borrowed and remain outstanding on the LOC.  We will further assume that only 50% of the inventory valuation (at each period end) can be used in the calculation.

In addition, the lender may stipulate in the LOC agreement that the maximum inventory value that can secure the LOC is $7.5 MM, regardless of the actual valuation.

Normally, without proper forecasting and analysis tools company managements are faced with the challenge of manually forecasting how much of the credit line amounts may be available to them during the plan or budget period (e.g., 12 month, 24 months, etc.).  In reality, many smaller companies are unable to do that or prefer to ignore it due to lack of proper technology tools.

This is in addition to the difficult task of forecasting cash flow and the cash account balance at each budget period end, unless the company’s balance sheet is accurately and completely forecasted.  In previous posts we saw that balance sheet forecasting is not only possible with Budget Maestro, it is a reality and is routinely used by the companies who use this application.

How would our LOC example work using Budget Maestro with Analytic Maestro?
First, we must complete our company financial plan and budget.  This is done in Budget Maestro and does not require programming or entering any formulas, links or macros.  We rely on using built in business rules and logic and can depend on drivers we enable, as well as other entered forecasted data and business specific assumptions.

The budget entered will automatically generate forecasted financial statements that cover every period included in the budget.  The obtained forecasted balance sheet will show us the forecasted cash, A/R and inventory balances (and all other balance sheet account balances).

Using Analytics Maestro, any data available in Budget Maestro can be displayed in any format we desire.  Since Analytics Maestro uses MS-Excel’s formatting and display capabilities we can customize reporting templates that will automatically pull data from Budget Maestro and display them exactly the way we want them to look.

A custom display showing the available LOC balance is set up using the Budget Maestro forecasted AR and Inventory account balances, in conjunction with the bank’s restrictions on these two accounts.

Using our above example (13.5MM LOC limit, 80% of AR eligible, 50% of Inventory eligible to a maximum of $7.5 MM) and with the following five ending balances:

                           Jan 2015    Feb 2015    Mar 2015    Apr 2015    May 2015
AR Bal(MM)    6.4              7.3                7.1                7.5              8.1
Inv Bal (MM)  13.6           14.4              15.1              15.7             16.2

we can see that in these forecasted periods the available LOC balances (how much we will be able to borrow on the LOC) are:

                      Jan 2015    Feb 2015    Mar 2015    Apr 2015    May 2015
LOC Avail.     11.9              13.0              13.2             13.5             13.5

A graphic representation of the forecasted available cash from our line of credit can be quickly set up and will display the above data as follows:

In this example we can clearly see from the display output that the company is limited in the first two months by the inventory credit limit component of the LOC and in the last two months of this example by the LOC total limit.  This data can be made visible for every period of the budget, for example 12 months, 24 months or longer.  It can easily be compared to current actual data as well as historical data.

As budget data and assumptions are changed, all financial statements are updated in real time.  The data used in our example will also be updated, showing the new results.  If you have more than one version of the budget set up in Budget Maestro, as well as actual and historical data, you can see all that as well.  With multiple LOC’s (in multiple entities) you can see each LOC data individually, globally or in any combination of entities.
With a forecasted balance sheet, using this example, not only can you project your cash balance and other balance sheet key account balances at each budget period-end, you can also clearly see the available cash from your line of credit, using the exact terms and restrictions imposed by the lender.

You can plan ahead to make this available LOC cash work better for the business and can also be better prepared to request changes (e.g., increases) to the LOC well in advance before you run into a cash crunch.  On the other hand, you can plan on reducing the LOC balance over time by better planning your inventory or production demand, better managing your vendors or supply chain, etc.

As is always the case with balance sheet forecasting, Budget Maestro with Analytics Maestro, takes the guess out of your forecasting through a clear and up to date presentation of key balance sheet numbers, financial ratios and other automatically calculated key performance indicators as well as provides a full set of forecasted financial statements just like your actual accounting system, except projected into future periods.

Tags: analysis, budget maestro, scenario planning, what-if analysis, what-if scenario

Are Data Scientists and Financial Analysts Becoming Obsolete?

Why data scientists are still needed in large organizations and how technology can offer great benefits to smaller companies.

I read an article by Nicole Laskowski, Senior News Writer, titled:  “Will the rise of self-service BI tools lead to the demise of the data scientists?”

The author questions whether readily available business intelligence tools used by non-technical company employees, without help from financial analysts and data scientists, may make the reliance on such corporate positions a thing of the past.

It’s true that with the help of some very advanced analytical tools, there is less need to perform intense data mining and other activities that extract valuable data out of corporate databases or data warehouses.  These tools are now available at lower than ever licensing and implementation costs and can be found even in small and medium sized organizations.

Of the many uses of such data analytics tools, business performance management comes to mind, along with analysis of financial statements, actual to budget variance analysis and of course various marketing oriented analyses that can tap vast amounts of information stored in multiple data warehouses around the globe.

As the above referenced article points out, data scientists or financial analysts are still going to be in demand, especially in large organizations where data analysis needs are complex and where the majority of data queries and reports are custom built for specific users or functions.  The tools and expertise required to extract and present the data far exceed the knowledge and experience of the average employee or manager and the conclusion of course is that these positions are here to stay and perhaps even expand.

What about small and medium sized businesses?  As it turns out, these are companies that never had a great number of financial and business analysts on staff and many still have few or even none.  With the availability of analytics software tools, some of which can interface with the company’s accounting or ERP software, many employees and managers in such companies can gain access to specific data and in a format meaningful to them.

A good example is the business intelligence gained from analysis of actual financial performance as evidenced by accounting data extracted from the accounting or ERP software for recently closed accounting periods or a series of historical periods (months, quarters, years).  This data is compared in the analytics software with similar data extracted from the planning and budgeting software, representing future accounting periods.

The result is a clear picture of how the company performed against its approved budget.  The analytics software can be set up to give its users key data in pre-defined formats, either graphical, tabular or both.  Users can slice and dice the data in any imaginable way in order to extract views of specific reporting entities, sales territories, product lines, customer classes, etc., for any desired time frame.

The information gained from this analysis, which can be performed as soon as an actual accounting period is closed, is intended to convey key data to management, who are tasked with making business decisions based on this data.  Since the analysis should never be delayed in a well-executed process, management can continually steer the organization in the right direction, while minimizing business errors and wrong decisions.

Since this process and its underlying software tools are now available to small and medium sized companies, the software and its users jointly become the “data scientists”.  As for large organizations and their much more complex needs, it looks like data scientists, business analysts and financial analysts will continue to enjoy job security.

Tags: analysis, budget maestro, forecasting, scenario planning, what-if scenario