The Budgeting and Forecasting Experts Blog

Closing the Books Faster?

The benefits of a quicker close process…

Hyoun Park, founder and principal consultant at DataHive Consulting, recently posted “Five Steps to Closing the Books Faster” on  He listed five steps that an accounting and finance department take in order to close the accounting period quicker.  “Closing” faster has been a popular topic of discussion as it enables management, lenders, shareholders, auditors, etc. to have financial results on which so many crucial decisions are made upon.

In recent years, many publically traded companies have experienced shortened filing deadlines of their annual and interim reports.  For example, accelerated filers must file an annual report within 75 days of their fiscal year end, yet large accelerated filers only have 60 days to complete this filing the FORM 10-K.  Similarly, quarterly reports are only given 45 and 40 days from quarter end, for the type of filers described above respectively.

This means that there is less time to perform annual audits and quarterly reviews.  To add even more pressure to the deadlines, additional compliance activities, such as auditing of certain internal controls must be performed in conjunction with close activities.

Non-SEC filers, like privately held companies and not-for-profit organizations, for example, also strive to shorten the close period.  Those who undergo an annual audit of their financial statements and quarterly reviews by an external auditor must be able to have all pertinent financial data and internally prepared financial statements ready for review or audit.

Although currently much less common, some financial and accounting systems make it easier to perform transactions in a new period when the previous period is closed.  Errors of posting to a previous, open period can be prevented.

In addition to the benefits mentioned above, additional incentives are:

  • Management can receive and review financial statements sooner.
  • Consolidation of financial statements, including inter-company eliminations can start earlier in the cycle.
  • There is more time to review the financial data and prepare more complete and accurate financial statements with proper disclosures and footnotes.
  • Less overall time and effort is spent by the accounting and finance departments each accounting period with a more streamlined process.

Lastly, there is the benefit of having final, actual accounting data available to the finance group using planning software for analysis against an approved budget and periodic re-forecasts.  The quicker this data is available for analysis, the quicker managements can review it and make timely and informed decisions.

Companies that use planning and budgeting solutions with integrated financial statements can benefit from having good insight into the future financial health of their organizations by comparing the forecasted statements with their actual counterparts, as soon as the accounting period is closed.  Closing the books faster can be a challenge for many organizations.  However, with the proper planning and discipline, the benefits are significant.

Tags: analysis, budget maestro, budget software, budgeting, budgeting and forecasting software, budgeting and planning, budgeting software, cash flow, financial planning software, spreadsheets Tagged ,

Cash Flow Statement: One of Your Most Trusted Tools!

And why you need better control over the preparation of this statement…

I just read article “SEC Nudges Companies on Cash Flows”, written by Compliance Week author, Tammy Whitehouse.  It refers to a study done by the SEC of cash flow restatements, as conveyed by T. Kirk Crews, Professional Accounting Fellow, Office of the Chief Accountant, U.S. Securities and Exchange Commission.  Findings suggest that the majority of errors were due to poor internal control over financial reporting, as well as too much reliance on end-user computing tools, such as spreadsheets. The article continues to explore the various possibilities leading to these errors, and stresses the importance of having the right processes in place with the appropriate internal control framework and full understanding of FASB ASC 230 – Statement of Cash Flows.

The statement of cash flow expresses a company’s results in terms of debits and credits to operating, investing and financial activities by the company, without adjusting for accrued revenues and expenses. It does not show whether or not a company is profitable.  However, it does in fact show the cash position of the company at a specific date by measuring revenue against outlays.  While a cash flow statement is required by the SEC in FORM-10K and FORM-10Q filings, as well as a common practice in all audited and reviewed financial statements prepared by external auditors for privately held companies, a forecasted Statement of Cash Flows is rarely seen in the budgeting and forecasting process.

Why is the Statement of Cash Flows so important?

The Statement of Cash Flows shows the sources of all cash receipts and cash outlays segregated into the following categories:

1)    Cash Flows from Operations
2)    Cash Flows from Investing Activities
3)    Cash Flows from Financing Activities

Whether the direct method or the indirect method are used, all cash receipts from customers, loan proceeds, sale of company stock, sale of assets and other sources are clearly listed on the statement, each appearing in one of the three categories listed above.  All cash outlays such as payments to suppliers, employees, taxing authorities, interest payments, payments for investments in other entities, and payments for acquisition of assets also appear in these three categories.

Budget Maestro Cash Flow Report Tile

In the case of a forecasted Statement of Cash Flows used for planning and budgeting, the benefits of having an accurate and complete statement are projecting and understanding:

1)    How much cash will be received in each planning period from the three identified cash flows categories.
2)    How much cash will leave the organization via payments to suppliers, employees, taxing authorities and other entities, segregated by the three cash flows categories.
3)    Cash requirements during the planning period and arranging for financing, sale of assets and other activities in order to meet the anticipated cash needs and well ahead of time.

My observation and experience is that many ERP and accounting software solutions do not produce an accurate Statement of Cash Flows, leaving users to either program it themselves in their ERP system or resort to using spreadsheets.  Spreadsheets are neither an effective nor efficient tool to produce financial statements.

The solution is to have more ERP and accounting software vendors provide a pre-programmed template for this statement where users can link their GL account or account groups to various components of the Statement of Cash Flows.

As far as planning and budgeting solutions are concerned, I’d like to see an integrated Statement of Cash Flows, with an integrated balance Sheet and Income Statement.  These statements should be automatically generated from the aggregation of all user forecasted data and with the use of the beginning Balance Sheet account balances, and will produce a complete and accurate set of financial statements for every period in the budget.

Readers of this blog know that with a software application like Budget Maestro, forecasting an accurate and complete Statement of Cash Flows is reality.  An accurate and complete Statement of Cash Flows is at the top of my list, along with the Balance Sheet, both for actual accounting and for budgeting.  There is little wonder now why the SEC is urging companies to take a closer look at their internal control over financial reporting, particularly the preparation of the Statement of Cash Flows.

Tags: budget maestro, budget software, budgeting, budgeting and forecasting software, budgeting and planning, budgeting software, business budgeting software, cash flow, cash flow analysis, cash flow budgeting, cash flow reporting, financial planning software, forecasting, spreadsheets Tagged , , ,

A Physical and Mental Health Predictor? A Budgeting Analogy

Probably not in the near future but your business can (its financial health that is)…

I just left my doctor’s office after completing my annual checkup.  While everything seemed to be in order I had a quick discussion with him on whether or not it would be possible with the new advances in medicine to accurately predict one’s future physical and mental health based on their current health, family history and perhaps other factors.

Imagine a system where all your health history, current vital signs and other pertinent information was in a computer database and while performing certain tests, the additional information was added to the existing data and a forecast or prediction of your future health became available to read and analyze.

This seems rather futuristic and perhaps unattainable. Nonetheless, it is a very intriguing idea.  What if we could start a preventive maintenance program in response to some prediction of a future health issue or disease?  This would be in addition to using existing well-known methods of maintaining health through proper diet and exercise.  Of course, some people may not want to know their future medical and mental health for various reasons but I think the majority of us will want that.

While we would have to wait for this technology to become available, we do have the ability today to predict and forecast a different kind of health.  What I am referring to is the future financial health of a company.  Unfortunately, many organizations are not aware of this, or are so wrapped up in their old financial processes that this hasn’t yet become reality.

Many companies that prepare their budgets and maintain them through re-forecasting often don’t fully benefit from these activities.  Even if the budget does not remain static throughout the budget time horizon, the information obtained from this process is limited and sometimes misleading.

Here’s a good example:

A budget only generating a forecasted income statement (P&L) for each period in the budget does not even begin to tell the entire story.  Without a budgeted balance sheet (and the derived statement of cash flows) you cannot forecast vital information such as available cash balances, cash needs, future receivables and inventory levels, future payables and other debt obligations, ability to meet loan covenants and many other crucial pieces of information.

You may have an insightful forecasted set of revenue lines and expenses.  However, can you say with confidence that you’ll be able to achieve these revenues at the forecasted costs?  Will you have sufficient cash to do that?  What about maintaining debt covenants?  Will your inventory levels and accounts receivable be sufficient for you to adequately draw on your line of credit?

The answer to these questions is no.  With only a forecasted income statement you can’t possibly forecast the financial health of your company in future periods.

What about the available technology?

Observing advancements in finance software in the last 10-15 years, I see a new trend emerging:  A complete planning, budgeting and analysis software solution that takes all user programming and formula work out of the process, while allowing users to collaborate on preparing a budget, using pre-defined system business rules, working with drivers and other allocation tools and automatically generating a complete set of future period financial statements.

Budget Maestro with Analytics Maestro is a great example of such a system.  When you are able to gain insight into the future financial health of your company you are able to better plan for the future, make more intelligent decisions and avoid mistakes.  Since we cannot yet predict our future physical and mental health let’s stay healthy doing what we know today but forecast the future financial health of our companies with the technology that is here now.

Tags: budget maestro, budget software, budgeting, budgeting and forecasting software, budgeting and planning, budgeting software, business budgeting software, cash flow, cash flow analysis, cash flow budgeting, cash flow reporting, financial planning software, forecasting, variance analysis

How Budget Maestro offers Relief on Revenue Volume Forecasting for Wholesale Client Part 2 of 2

Revenue volume forecasting is often the primary variable for wholesale and retail companies’ annual budgeting process.  As the forecast timelines shorten to weekly updates, the need to adjust sales volumes becomes paramount, and the risk of maintaining and troubleshooting a formula based tool like Excel is inefficient. With helpful options of standard and component costs, inventory and backlog, the Revenue model of Budget Maestro can offer relief and assistance. One of Budget Maestro’s wholesaler clients, Wholesaler, is a master distributor who greatly benefits from the software.

Importing more than 1,000 SKUs which are delivered to nearly 1,500 national clients, Wholesaler has intricate operations. Monthly updated “volume by product” and fluctuating exchange rates also result in rapidly changing costs. Budget Maestro allows Wholesaler to load volume assumptions from the sales team with the latest changes per SKU for each customer. In addition, the related material costs by SKU from the purchasing team can be loaded simultaneously to market demand. Drivers allow for assumptions of “cases per pallet” and “weight per pallet”, driving allocations of “warehouse costs per pallet” and “shipping costs per pallet”. All key costs of the acquisition, storage and distribution of the SKU by customer are handled with the Inventory Related Costs and Sales Related Cost models.

Once the latest metrics are loaded, all the results are pushed out to dashboards in the Analytics Maestro business intelligence tool.   This provides a graphical look at not only the profitability by customer, but also by SKU.  Due to assumptions that are built on the same foundational accounts and segments that are stored in the Dynamics NAV general ledger, Link Maestro is able to load actual data that aligns with the forecast assumptions.  This data synchronizes in Analytics Maestro as well allowing for budget to actual comparisons.   So they can slice and dice data for groups of customers by region or channel manager, as well ask SKU by product group, brand, warehouse, or sales region.  The synergy of Budget Maestro, Link Maestro and Analytics Maestro provides clients with a more granular look at the drivers impacting the bottom line.

Tags: analysis, budget maestro, budget software, budgeting, budgeting and forecasting software, budgeting and planning, budgeting software, business budgeting software, financial planning software, forecasting

Leveraging the Power of Revenue Modeling as part of the Budgeting Process Part 1 of 2

For many clients, revenue is the most important part of the budget.  Not surprisingly, Budget Maestro’s revenue modeling capability is one of the most elaborate, featuring a similar concept of related costs, just as it offers related expenses in payroll.  For revenue, these activities are the related costs in inventory related costs (IRC) and non-inventory or sales related costs (SRC).  In this two part series, we will take you through different clients and their approaches to revenue.

revenue modeling

Representing nearly 30 percent of the Budget Maestro install base, discrete and process manufacturing business are the largest segments of Budget Maestro users.   This week we took a plastics company through its options of putting together revenue related costs.  It considered budgeting standard costs, by product pulling finished goods out of inventory.  The finished goods drive work-in-process, which in turn drives the raw materials (resin, bags, boxes, etc.), absorbed labor and overhead.  Although this looked promising and accurate, it didn’t account for bottlenecks in production and a seasonal business that required a stockpiling of inventory.  It needed to decouple the production of products from the demand for inventory.

The company turned off the inventory, work in process, related costs, and simply paid for the cost of goods sold with a credit to finished goods inventory.  The production model was then moved over to the capital asset budget.  Here it could still import its standard costs per unit as activities for all the steps in their manufacturing process.  It started with Finished Goods Inventory, and End Production Volume, which is now independent of the budgeted demand from the revenue budget activities.  It can be adjusted based on the monthly capacity of the packaging machines assumptions by the production manager at each plant.  The Finished Goods inventory was paid for with the same standard cost used in revenue crediting work in process.   The top level work in progress activities of WIP Materials, WIP Labor, and WIP Overhead break down the next level of Inventory.  This isn’t a straight pass through of unit volumes or timelines.  The volumes of inventory were one to one for Labor and overhead, but four to one for WIP materials as compared to finished goods.  So 250,000 units per month of finished goods used 1,000,000 units of WIP resin.  The WIP took advantage of the period shift as well so the timeline for buildup of WIP was based on the Finished Goods demand in the following month.  Likewise the purchase of the raw material resin was in the month prior to the WIP middle step.  The automation is now cascading off the finished goods production demand rather than directory from the revenue demand for finished goods.  Each of these volumes revenue units, finished goods units, WIP units, and raw material units has their own statistical account so both the revenue units and inventory asset units are available to compare how well the production budget meets the inventory demand in both dollars and units.

If we follow the dollars of the accounting through Budget Maestro for resin, we debit finished goods and credit WIP.  This drives the cascade of related activities of a debit to WIP resin and credit to raw materials resin in the prior month, which in turn drives a debit to raw materials resin two months prior and credit to cash.  For the labor the same finished goods record drives a debit to raw material labor and credit to labor absorption in the prior month.  It also drives a debit to raw materials overhead and credit to overhead absorption.  This is exactly what the client needed and they are now building out all the steps in their production process.

When the model is complete, the income reports show revenue, standard cost of goods, labor and overhead variance lines.  The related balance sheets will show inventory volumes at each level and the cash flows will show the cash generated from revenue, and well as the cash demand from inventory, labor, and overhead costs.  All of this detail is available to the “what if” engine to model versions of changes to sales volumes, production capacities, price or cost changes and their impact to Income Statement, Balance Sheet, and Statement of Cash Flow.


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

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