The Budgeting and Forecasting Experts Blog

Three Signs You’ve Outgrown Spreadsheets for Personnel Budgeting

Posted by John Orlando on May 23, 2013 at 3:22 PM

Growth is usually a good thing.  But when a business grows, personnel budgeting becomes more complex – too complex for spreadsheets.

Personnel costs are a large portion of most companies’ cost structures, and it is vital to have a clear, accurate and detailed view into the impact personnel costs have on the bottom line.

The high level view of a personnel budget will give the projected dollar amount a company will pay in wages and fringe benefits.  A spreadsheet can certainly handle this information – but there’s much more to personnel budgeting than wages and fringe benefits.

Here are three signs you’ve outgrown spreadsheets for personnel budgeting:

1. You can’t project the impact of medical insurance premiums.  Regardless of the size of your company, medical insurance plays a significant role in overall personnel costs.  For example, a detailed personnel budget will allow you to calculate the exact amount medical coverage cost based on each employee’s plan, marital status and family situation.

2. You get ‘surprised’ by bonuses.  Bonuses are generally a good thing – your employees are meeting – and exceeding – their targets.  The big picture tells you there’s more revenue coming in.  But can you project what those ‘home runs’ mean to your bottom line?  Do you have a clear understanding of your anticipated bonus pay out for each quarter?  Yes, there’s more revenue, but in this case it may not always mean more profit.  The last thing you need is to be surprised by what you need to pay out for quarterly and annual bonuses.

3. You have inaccurate numbers for seasonal and hourly workers.  Budgeting for salaried workers is fairly easy.  You have an annual fixed cost for each employee.  Hourly and seasonal employees bring a greater level of complexity.  For example, one windows product manufacturer in Maine sees significant seasonal fluctuation.  Summer is their busy time; winter is slow.  But simple changes in seasons – an early spring or exceptionally warm fall will stretch their season – resulting in larger payroll expenses.  Or in this season’s case, our late spring means a shorter season for them.

The complexity of personnel budgeting is further magnified by the number of employees.  A spreadsheet could manage these details for 10 – 20 employees (although it won’t be easy).  But once you move from a very small business to a true SMB, your spreadsheets will proliferate, the formulas will break and the data can become ‘untrustworthy.’

If these signs fit your situation, it’s time to look into a more sophisticated approach to personnel budgeting.  After all, it’s your bottom line – and you need a clear picture of it.

Tags: budget software, budgeting and forecasting software, budgeting software, personnel planning, spreadsheets

Three Questions to Ask Yourself When Budgeting with Spreadsheets

Posted by John Orlando on May 8, 2013 at 3:08 PM

 

The furor around the errors found in economists Carmen Reinhart’s and Ken Rogoff’s spreadsheet refuses to die.  The story has been covered by many different media outlets, including The New York Times and The Huffington Post.  To recap: these two leading economists made recommendations pushing global government austerity based on faulty data in a spreadsheet.

The world now knows what many CFOs and finance executives know: spreadsheets are error-prone and even simple errors can result in considerable ramifications.

In this case, the errors were, in fact, very simple.  The spreadsheet omitted some vital data and had an error in a formula.  These mistakes were discovered as other economists attempted to recreate the findings.  Correcting the errors changed the findings significantly.

What can you learn from this well-publicized and embarrassing mistake?  Here are three things to ask yourself:

1. Are you confident in your data?
When you are basing decisions on data in a spreadsheet, you need to take two things into consideration:  Is the data in the spreadsheet correct and do you have all the data you need?

2. Could your spreadsheet be replicated?
You and your management team base corporate decisions on the data contained in your spreadsheets.  If you needed to defend your decision, could you replicate the results?  Could someone else recreate the spreadsheet and come up with the same numbers?

3. How much risk do you face?
Your spreadsheet error is not likely to make the pages of The New York Times or The Huffington Post.  But even one simple error could reflect badly on you and your team.  Are you willing to risk your reputation on your spreadsheet?

It’s an “open secret” that large percentages of spreadsheets have numerous errors, yet spreadsheets are still the number one tool used for corporate budgeting.  Is the risk – and ramifications – of using spreadsheets worth it?

Tags: budget software, spreadsheets

Does Your Business Need Budgeting Software?

Posted by John Orlando on May 3, 2013 at 12:21 PM

Excel is the world’s most popular budgeting software.  But as we’ve pointed out before, Excel is really not the best way to budget, forecast and plan.  The reasons for moving to purpose-built budgeting software and off of Excel are myriad.

There are some signs you should look for; these will help you determine if Excel still works for you, or if you need to make a change.  See if you recognize any of these:

  • Your business is forced to accommodate your planning solution
  • You can’t synchronize business views
  • No one sees the whole picture
  • Your budgeting, planning, forecasting and reporting processes eat man hours; for some of your team, working on these in Excel is all they do.

One of your biggest challenges is finding budgeting software that is the right size for your company.  You’ll want the key features (listed below) of an enterprise software solution, without the price tag and complexity of one.

Once you’ve decided you to get real budgeting software and stop using Excel, you need to think about the core requirements for budgeting software.  These are:

  1. Implementation and ease of use
  2. One version of the truth
  3. Reporting takes center stage
  4. Collaborating is easy
  5. “Obvious” issues are easy to identify – they almost jump out at you
  6. Ad hoc analysis and ‘what-if’ scenario planning
  7. P&L,  balance sheet and cash flow numbers
  8. It doesn’t require IT to deploy or maintain
  9. Existing account structure remains valid
  10. It’s scalable

Nearly every business will have additional requirements that are specific to their business.  But this is a good start to help you get on your way to a better budgeting solution.  If you’d like additional insight into what to look for, download our white paper, “The CFO Guide to Budgeting Software.”

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

The Costliest Excel Error?

Posted by John Orlando on April 22, 2013 at 1:46 PM

Everyday organizations of all sizes base decisions on data they compile and calculate in Excel spreadsheets.  Most of the time those decisions appear to be OK.  But sometimes the decisions made on information contained in Excel are wrong.  And in some cases, they are egregiously wrong.

A recent simple Excel error has had worldwide ramifications.  Two Harvard economists, Carmen Reinhart and Kenneth Rogoff wrote a paper that identified a tipping point for government indebtedness.  This resulted in economists recommending  governments across the world take austerity measures to ward off a “threat to sustainable economic growth.”

As economists debated the conclusions derived from the data, another issue arose: other researchers couldn’t replicate the results.  A recent column by Paul Krugman of the New York Times covered the issue.  In “The Excel Depression,” Krugman wrote, “they [researchers] typically found some correlation between high debt and slow growth – but nothing that looked like a tipping point…”

As Krugman’s piece details, the Harvard economists allowed the Political Economy Research Institute at the University of Massachusetts Amherst to examine the original spreadsheet.  They found the spreadsheet lacked some vital data and that there was a basic Excel coding error.

Sadly, those of us in the corporate budgeting, planning and forecasting world are all too familiar with the ramifications of one simple Excel error.   There are plenty of other examples of how spreadsheet errors can lead to significant negative outcomes.

Unfortunately, one small Excel error can embarrass even the smartest people around.  This is what happened to the Harvard economists.  But the reverberations of how people acted on this information are still affecting the economies of countries worldwide.

That’s one extremely costly Excel error.

Tags: spreadsheets

The Cost of Budgeting with Spreadsheets

Posted by John Orlando on April 12, 2013 at 4:08 PM

In an earlier blog post we discussed some of the risks when using spreadsheets for budgeting.  Now we’re going to look at some real world examples of the ramifications of errors in spreadsheets.

Lost Money

This multi-billion dollar food service contractor signed a contract with a major entertainment resort.  The contract was for $20 million in food services.  The Pro Forma budget included account food cost and service expenses; initial calculations showed a $3 million dollar net profit.

Unfortunately, there was an incorrect food expense structure error that not only eliminated the profit, but it also resulted in a loss for the company.

Once the company caught the mistake it needed to rework the contract to stop the losses.  But, the losses from the first five months of the contract were never recovered.

Lost time

A $100 million manufacturing company had a near-final budget that was in its third iteration.  The CFO’s staff provided 50 different department managers with a standard template for final expenses.  The template listed account numbers down the side of the spreadsheet and months across the top of the spreadsheet.  All the department managers needed to do was to add expenses by account.

Once the CFO’s team collected the spreadsheets and started consolidating them, they realized some managers had changed the template.  They added rows to the spreadsheet to clarify the numbers.  Some sheets had 60 rows; others had 61, 62 or 63 rows.

Consolidating these spreadsheets was further complicated by the need for multiple versions to show profitability increases of three and ten percent.  In the end, it took the CFO’s team almost 12 hours to consolidate the 50 spreadsheets.

Lost Credibility

The marketing department for a $10 million software company wanted to expand its budget.  The marketing manager finalized his budget and presented it to the CEO and CFO.

Unfortunately, there was one simple error, which resulted in the CEO and CFO ending the meeting, worried how many other errors were in the spreadsheet.  The manager was told the CEO and CFO would not discuss this again if the data was incorrect.  This waste of time resulted in the marketing department’s request for an increase being denied, and the manager’s credibility was called into question.

If you are still using spreadsheets for budgeting, you need to ask yourself a question: can you afford to lose money, time or credibility?

Tags: budget software, budgeting software, spreadsheets

Is Business Budgeting with Spreadsheets Worth the Risk?

Posted by John Orlando on April 1, 2013 at 5:50 PM

Despite the well-known risks of using spreadsheets for budgeting, spreadsheets are an extremely popular tool for budgeting. But is it worth the risk?

While the rate of errors in spreadsheets are widely documented (one study found that 94% of spreadsheets have errors and that the average cell error rates is 5.2%), there are other, equally important risks.
Let’s take a quick look at them:

•Lack of Version Control. While this may not sound like a ‘risk,’ a lack of version control can result in basing decisions on the wrong data. The typical $50 – $200 million dollar company has between 250 – 500 spreadsheets for budgeting and may have 50 different people involved with those spreadsheets. Keep track of which version is the latest, or even where some of the numbers come from, can be nearly impossible.

•Lack of Privacy. Not every financial analyst or person involved in the budgeting process can or should see all the numbers. Payroll, ledger details, costs of benefits and other financial details provide information that needs to remain secured, with limited access – even to those involved in the budgeting process.

•Costly Mistakes. Again, here’s where the numbers can be astounding. According to the same study, there are three types of errors that typically occur in spreadsheet models:

•Mechanical Errors. Most often these come from typos and pointing to the wrong cell.

•Logical Errors. These happen when the wrong algorithm or formula is used.

•Omissions Errors. These are when critical components are missing from the model.

These issues lead to bigger risks – lost money, lost time and lost credibility. We’ll dive into some real-world examples in an upcoming blog post.

Tags: budget maestro

Top Performing Organizations Rely on Rolling Forecasts

Posted by John Orlando on March 18, 2013 at 4:44 PM

Centage recently hosted a webcast, “Rolling Forecasts Enable Accuracy and Agile Business Planning,” featuring Nick Castellina, research analyst, Aberdeen Group.

This webcast was based on recent research from Nick and provides a number of key facts about rolling forecasts. Perhaps most important is that top performing organizations are more likely to use rolling forecasts and best-in-class organizations use key technologies to enable agile forecasts.

Nick’s findings reveal in best-in-class organizations:
•94% of financial reports are delivered in the time needed for decision-making
•Actual costs are within 3 % of budgeted costs
•Actual revenue is within 2% of forecasted revenue

And in “laggard” organizations:
•58% of financial reports are delivered in the time needed for decision-making
•Actual costs are within 20% of budgeted costs
•Actual revenue is within 22% of forecasted revenue
The gap is revealed as well when looking at who is adopting rolling forecasts.
•71% of best-in-class organizations are adopting rolling forecasts
•The industry average of organizations adopting rolling forecasts is 61%
•Only 47% of laggard organizations are adopting rolling forecasts

Perhaps the importance of rolling forecasts is best demonstrated in the impact rolling forecasts have over changes revenue growth: 10% of organizations that use rolling forecasts have realized revenue growth over the past 24 months, whereas only 7% of organizations not using rolling forecasts saw revenue growth over the same period.

These numbers are stark and make a very strong argument for moving to rolling forecasts. Maybe it’s time for you to adopt rolling forecasts.

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

Rolling Forecasts: Why Companies of all Sizes Need Them

Posted by John Orlando on March 7, 2013 at 5:35 PM

Research by Business Finance magazine and APQC finds that the majority of budgets have targets that become obsolete before mid-year; this can be prevented with rolling forecasts.

Steve Player, noted author and program director for the Beyond Budgeting Round Table(BBRT), is sharing his insight on rolling forecasts and the role they play in organizations of all sizes. 

Join us for a webinar on Tuesday, March 12, 2013 at 11:30am ET, to hear Steve discuss:

  • Organizations’ motivation to move to rolling forecasts
  • Seven reasons my SMBs must adopt rolling forecasts
  • Getting started with rolling forecasts

Steve will also provide real-world examples from small to mid-sized companies that are already working with rolling forecasts. 

Register for our webinar today!  http://bit.ly/Xo51km

Tags: budgeting and forecasting software

Two Sided Story

Posted by John Orlando on March 1, 2013 at 5:19 PM

The old adage that there are two sides to every story remains true today especially as it pertains to accountants.

The discipline of accounting is built on the fact that Assets = Liabilities / Owners Equity, a two sided equation.  For every Asset transaction their must be a Liability / Owner Equity transaction.

All financial professionals live by this formula for day to day accounting transactions.

However, when a budget, plan or forecast is prepared more than likely it is prepared in a vacuum with little if any regard to our two sided story.  The budgeting, planning & forecasting process uses up to 95% of our intellectual capacity dealing with the Income Statement and treats the Balance Sheet and Cash Flow as an afterthought – not really connecting the three main reporting functions with our two sided equation.

In order to build a comprehensive budget, plan or forecast all three reporting components need to be synchronized and that can only happen when the two sided equation is taken into account.

As an example when you are building you Income Statement it is not sufficient enough to think – marketing expense for the year will be $100,000 spread equally over 12 months.  Using this methodology you completely ignore what impact this has to your Balance and thus to your Cash Flow.

Having an application that guides you to the second half of the story (Liability / Owners Equity) – do I want to pay cash for this or put it into A/P first and then pay after 60 days completes the accounting equation and synchronizes your Income Statement, Balance Sheet and Cash Flow.

Remember, when preparing your budget, plan or forecast two sides of the story make the story complete

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

Best Practices on Leveraging Rolling Forecasts

Posted by John Orlando on February 20, 2013 at 5:43 PM

Nick Castellina, research analyst for enterprise applications at Aberdeen will share his thoughts on rolling forecasting and the results of a recent Aberdeen survey on how leading organizations generate more accurate budgets and forecasts.

Join us on Wednesday, February 27, 2013 at 11:30am ET for a webinar featuring Nick.

“Inaccurate forecasts make it difficult for organizations to have confidence in their financial standing and make informed investments,” said Nick.

We’ll cover a wide range of best practices from top performing companies, as well as how to:

  • Forster communications between business and finance throughout the planning, budgeting and forecasting processes
  • Enable flexibility in the forecasting process through automated, monthly forecast updates
  • Tailor key performance indicators to ensure speed and accuracy
  • Centralize financial and non-financial performance data for easy access
  • Provide data to decision-makers in the time needed to make informed decisions
  • Integrate sales forecasts with revenue forecasts
  • Share data internally and externally to gain visibility into performance

Register for our webinar here: http://bit.ly/W1g7ei

Tags: budget maestro, budgeting and forecasting software