Centage Blog

Cash Flow Forecasting Best Practices

It is time to demystify existing misconceptions and practices

Earlier this year I participated in a discussion on the Proformative.com site, titled: Cash Flow Forecasting Best Practices. A Proformative member asked a question which is very common in many finance organizations: What are the best practices when it comes to developing a cash flow forecast model? The person indicated that it was for a large publicly held company with global operations and that they have a comprehensive P&L forecast but struggle with a large and cumbersome Excel model which must be tied to the budget (P&L). This person was looking to start from scratch and build a more robust and manageable model. It was clear that they needed help. Does that sound familiar?

  • Is your company struggling in forecasting its cash flow or is unable to forecast its Balance Sheet and the derived Statement of Cash Flows?
  • Are you using home grown spreadsheets you inherited from a person who is no longer with the company?
  • Have you noticed broken link messages and suspect that other errors may exist in these worksheets?
  • Are you unable to maintain these spreadsheets, or add records without introducing new errors?
  • Are these new additions properly linked into the model?
  • Most importantly, is the output from these worksheets meaningful and reliable?

If you answered yes to any of the first four questions and no to one or more of the last two you probably realize that you must make a change in this process. You also realize that you are not alone which explains why many people responded to this question on Proformative.com and why the topic of cash flow forecasting is popular on that site.

What surprised me was that a good number of the answers were focused on developing a more robust spreadsheet approach to solving this problem, convinced that the spreadsheet is the answer to this challenge; some claiming that they have a model that works and is able to provide a forecast of the cash going in and leaving the organization.

What about the sources of this cash, or the inflows and outflows of cash into and out of each of the three main categories and in each forecasted accounting period? And what about the one or two people who suggested that a cash flow projection can be easily obtained if you have a reliable forecasted Balance Sheet? But how do you reliably forecast a Balance Sheet, complete and accurate and always synchronized to your P&L forecast?  Do you use another home grown Excel model to do that?

As I have written before on this blog and in other forums, Excel is a fine application with a tremendous amount of power and features. One, however, must understand its limitations (and their own limitations in using this application) when using Excel in certain financial processes such as financial reporting, planning, budgeting and forecasting, processes that should always include a Balance Sheet and a Statement of Cash Flows. The blog post titled “Should Excel be Expelled” touches on this idea.

It seems to me that many finance professionals, greatly skilled in using and programming Excel, don’t realize that much of Excel’s apparent power and seemingly endless features may lead to a false sense of believing that anything can be done with the software. This results very often in gigantic models being developed, incorporating many workbooks containing many worksheets each. The risk of having material errors in these models increases exponentially as the complexity of the model increases. To that add the often lack of documentation and rarely used change management controls, even in large organizations, and you begin to see the magnitude of these unmitigated risks.

Even in a perfect world with perfect Excel programming, a robust internal control environment and other positive factors, a cash flow forecast, or more accurately, a forecasted Statement of Cash Flows cannot realistically be modeled in Excel because it requires a complete and accurate forecasted Balance Sheet, perfectly synchronized to the P&L budget model. My blog posts “Can you Really Forecast your Cash Flow?”, “Forecasting a Balance Sheet in a Spreadsheet World”, and “Why you Must Forecast your Balance Sheet” (and Part 2), further explain these concepts.

To me it makes a lot more sense to implement a purpose designed solution to accomplish the tasks of planning, budgeting, forecasting and analytics. Many of the blog posts on this site cover this critical set of business processes. Before embarking on new, complex projects, we need to realize Excel’s strengths and limitations, and our own challenge of controlling our desire to solve any problem with this tool.

Categories: cash flow, cash flow analysis, cash flow budgeting, cash flow reporting Tagged , , , , ,

3 Steps to a Quicker Financial Close

A perennial financial planning goal for CFOs and controllers each year is to shorten how long it takes to close the month. Free up resources? You bet! If each person on your team had another 8 hours a month, I bet you’ve got a wish list of projects right now that you’d love to have them dig into.

Step 1: Identify Your Motivator

Before you dig too deep into the metrics, you’ll want to really zone in on why you want to close sooner. The more precise you are about the reason, the better you’ll be able to articulate it to your team.

  • Are significant mistakes getting carried forward into the next month because they just weren’t noticed until after close?
  • Are you meeting filing deadlines by the skin of your teeth?  Is it the printing schedule, tax filings, or your 10-K reporting? Or all of the above?
  • Does having a small team mean restricting which balance sheet accounts you’re able to review at month end?

Step 2: Conduct a Review

It’s not just about getting done sooner. It’s about making sure you have enough time to complete the financial close activities, give sufficient time to the business owners to review the numbers, and for you to produce the reports that you need to run your business.  Here are a few metrics to consider:

  • Find your bottlenecks. Track the completion times of each activity then zero in on what looks out of sync. Are the accruals not being done earlier because of a backlog in A/P? Was the consolidation delayed because you didn’t receive timely reports from an overseas office?
  • Consider the current close deadlines. If the duration of time from the end of the reporting period to when the financial statements are issued were to be shortened, would something suffer?
  • Check the number of adjusting entries that were made. Are the main problems from posting mistakes or is it due to coding errors by a team member using an old chart of accounts?

Step 3: Implement the Financial Close Solution.

Now that you’ve identified the key time-consumers during close, it’s time to put some changes into action so you can see real results.

  • Prepare and review the close schedule as early in the month as possible to get your team all on the same page.
  • Communicate your timeline to all department heads so they take ownership of their revenue goals and expenses throughout the month. It’ll also encourage them to be timely in providing the data and operational reports your team needs to close the books.
  • Consider daily or weekly balancing for A/R receipts, A/P checks, and invoicing if you’re not already doing them.
  • Don’t sacrifice accuracy for speed. Meeting those deadlines is critical but doing so with bad data is worse.
  • Use technology to encourage collaboration and streamline the work. Consider what you’ve got and acquire what you need.

If you’re using Budget Maestro and Analytics Maestro, you can pull in up-to-the-minute data during your financial close to isolate unusual fluctuations, missed accruals, and unexpected discrepancies between the budget and actuals. There’s no need to wait until after close to find these things during the reconciliation process.

You can drill down on the totals to identify the specific offending line item. Operations will appreciate the help is pointing them right to what needs to be looked at. Review your Cash Flow against your projections too. You might find that a deposit receipt got processed at the bank but misfiled in the office and missed getting recorded in the G/L.

What can you do to make your financial close more efficient without compromising accuracy?

If you would like to see how budget maestro can help you with a quicker close, join us for a live webinar on Thursday, February 11, 2016 2:00 PM EST/11:00 AM PST. Click here to register.

Businesses of every description rely on the Budget Maestro™ family of software solutions by Centage Corporation to improve the efficiency and effectiveness of their business budgeting and planningfinancial forecastingfinancial consolidation and reporting processes. For more information, take a tour of Budget Maestrocontact Centage, or call 800-366-5111 now.

Categories: budget maestro, budgeting and forecasting software, budgeting software, business budgeting software, financial planning software Tagged , , , , ,

Major Financial Planning Trends for CFOs in 2016 [Infographic]

Each year we conduct a survey to find out what matters most to CFOs. It’s interesting to learn both what they anticipate their top priorities to be as well as the challenges and opportunities that they face. This year we expanded our scope to include other executives in the finance community such as VPs of Finance, Financial Managers and Controllers.

These are some of the questions we asked:

  • What are your top finance priorities for 2016?
  • Rank the issues you believe pose new risks, challenges or opportunities for finance functions.
  • Are you currently using spreadsheets in Excel as your budgeting and financial planning software? If yes, what is your biggest challenge associated with using spreadsheets?

What landed as the top financial priority for 2016?  Cash flow.

While not entirely surprising, the details shared with us show distinct patterns. Managing Cash Flow and increasing and diversifying Revenue came in as the primary concerns among our survey respondents. Monitoring and improving the cash flow process, managing current debt, and selecting the right investments were some of the top concerns.

Funding and Cost Control were the next layers of priorities. Several answers indicated the desire to raise funds to support acquisitions and need to secure financing for capital expenditures. Those clear signals of growth and expansion are great to see.

Budgeting and Software Updates rounded out the top 2016 Financial Planning Priorities. Improving projections and conducting long range planning were right up there with meeting the budget numbers. The key word among the executives that chose financial planning software as their top priority was Automation. ERP implementations and integrations, improving data analytics and mitigating security risks were other leading responses.

For new risks, challenges, and opportunities – most of our respondents said that Compliance and Regulations ranked as their #1 concern. That was followed by organizational performance and economic conditions.

For example, finance executives showed their concern for increased regulations. Tax code changes, SEC filings, Affordable Care Act rules, PCI compliance and Department of Labor mandates each have their own sets challenges. Each financial professional must not only keep up with the changes to ensure they’re implementing them timely but also has to manage the costs associated with them.

According to the survey results, 80% of finance executives use Excel spreadsheets as their business budgeting and financial planning tool. The #1 challenge associated with Excel for budgeting isn’t a surprise to any of us. It’s error prone. I’m sure you’re intimately familiar with broken links, circular formulas and faulty macros. So why are people still using cumbersome spreadsheets for budgeting?

As a leader in your organization, I’m sure you’ve set performance goals for yourself and your team that are in alignment with your company’s top priorities. Hopefully this data has provided you with valuable insights and information that can give you a competitive edge in the marketplace.

Take a few moments to consider what your own answers are to these survey questions are so that you are well prepared for what the new year brings.

Businesses of every description rely on the Budget Maestro™ family of software solutions by Centage Corporation to improve the efficiency and effectiveness of their business budgeting and planningfinancial forecastingfinancial consolidation and reporting processes. For more information, take a tour of Budget Maestrocontact Centage, or call 800-366-5111 now.


Categories: analysis, budget maestro, budgeting and planning, financial planning software Tagged ,

Make Faster, Better Decisions: How to Use Your Budgeting Tool for What-If Analysis

The budgeting process for most companies occurs over several months. You prepare the budget model by adapting last year’s Excel spreadsheets, plan and distribute them to each department head, and answer their questions about how to use it. Then, once they’re done, you proceed with the painful process of consolidating all those spreadsheets together to create your overall budget.

Keeping all the pieces straight and tracking which have been updated and which haven’t, isn’t so easy. Unfortunately, sometimes your best analyst spends their time managing the logistics of the budgeting process instead of being able to do the actual evaluation, analysis, and updates to the plan in order to make it helpful for running your business.

Is This You?

Half of the preliminary budgeting spreadsheets have been integrated into the Master budget workbook. And something changes.

A new criteria is introduced. Your company has the opportunity to acquire a competitor. Great news! …Or is it? While you try to keep your focus on the details of the deal, your mind curses at the fact that the budget for nearly every department will be affected. You start thinking of the logistics of essentially starting over with the spreadsheet distribution process. Re-consolidating everything into the Master. You hope the new VP of Sales can work his numbers up quickly since they’ll have such a large impact on the other divisions.

Consider this.

What if you didn’t need to operate on hope? What if version control of your budget model wasn’t a concern? What if your best analyst focused on analyzing the impact of the purchase rather than using their time to manage the logistics of your budgeting model?

How quickly could you use your current budgeting tool to determine the ROI of the proposed purchase if it finalized in two months verses in six months? How valuable would it be to know how your current year cash flow will be affected by the integration of their book of receivables in those two scenarios?

Acquisitions don’t happen every day for most of us but things do change. You need to be ready for it.

Something new.

Let’s add a new product. How will it affect your inventory? Will your current cash flow be sufficient to cover the ramp up time? How would the additional staff to launch it affect your bottom line?

When you use a modern budgeting tool, life can get easier. If you were using Budget Maestro today, you can pull in your YTD actuals, apply your budget model to the remaining months of the year and see where things are at. Now save that set up under a new name, “Scenario 1.” Enter in the specs of the new product that’s being considered. The cost, price, anticipated sales volume, etc.

Immediately you can review the impact on your income and expenses and your bottom line. Check your cash flow reports. Will money be freed up when the revenue starts flowing? Do you need to anticipate investing it? Or do you need some short-term funding to get your stock established before you can do that launch?

These situations happen for us every day. I’m sure you’ll have a gut feeling of what the results will be. Does that match what you came up with in completing this 20-minute exercise? What if it doesn’t?

Save where you’re at now as “Scenario 2.” Update the proposed price point and cost of the new product if you were to make a luxury version of it instead. Sales volume may be lower, but your new profit margin could more than make up for it. You can run those numbers in just a few minutes and compare them on screen to see which product helps your bottom line more.

How quickly would you get to the same answer using your current spreadsheet method? Modernizing your budget process can help your company with decision making year-round.

Categories: analysis, budget maestro, budgeting and forecasting software, scenario planning, what-if analysis, what-if scenario Tagged , , , , , , ,

The Benefits of an All-Encompassing Budget

Why using inadequate tools and approximating the balance of forecasted Balance Sheet accounts is a bad approach for budgeting

I recently had a discussion with a colleague who is a partner in a local management consulting firm about organizations’ attitude toward the planning and budgeting process and the benefits they reap from these activities.  I expressed my views on how a proper budget should be prepared and why it is vital to budget the entire chart of accounts with the benefit of obtaining a complete set of future period financial statements. I further explained that all accounts that contribute to creating the Balance Sheet must have their balances updated throughout the budget period, performed through increases and decreases (debit and credits) which are derived from the forecast of revenue and expense accounts (Income Statement accounts).

The argument against doing this was (according to this person) that you can use a spreadsheet to forecast the ending balances of all critical Balance Sheet accounts using simple assumptions and the data from forecasted revenue and expense accounts.  He recognized that this would be a rough approximation of  account balances but argued that since most budgets are not accurate anyway and companies almost never hit their revenue and expense targets, even if there was a way to accurately and completely forecast the Balance Sheet and Statement of Cash Flows, they would be inaccurate due to the inaccuracy of the revenue and expense account balances all due to bad assumptions, inaccurate budget data supplied by the various reporting entities and other reasons.

The reason I bring up this subject is that I have heard these arguments before from finance executives and professionals who were tasked with preparing their companies’ annual budgets but not given the appropriate tools to do so, added to old traditions, misconceptions and workloads only allowing these people to repeat traditional processes without taking the initiative to look for more advanced ways to obtain meaningful and useful results.

If you accept the fact that budgets are never accurate and therefore no additional effort should be put into forecasting what really matters (e.g., cash account balances, other assets and liability account balances, etc.) than you are left with repeating the same budget process chores year after year with little or no benefit to the company. With this attitude, how can we expect company managements to make solid business decisions, let alone have insight into the future financial health of their organizations?

If you are approximating or grossly estimating the balances of your forecasted Balance Sheet accounts through use of spreadsheets or purpose designed Planning and Budgeting software solutions that behave like spreadsheets (e.g., require user supplied formals and links and with no built-in business logic and automated journal entries) your errors are likely to be compounded by the errors in the forecast of revenue and expenses.  Essentially, what you get is an inaccurate P&L forecast driving a flawed Balance Sheet forecast causing its account balances to be removed from reality; that is if the Balance Sheet is forecasted at all.

In contrast, if you use a solution that ensures your forecasted Balance Sheet and Statement of Cash Flows are systematically complete and accurate by the nature of the system logic and automated forecasted transaction processing, you can focus on good planning and budgeting with built-in tools and business logic that will allow your P&L forecast to be complete and reasonably accurate; as accurate as your assumptions.  The accuracy and completeness of your forecasted Balance Sheet and Statement of Cash Flows will follow and match the accuracy of the Income Statement.

That is a giant leap from traditional budgeting approaches, those based on tradition, bad habits and inferior tools.  I think it is time to evaluate the new alternatives.


Categories: budget maestro, budget software, budgeting, budgeting and forecasting software, budgeting and planning, budgeting software, business budgeting software, cash flow Tagged , , , , ,

Don’t Be Deceived – Payroll Budgeting Tips You Need to Know

You’re deep into your year-end close and 2016 is looming in the shadows. To keep from being overwhelmed, isolating one piece of the pie to focus on is the best way I’ve found to manage my work when things get harried.

The area I’d like you to zone in on this week is payroll budgeting. With W2’s and 1099’s to prepare shortly, it’s a good time to look at how your year-end numbers for payroll and benefits played out against your 2015 budget. What kind of impact did they have on your cash flow forecast last year? Did payroll create an unexpected shortfall? Were there any jumps or dives that weren’t accounted for in your 2015 budget?

To an outsider, budgeting for payroll is deceptively easy. Multiply your FTE wages by 1.25 to account for taxes and benefits and divide everything by 12 to get to your monthly budget, right? That may work as a good rule of thumb for really small companies or as a high-level guess for filling out a survey form but usually that’s not enough detail if you want (and need) your budget to be as accurate as possible and really used to manage your cash flow and your business.

The Layers.

You could annualize everything and pretend there’s no turnover, no retirements anticipated, and no year end bonuses. While you’re pretending you might want to forget about taxes too. It’s pretty rare to have a thriving business where there aren’t at least a few executives who hit the FICA cap in the 2nd or 3rd quarter. Their (and your) 401(k) contributions are likely to be maxed out along the way as well. Seasonality and part-time workers can throw a wrench in your payroll planning process too. Will each of your department heads be able to get to that layer of detail and still have some time available to do their day jobs?

When you dig deep into the layers of taxes and benefits, budgeting for payroll can get quite tricky. It’s been a while since I had to consider accounting for all of that within Excel spreadsheets. I can’t imagine going back to that but I know many of you use spreadsheets as your budgeting tool so I wanted to get fairly detailed to make sure you hit the mark when you look at your 2016 payroll budget. Where do you need to make revisions to get your cash flow forecast as accurate as possible?


What we’ve talked about up until now are for a run-of-the-mill operation. Are you adding a product line and new trainers to go with it? Are you discontinuing one where its margin just isn’t the best use of your resources? Is a new location in your near future? Will that 15% growth that the owners anticipate require additional personnel to support it?

And then there’s the holy grail of how many businesses grow – through mergers and acquisitions. Blending a new company into a consolidated forecast mid-year, while often profitable, isn’t any fun. Make sure that when you combine the forecasts that you consider duplicated positions and attrition fallout during the merger. Getting the payroll dollars themselves right is a formidable challenge but you’ll want to make sure the appropriate adjustments to your tax and benefit forecasts are accounted for as well.

No Surprises.

Go ahead and wrap-up 2015 but also take some time this week to evaluate your payroll budgeting software so that 2016 doesn’t bring about any unwanted surprises.

If you would like to see how budget maestro can streamline your payroll planning process and make it more effective and efficient, join us for a live webinar on Thursday, January 28, 2016 2:00 PM EST/11:00 AM PST. Click here to register.

Businesses of every description rely on the Budget Maestro™ family of software solutions by Centage Corporation to improve the efficiency and effectiveness of their business budgeting and planningfinancial forecastingfinancial consolidation and reporting processes. For more information, take a tour of Budget Maestrocontact Centage, or call 800-366-5111 now

Categories: budgeting, payroll planning Tagged , , , ,

The Dreaded Statement of Cash Flows

How you can automatically generate an actual Statement of Cash Flows regardless of what ERP software you use

Those who have experienced the manual preparation of a Statement of Cash Flows using beginning and period end Balance Sheets plus a periodic Income Statement know that this can be a chore and can cause a little confusion along the way with figuring out how to place the different numbers in the designated sections of this statement.

Fundamentally, the preparation of a Statement of Cash Flows is not that complicated and you would expect all accounting and ERP software vendors to provide a working template with each installation. Many of the software solutions targeted at the small to medium size companies not only do not provide such a template but are not capable of programing this statement and as such, a Statement of Cash Flows is not available to users of these software packages. The result is that a Statement of Cash Flows is not produced in many small and even medium size organizations.

Many companies that are required to submit a periodic Statement of Cash Flows, either because they are SEC filers or their lender asks for it, must produce this statement manually for each required period.

I’ve talked to several ERP software vendors and their typical response was that their GL software was not designed to automatically produce a Statement of Cash Flows because there is no way to tag each GL account with the proper treatment for this statement (i.e., how to use each specific GL account activity or changing balance in the compilation of this statement). This confirms that users of these vendors’ software have to perform this chore manually; that is, if they care to do it at all.

I’ve devised a way to automatically produce an accurate and complete Statement of Cash Flows, in each required period, regardless of what ERP software is used and whether or not its GL can accommodate this statement. To do that I use Budget Maestro which is a planning, budgeting and analysis software, primarily designed for small and medium companies in a variety of industries, where actual and budgeted financial statements and various reports can be generated in almost real time from available actual accounting and operations data and existing budget and forecasting data.

Budget Maestro was designed to produce all three major financial statements: An Income Statement, a Balance Sheet and a Statement of Cash Flows for every period included in every version of the budget implemented at the company and consolidated across all business entities that make up the organization.

As such, these financial statements are also available in a special version of the data known as Actual Plan. Here, actual accounting data (e.g., period-end Trial Balance) populate this Actual Plan through an export from the ERP GL or via a direct link available for several of the more popular SMB ERP software.

If you transfer your closed period (e.g., month) GL account balances into the Actual Plan in Budget Maestro (something you really need to do to be able to perform analysis of Budget vs. Actual), you will automatically gain access to all three financial statements (plus many other reports you can set up in the system). The actual Statement of Cash Flows will automatically be generated and available to publish. It will be complete and accurate and you will have the choice between using the Direct Method or the Indirect Method.

The secret to accomplishing this in Budget Maestro is careful planning of the chart of accounts and reporting format. This should closely match the setup of your actual GL and its reporting hierarchy. From that point on it is only a matter of periodically performing the data transfer and updating Budget Maestro with any changes to the chart of accounts as they occur in the ERP GL.

Existing and new users of Budget Maestro now have a viable and practical option to generate an actual period Statement of  Cash Flows. This should no longer be a mystery to many accounting and finance managers and depriving company executives of vital information about the financial performance of their organizations should no longer exist.  Furthermore, by using Budget Maestro as an all-encompassing budget solution, The Benefits of an All-Encompassing Budget, company managements can finally gain real insight into the future financial health of their organizations.

Categories: budget maestro, budgeting, cash flow, cash flow analysis, cash flow budgeting, cash flow reporting Tagged , , , , , , , , , , ,

Business Budgeting Software: How to Move from Resolution to Reality

New Year’s is the perfect time to reflect on 2015 and think about what you’d like to see happen in 2016. What activities and processes at your company take up the most time? Are they in line with the value you’re getting from them? If not, it’s time to take a look and see how you can maximize your ROI.

We’ll always have the ‘next thing’ in the hopper. Year-end close. Readying the annual report and footnotes for your board and investors. There’s the 1099’s and W-2’s to prepare. Are you going to have trouble with TIN matching? The needs of the auditors usually follow that.

Despite what’s in front of me, I like to slow myself down a bit and get pen and paper out to reflect. Where did I invest my time last year? How fruitful was it? I take some time to evaluate what worked and what didn’t. You’ll likely benefit from doing the same.

Where are your bottlenecks? Are your meetings productive? Are your email filters doing their job of highlighting your priorities? Do your reconciliations take weeks instead of days to complete? Some certainly warrant it, others may not. Are you closing your months as quickly as you’d like? Maybe not if you don’t have enough time to take corrective action when expenses shift out of line.

I go deep next. I isolate a particular process and dig. Let’s say it’s your business budgeting process. Explore all the nooks and crannies of it. The resources involved. The time, the people, the departments most affected. What’s the end result you want?

If you’re using Excel for your business budgeting, do a high level analysis of the scope of the work. Is data entry taking a significant portion of time? Is parsing out the spreadsheets and getting them back from your department heads a chore that you’d love to do without? How complicated is the process of integrating the various spreadsheets back together?

While these are the mechanics, they can make you stumble and lose efficiency. How about the actual job of working out the numbers. Is information flowing between your departments smoothly? If Sales projects an increase in the spring following the Consumer Electronics Show, is it being reflected in the inventory volume and production hours needed? Do you have to validate that manually? How many iterations are required if the scenario changes?

This detailed evaluation is a necessary evil but now it’s time to dream a little. Forget about the industry standard and being up to par with it. What’s the best outcome you could shoot for? You want to remove redundancies in the work. Eliminate version control issues. You’d love dynamic income statements, balance sheets and cash-flow statements that update as the drivers are adjusted.

These are your criteria to use to find a solution. Visit comparison sites, get the assistance of a business software specialist, but most importantly, talk with companies that have products that meet your needs. Try them out.

Resolutions don’t need to be something that are forgotten about in a week or two, or regretted at the end of the year when you realize that you didn’t implement the changes you’d hoped for.

Take the time now to open your calendar and schedule a few short blocks of time over the next few months to take the actions needed to make your business budgeting resolutions a reality.

Businesses of every description rely on the Budget Maestro™ family of software solutions by Centage Corporation to improve the efficiency and effectiveness of their business budgeting and planningfinancial forecastingfinancial consolidation and reporting processes. For more information, take a tour of Budget Maestrocontact Centage, or call 800-366-5111 now.

Categories: analysis, 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, payroll planning, personnel planning, quickbooks, scenario planning, spreadsheets, variance analysis, what-if analysis, what-if scenario, workforce planning Tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Don’t Deprive your Company Management of Meaningful Financial Information

Why you must make sure financial information is periodically, timely and properly communicated to those who really need it 

There are many blog posts here that focus on how important accurate and complete data is in assessing the financial health of any organization, past, present and future. I’ve also written on more than several occasions on how critical it is to employ the right tools in analyzing financial data spanning historical periods, the current fiscal year and all future periods presented through a plan and budget.

All these data, when correctly used, can provide insight into the company’s performance and even project the financial direction it is headed in and influence the decisions that management must make along the way, such as:

  • Will the company be able to continue and sustain its growth (given that marketing and sales opportunities are executed according to plan)? Are specific changes needed to achieve that?
  • Will it have the cash required for this growth? Will it require additional financing? When? In what amount?
  • What additional employees are going to be needed? In what departments? When?

Or conversely:

  • Will the company have to restructure its operations anticipating a downturn in the economy? Will the workforce have to be reduced? How? When?
  • Will new financing be required in order to be able to weather this economic downturn?
  • Will selling of certain assets be required? When?
  • Is the company facing new competition? Will it need to change its strategic and operational plans?

There is little doubt that such important decisions must be supported by reliable facts; this is true both personally and in business. Simply relying just on experience, intuition or speculation usually does not work. We all see how even large organizations make poor choices and decisions (this is usually discovered months and sometimes years later). We witness badly executed acquisitions (or acquisitions that should not have been made in the first place) and expansions into new product lines and new territories without proper research and analysis of existing data and business intelligence. We observe decisions that were not based on facts or reliable data, or due to inability to properly read and understand that data because of lack of a structured analytics process or poorly chosen tools for this job.

Yet finance executives and professionals are tasked with providing management with this needed information, delivering presentations that are both complete and accurate and also easy to understand.

I’ve seen organizations that had the need and opportunity to set up financial tools that would achieve analysis and reporting excellence, but decided not to. They were simply too wrapped up in their daily work, period end closes and delivery of internal and external reporting. Added to that was tradition and taking the path of least resistance which was often doing the same thing they have always done and were comfortable doing.

This is when finance leadership, driven by a progressive CFO, Why CFOs Need to Adopt Financial Analytics) can make a tremendous difference. They must break the old pattern of doing what they have always done, usually limited to collecting and compiling budget data only pertaining to revenue and expense items, while frequently not even comparing it to actual results and certainly not in a timely manner. A much more progressive approach, which surprisingly does not take more time or resources to complete, yet affords management the right information they need: Why you Must Forecast your Balance Sheet Part 1 and Part 2, every accounting period and in concert with actual accounting results for each closed period and immediately after each close.

When company CEO’s are measured by their organizations’ results and often are replaced when expectations are not met, it is vital that those who lead the organization are given the best possible view of their organizations’ performance, through meaningful reports and presentations obtained from a comprehensive data delivery system, Analysis of Everything that draws from past, present and future (forecasted) data. With a proper system setup, there is no reason why company managements should be deprived of critical information needed for them to successfully lead their organizations.

Categories: analysis, 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, payroll planning, personnel planning, quickbooks, scenario planning, spreadsheets, variance analysis, what-if analysis, what-if scenario, workforce planning Tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

The Budgeting Perils of Extending Credit

When your fiscal year is the calendar year, you make a big push to reduce your receivables before 2016. You want to collect the payments quickly regardless, but there’s more riding  on it at year-end.

When you’re on a cash basis, you recognize income when payments come in. If you haven’t been paid yet, your income is lower this year and you might not meet the income projections that you (and the owner) were counting on to secure funding for opening that second location. Not so good.

Mid-size and larger businesses mostly use the accrual method. Income was recorded at the time of the sale but if you don’t get the full payment this year, you’ll be accruing for bad debt. If your receivables aren’t paid down, you’ll have to accrue a higher amount. Your income’s been recorded, now you’ve got a higher expense and lower EBITDA. (We can put the controversy about the value of EBITDA aside and just say that the bottom line is that your bottom line will be lower.)

In reality, you know the vast majority of your receivables are collectible and they shouldn’t be factored into bad debt based on the full value of the sale. You’ve extended credit to Customer A and created an installment agreement where the funds will be paid in monthly intervals over four months. You’ve done the same with Customer B but their purchase was much larger and with their stellar credit history, you set up a payment schedule where they made a modest down payment and spread the remaining installments over the next three quarters. You get the sale and they don’t have to pay you until they sell your product. Everyone wins.

Your A/R sub-ledger records the amounts due in the correct periods. Your calculation of bad debt expense takes those situations into consideration. A lot of programming hours went into your A/R software system to allocate the receivables properly and provide you with what you need for your actuals at year-end.

Do you have that same level of detail available to you when you create your budget?

I imagine you don’t. It would be maddening to try and do budgeting with spreadsheets. Most of you don’t. You can’t take the time to get to that level of detail knowing that you’d need to maintain all the formulas and links. Doing it once is one thing, but anticipating adjusting it multiple times without an error is too risky and too time consuming. So you muddle through the bad debt accrual with coin-toss projections. I’m being facetious but you’re doing the best you can.

Neil Amato pointed out in the Journal of Accountancy article “Forward Roll: How Companies Can Move Beyond Traditional Budgeting,” it’s time to take a fresh approach.  Let’s be more agile with our projections and reduce the risk of error while maintaining an accurate view of how we think the year will play out. Using a solution connected directly to your database allows for on-the-fly scenario planning and cash flow projections that can go a long way toward helping your company manage its growth and explore opportunities.

Is the bad debt provision in your budget as accurate as you’d like it to be?

Categories: analysis, 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, payroll planning, personnel planning, quickbooks, scenario planning, spreadsheets, variance analysis, what-if analysis, what-if scenario, workforce planning Tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,