If your clients are still using Excel to do their budgeting and forecasting, they may not be using the most effective or efficient means to an end.That was the message delivered by K2 Enterprises' chief executive Val D. Steed at the recent American Institute of CPAs' National Not-for-Profit Industry Conference, here.

In a keynote session titled "Technology Tools for Budgeting & Forecasting," Steed pointed out that there is ample evidence that the current budgeting/forecasting process is not achieving the goals that many companies and practitioners expect in terms of time required and accuracy. Quoting a recent study undertaken by Ventana Research, which identified three root causes for the disparity in expected results, he suggested several alternative strategies to address the identified problems.

According to Steed, these root causes include "a lack of clear direction and realistic assumptions up front, which causes considerable rework on the back end, a general lack of ownership of data used and analysis performed (i.e., 'Those aren't my numbers'), and a dependency on spreadsheet tools, which bog down the process. These [spreadsheet tools] are cumbersome for non-financial managers, are vulnerable to human error, and can be unwieldy when multiple iterations of the plan require numerous changes and the need to track each version."

The strategies suggested by Steed fall into two categories: The first is to change the process and technique, while the second is to employ one or more of the new software tools that are available to expedite the process.

With the problems inherent in the standard method of budgeting, some alternatives that might be more appropriate to your clients' goals include flexible budgets, rolling budgets and forecasts, zero-based budgeting, balanced scorecard, activity-based budgeting, and economic value added.

Flexible budgets and rolling budgets and forecasts are familiar to accountants, but not all that commonly used by many clients. By restating the budget in terms of achieved revenue results (flexible budgeting), your client sees performance in terms of a ratio, rather than just a variance.

Rolling budgets orforecasts try to improve accuracy by taking into account conditions in a rapidly changing economic environment, realizing that conditions that existed when the initial budget was constructed, 14 to 20 months earlier, may not be relevant to existing conditions.

Zero-based budgeting is another familiar technique, which pretty much ignores historical revenue and expense figures, requiring that a budget be constructed from scratch. This has the result of forcing your client to consider the actual conditions that exist currently, rather than those that existed when the first budget, updated annually for years, was constructed.

The downside is that the process is too time-consuming to do every year. At best, zero-based budgeting is practical every three to five years, with a more standard incremental budgeting process used in the intervening years. By starting the budget process from scratch every so often, your client is assured that their budget assumptions don't get stale.

Another technique is activity-based budgeting. This is most appropriate for your clients who use activity-based costing or activity-based management techniques. Activity-based budgeting requires your client to plan and control value-adding activities and processes, and thereby control expenditures. Because of the enhanced visibility of activities in this model, successful implementation often results in the adoption of better processes and work methods.

One of the techniques mentioned in Steed's presentation, EVA, is a proprietary financial performance method developed by Stern Stewart and Co. Stern Stewart (www.sternstewart.com) is a global consulting company that trains and helps companies implement the EVA process. Rather than creating and analyzing budgets to measure the company's economic performance, EVA measures the creation or destruction of shareholder wealth over time.

Finally, the balanced scorecard introduces a single-page, four-panel matrix that consists of 15 to 20 performance metrics across four perspectives that include the financial perspective, the customer perspective, the internal business perspective, and the innovation and learning perspective. Each of these panels lays out the goal and the measures, providing a much more in-depth overview of a client's performance.

The right tool for the task

Steed was quick to point out that electronic spreadsheets, such as Excel, are the primary analytical tool of accountants in both industry and public practice. These, and the budgeting functions built into some accounting software, are the tools most accountants reach for first when it's time to perform this task.

"Spreadsheets are extremely powerful," Steed admitted, "and provide great flexibility in building budgeting and forecasting models that relate the projections of multiple departments or divisions. But the free-form nature of spreadsheets - arguably their most powerful feature - is also their greatest failing. While any relationship can be easily modeled, the consolidation of information from multiple managers, departments and divisions is very cumbersome, time-consuming and mistake-prone."

"Dedicated financial budgeting and forecasting tools are very sophisticated and provide extremely useful budgeting and forecasting functionality," he continued, "as well as enhanced business analytics and reporting. Most of these applications are fully customizable to the needs of the organization. Many use Excel as the data input and reporting interface, and provide data drill-down and -around capabilities. Prices for these dedicated tools range from a few thousand dollars to hundreds of thousands, depending on the features provided and the number of user licenses required, but they will cut your budget cycle from 50 to 80 percent. That's a huge payoff."

Steed then presented a list of 12 key features that are available in many of the dedicated budgeting and forecasting tools. These features include the ability to automate the process of accumulating the data; two-way integration with the general ledger while passing only the developed back into the accounting software; providing for a distributed process; allowing Web access for input and review; providing tools to automate workflow and enhance communication; providing drill-down capabilities for planning and analysis; providing roll-up capabilities for input from lower managers; providing a structured system of security and control; providing customizable input screens; providing user-defined calculations; allowing for flexible budget reporting; and having a user-friendly report writer.

While Steed pointed out that there are alternative approaches (and tools) to conventional budgeting, he also made sure to underline that the conventional budgeting process underlies many of the financial pro-formas that are required under Section 401(b) of SOX, so it's important not to throw out the baby with the bathwater.

"The implications of this section of the act are clear," Steed said. "Any accountant associated with the financial presentations of a company must now assume some direct responsibility for the quality and accuracy of those presentations. This is a difficult task with historical information, but budgets and forecasts present an even greater challenge."

"In today's business and legal environment," Steed continued, "'armchair' budgets that are not founded on sophisticated analysis of historical information and known trends will not be acceptable. While management's best guess will still be a valuable component in the budgeting process, it can no longer be the driving force."

Ted Needleman, a former editor of Accounting Technology, is a consultant and freelance writer based in Stony Point, N.Y.

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