[IMGCAP(1)]Spreadsheets have long been considered a necessary evil when it comes to the process of annual budgeting and re-forecasting.
But even with dedicated software solutions, companies still find themselves dependent on formulas that must be programmed manually into the budgeting software and then further reviewed and updated as the model changes. Given the fast-paced world of business today—acquisitions, new product rollouts, and organizational realignments—the budget needs to change as the business changes. Otherwise management may be misled by inaccurate financial information. To make a budget useful, organizations must incorporate business logic into it from the outset.
If you’ve spent more than a few years preparing and presenting annual budgets or perhaps participated in the periodic reviews and re-forecasts of these budgets, you have certainly come to the realization that the budget outputs must be a result of your implemented model and a consolidation of inputs from several budget participants such as departments or cost centers. What you may have also learned is that this entire process would be better off with business logic built in from the get-go, able to take into consideration the use of drivers and prior actual results in order to determine what the budget is actually going to look like in the end.
Unfortunately, Excel spreadsheets are not the right tool for the job. And yet, many companies still use Excel to prepare annual budgets and conduct re-forecasting work. There is so much effort that goes into the setup of these spreadsheets—the enormous complexity of the formulas, functions and links used, the tedious maintenance required to keep the model up-to-date—but at the end of the process all you can really hope for is that the numbers are relatively free from material errors.
To avoid that problem, some organizations have upgraded to a dedicated software solution for corporate budgeting, modeling and analytics. However, many of the formulas and accounting rules used in the spreadsheet version must be programmed into this budgeting software and periodically reviewed and updated as the model changes. Many additional links and other application-specific programming must also be performed before you can actually use the application. Turns out, this is not much different than using spreadsheets themselves.
Neither of the above approaches is ideal given the complexity of the model setup and the continual maintenance required to keep the plan and model functioning correctly and delivering the desired results. Neither approach can ever deliver complete and accurate financial statements (with the exception of a forecasted income statement), due to their inherent limitations, the most obvious of which is not having a built-in general ledger (a GL that operates like the actual accounting software or ERP GL). After a great deal of programming, you may be able to obtain a balance sheet and statement of cash flows, but these will be approximate and incomplete at best. As a result, many forego these statements altogether.
Incorporating Business Logic into Your Budgeting Solution
To make a budget useful, you need to incorporate some business logic into it. This is where the myriad of formulas and links among the many spreadsheets come into play. They must represent the particular conditions that drive your business and the many nuances unique to each of its operations. You can’t just use a generic spreadsheet model or any of the various dedicated budgeting software solutions right out of the box and hope to be able to deliver a meaningful and useful annual budget. Much preparation, and often expensive consulting and internal labor, must be employed first.
By leveraging a dedicated software solution that has business logic already built into it, a menu-driven environment with drop-down lists and tables that you select from within each budget area, for each budget line item, either globally or individually, plus the ability to select unique defaults, drivers and other logic, you can set yourself on the right path. The end result is a modular budget (revenue, expenses, assets, liabilities, etc.) with input from all business units.
Budgeting Solutions with Accounting Rules
Business logic on its own is not enough; organizations also need the system to have accounting rules built in. This will ensure that every budget line will cause the values representing GL account balances (ideally identical to your actual accounting GL accounts) to update in every budget period, and then contribute to the generation of the forecasted financial statements and other operational reports.
Unfortunately, using the spreadsheet approach and most of the dedicated planning, budgeting and analysis software solutions, due to their inherent design, accounting rules cannot reasonably be established. Thus the lack of ability to create a reliable balance sheet and its companion statement of cash flows becomes a major challenge. It seems that the more work and money you invest in these approaches, the less productive you become, and the more ambiguous some of the results.
Business Logic and Accounting Rules Aren’t Nice to Have, They’re Necessary!
Built-in business logic is needed to allow the organization to build the best plan or model, which in turn becomes the budget. Built-in accounting rules are needed to allow the system to automatically use the budget to generate forecasted financial statements and other reports, always synchronized to the plan and budget itself, and behaving like an actual accounting system.
Think of this as financial statements generated from accounting events that have not yet occurred, but are projected to occur based on the budget. As the budget is updated, so are these projected accounting events. The system automatically makes sure, using its built-in accounting rules, that the financial statements are delivered in the same format and fashion as their actual accounting system counterparts.
This approach ensures the generated Balance Sheet and Statement of Cash Flows are automatically updated in real-time with every change in the budget. From there finance and accounting professionals can monitor key financial ratios, manage compliance requirements, and drill into specific business requests such as understanding how much line of credit is available to support a geographic expansion.
No matter your industry or organizational size, every company can benefit from greater insight into their financial future. Trading in traditional budget and analytics processes in favor of those with built-in rules and logic can deliver the accurate, detailed information companies need to compete, thrive, and grow.
Alan Hart is a former CFO with nearly 20 years of experience in accounting, finance and management. He works with Centage Corporation to evangelize driver-based budgeting and forecasting solutions. To read more of Alan’s thoughts on budgeting and forecasting, visit http://centage.com/Blog.
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