By Ed Gromann, Chief of Staff and Strategic Initiatives, Centage Corporation
Here’s a thought worth imagining this budget season: what if you could build a budget that was fully synchronized with your financial statements? Four benefits immediately come to mind. First, you could turn around a sophisticated budget model in a matter of weeks, rather than the months it takes to create a plan in a spreadsheet. Second, you could quickly run multiple scenarios by your team in order to assess what your financial statements would look like if you increased (or decreased) sales by 10%, opened a new sales office, or acquired a new company. Third, you could present your budget — replete with what-if scenario tests — to your board early in the Fall, rather than the week between Christmas and New Year’s. And fourth, of course, is that you’ll be able to enjoy your holidays without worrying about the budget.
So are synchronized financial statements a pipe dream? If not, how does one achieve it? Let’s look at the steps needed to get there.
Connect to your GL and financial data
The US business community is currently in the throes of a digital transformation, and it’s time that this transformation hit the finance department. Keeping critical data sources in separate siloes hobbles the financial team. You can’t plan intelligently, meaning that if you don’t have a comprehensive picture of the business, you can’t come up with multiple scenarios as to what may happen and put contingency plans into place. It limits business agility, because luck is the only way to spot important trends in time and either exploit them to your benefit or mitigate them if necessary. Perhaps worse of all, you can’t improve your overall planning process.
Connecting your GL to your financial data will allow you to build a robust model you can use to see how goals and financial assumptions will impact your financial statements. And that’s just the start. The model will streamline and increase the accuracy of your forecast and planning process.
Sync your chart of accounts and actuals throughout the year
Creating a budget is synonymous with creating unreasonable expectations. How is anyone, in the summer of 2019, able to predict what the economy and market will look like in Q4 2020? We can make all the assumptions in the world, but there will always be factors outside of our control that will greatly impact financial statements.
So imagine if the changes made to your chart of accounts and your actuals flowed through your financial plan automatically. Here’s what would happen: your budget would cease to be a static document you update once a year, and morph into a rolling forecast, allowing you to set a long-term (say, 3-5 year) goal, but still optimize the strategy your implementing to get there every quarter. In fact, your rolling forecast could replace your budget entirely if you want maximum holiday enjoyment.
Build dimensional budget models with hierarchical considerations
Spreadsheets are inherently flat documents, which is why so many financial teams struggle to represent a multidimensional company, with all its hierarchical considerations incorporated. Someone should tell them it’s not their fault; they’re simply expecting too much out of a spreadsheet.
If a business had just three numbers to work with — expenses, revenue, profit — budgeting and decision making would be easy, but that’s just not the case. We plan by location, division, product, market sector, and P&L. And decisions can be far reaching: choices made by operations and expenses incurred by marketing can (and do) have direct impacts on sales and customer care.
Building the right hierarchies into a budget is complex, to be sure, but it is the only way to build true flexibility into a plan. Without that flexibility, you have no way of knowing whether you can fund a year-end initiative or have the resources available to take advantage of an unexpected boom.
User drivers and allocations to match your business model
Like anything else, drivers can change throughout the year. CFOs try to enter fixed contracts as much as possible when, say, entering certain manufacturing arrangements in order to predict the fixed cost of raw materials. However, some drivers can become variable quickly, such as labor costs (think of a union strike). CFOs need to adjust these quickly to maintain the credibility of the forecast. Allocations fall under a similar category (assuming they’re driver bases, such as allocating manufacturing costs based on volume). Volumes can vary dramatically from the plan due to forces outside the CFO’s control. If the weather is hotter than normal, a beverage company’s customers will drink more iced drinks than hot ones, requiring the CFO to change his or her volume mix, which in turn, will change manufacturing expense allocated expenses. Synchronizing your plan to the financial statement will give you the earliest opportunity to assess if you’re on target to meet your revenue goals, and to warn the management team or market if necessary.