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Tuesday, March 1, 2011

Tracking the Budget One Dollar at a Time


It stands to reason that no one understands a company’s financial picture better than the CFO. But what if the entire management team could grasp where the money was coming from and where it was going – in other words: Budget 101?

Armanino LLP advises companies to put budget and forecasting processes into place so company leaders understand their business at its most fundamental level.

“Management spends a lot of time figuring out what they ought to do in the future. But they have no systems in place to help them understand the repercussions of making those decisions,” said Dave Davis, an Armanino consulting partner. “Why wouldn’t you have a system to help you with one of the most important business processes there is: budgeting and forecasting?”

It is critical for every business to create the budget process – not just a budget, but an entire process. Figure out who should be at the table so that all aspects of your business are represented. Then schedule a time to sit down and review progress versus the budget–either every quarter or even every month. This ensures that your team regularly comes together to assess your company’s financial picture.

One benefit is that it forces management to analyze financial assumptions in real time – rather than at the end or beginning of the year – and it allows leaders to compare the budget forecast with what is actually happening in the market. As a result, the company can respond if it veers off budget and quickly get back on track. Another plus is that engaging in regularly scheduled budget review sessions throughout the year makes the annual process significantly easier.

“With a defined process, you will understand what the drivers of the business are and where they will take you if you go in a certain direction,” Davis said.

During his decades in business, Davis has watched the budget tools available to CFOs get better and better. Davis said the tools have become more sophisticated. But, he emphasized, they are only as good as the information provided. Recently, he has become a fan of a new software program called Adaptive Planning, which elevates the two-dimensional spreadsheet to a multi-dimensional analysis tool.

“Excel spreadsheets are prone to error, you just can’t be sure that someone didn’t incorrectly enter the formula,” he said. “Adaptive Planning is really a software application that allows you to bring structure and accountability to the process. It’s a data-based structure versus just a spreadsheet.”

Spreadsheets were revolutionary when they were introduced in the 1980s. But they have flaws, and a major one is that an employee can tamper with a spreadsheet to change an outcome. Second, spreadsheets are not multi-dimensional, so they cannot track sales by customer, product and region easily in the same file. But all those requirements can be built into the Adaptive Planning system.

Davis said it makes sense to use cutting-edge technology to ensure that business leaders have all the information needed to make decisions about their business direction. Plus, the system doesn’t require hardware or IT maintenance because it’s maintained in the “cloud.”

Bottom line, such a tool can help companies become more efficient with their hard-earned dollars, more in tune with their company’s strengths and weaknesses, and able to keep costs under control while growing their top lines.

“This tool helps drive a more robust and defined budget and forecasting process – and it’s a process that is extremely important,” he said. “Armanino’s value is that we bring best practices to our clients, and part of best practices for budgeting and forecasting is a state-of-the-art software solution.”


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