Why SMBs Need to Pay Closer Attention to Their Forecasted Balance Sheet and Use Good Analytics
Most small and medium-size companies (SMBs) do not have the resources that larger ones have. Their accounting and finance functions are often performed by the same individuals, with strategic and operations plans and budgets usually done once a year, before a new fiscal year is about to begin and without much attention to analytics. Quite often, planning and budgeting is not worked on or monitored year-round.
Companies that perform well during the year, and especially those that enjoy a string of successful years, tend to fall into complacency, that is, they seem to pay less attention to how their actual results compare with their budgets, and in many cases, do little to make decisions based on actual results. Many simply lack the proper tools to build a well-planned budget and continually monitor and compare actual results against the budget in real time.
Many SMBs still use spreadsheets in their budget process, which limits their ability to properly plan and develop a budget that can be maintained throughout the year. They are also without the right tools to gain much-needed insight into their future financial position.
Those that happen to be performing well may seem content with not making changes, although we see more and more companies actively looking to change to a purpose-designed software solution that behaves like an actual accounting system and can deliver a complete set of forecasted financial statements fully synchronized to each other and the underlying budget.
But what happens to complacent companies when, after several years of relative success, things change and their performance starts slipping?
Unless the organization’s finance function is sophisticated and employs experienced persons, especially sophisticated analysis tools and a good data collection system, these companies may unknowingly drift into an unhealthy financial position, a process that can take as long as two or more years.
Managements are certainly aware of unprofitability—after all, they get periodic profit and loss statements that show, on an accrual basis, negative net profit. Certain changes are usually made to return to profitability, but these changes, often including layoffs, are seldom the solution to the problem.
If the company uses a credit line or other forms of debt to finance operations, it is not uncommon to see this debt finance losses. The company may be perfectly compliant with their debt obligations and make all required loan payments. However, in the background, their financial ratios deteriorate, and in the case of financial loan covenants Forecast and Monitor Your Loan Covenants Compliance, there comes a time when one or more becomes noncompliant, often discovered first by the banker.
From my experience, one of the most important aspects of planning, budgeting and financial forecasting is the ability to forecast the balance sheet with reasonable accuracy for the duration of the budget. The forecasted balance sheet must be as accurate as the budget itself and update in real time as changes are made to the budget Why You Must Forecast Your Balance Sheet Part 1 and Part 2.
Companies that have such forecasted balance sheets (and forecasted statements of cash flows, which are constructed from income statements and balance sheets) must pay close attention to how certain values change along the budget timeline. Since a balance sheet represents the financial position or health of the company, using analytics tools can quickly reveal key financial ratios and how they behave during the budget timeline.
When you look at different versions of the budget or use “what-if” scenarios, each produces a different set of forecasted financial statements, and you will clearly see how the financial position of the company is affected by each. These analytics are critical, so you must properly implement capable budget and analytics solutions and use them year-round.
Using analytics with solid budget software that produces accurate financial statements in each budget period will make all the difference between approving a budget that just isn’t unattainable (but also detrimental to the company’s financial health) and one that is realistic, sensible and constructed in a system carefully designed and implemented for the job at hand.
The best news is that everything I am describing here can be achieved by even smaller companies in the SMB space.
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 planning, financial forecasting, financial consolidation and reporting processes. For more information, take a tour of Budget Maestro, contact Centage, or call 800-366-5111 now.