And why they can’t continue to do their daily work without it
RK Paleru, Executive Director of the Systems, Analytics and & Insights Group at George Washington University recently authored the article “How can CFOs adopt Financial Analytics?”. He touched on the reality facing the finance departments of so many organizations that are not adopting new technologies and therefore still relying on spreadsheets to deliver the results that support decision making. While these departments know that these tools are flawed, they still continue to rely upon them.
In response to Paleru’s article, a great discussion ensued on Proformative’s website. One member commented that accounting and finance departments are so wrapped up in the close process, financial statement consolidations, financial reporting generation and compliance activities, that there is hardly enough time to devote to analytics, especially with the inadequate tools many of these organizations possess. I tried to reinforce the notion that upper management (the CEO, CFO and certain other management team members) must have timely, accurate and complete data in order to be able to make reasonably informed business decisions. In addition, major changes have to be made in order for management teams to be able to see and understand their company data immediately, as actual data becomes available and in conjunction with existing and updated planning, budgeting and forecasting data.
My general observation is that many existing planning and analytics software solutions do not provide CFOs the data they need. This is due to the fact that the majority of the software solutions today cannot produce accurate and complete future period financial statements, and especially the Balance Sheet and Statement of Cash Flows.
This is why I am excited by a new generation of Planning, Budgeting and Analytics software which I call: “SmartBudget Driven Future Period Financial Statements and Analytics”. I’m sure this definition will be refined as this software category matures but for right now the essence of it is:
Generating future period financial statements and other reports, driven by a smart budget, prepared using built-in drivers and system pre-defined business rules, automatically consolidated across the enterprise that provides the CFO (and the CEO) with the insight into the future financial health of their organization.
Using this type of software, all the traditional potential errors and omissions are completely eliminated or greatly reduced due to the fact that no spreadsheets are employed in this process and users are never asked to provide formulas, functions, links, macros or any other programming.
The software should also perform analytics in particular areas of interest such as sales and expenditures and respond to any other custom requirements the organization might have.
Another desirable feature is the ability to “drill back” into the source GL containing the actual accounting period results. By pulling in any required detail data from the GL (as detailed as actual transactions, if the ERP software GL is set up to post into in detail), the analyst can examine specific variances and anomalies, not visible on the summary level. The root cause of these variances or anomalies can be investigated and any found issues can be quickly remediated. The CFO, equipped with this information will have the opportunity to make process changes, or make timely and informed decisions.
- Sales analytics, using both actual and budgeted data
- Expenditure analytics
- Future period Balance Sheet for each budget period
- Future period Income Statement for each budget period
- Future period Statement of Cash Flows for each budget period
- Many other specific reports, tailored to the company’s needs
The future period financial statements can be consolidated or filtered by any entity or level in the enterprise entity hierarchy.
With this data, CFOs can have a pretty good idea of what the financial health of the company is going to look like. They can see the predicted cash balance, receivables, inventory, payables and other liabilities. They can easily obtain forecasted future financial ratios determine whether the company will comply with loan covenants whether or not it will be able to utilize its credit lines, whether or not it will be able to retire debt and other obligations in future periods and more.
CFOs can have a pretty good idea of what the financial health of the company is going to look like. A CFO can perform his or her job with peak performance when relying on intelligent data in real time. Not relying on analytics can be a costly mistake. Luckily, there is a new technology available that can change all that.