The benefits are tremendous, the technology is here.
Those who know me and those who read this blog know my views on corporate balance sheets in general and forecasted balance sheets in particular. Few finance executives and finance professionals would dispute the fact that the corporate balance sheet, more than any other financial statement, depicts the financial position or financial health of the company.
Few would argue against the notion of “it would be nice if we could have a complete and accurate forecasted balance sheet” but many don’t act on that idea, even though the technology to deliver such forecasts is available, albeit, not widespread. There seems to be a disconnect between the overwhelming benefits and the absence of this practice. I am here to explore this disconnect, offer some reasons behind this behavior and provide encouragement to those who are contemplating adopting this practice.
First, to be completely fair, the technology is relatively new and only a handful (or less) of vendors allow their users to generate a balance sheet, one that is complete and accurate and always in sync with the budget – one that is an extension of the actual balance sheet into future periods.
This implies that not everyone is exposed to these possibilities at this time.
What about other reasons?
I think the overwhelming reason is that most of us are creatures of habit. We’ve learned to do our jobs and be proficient in performing all the daily tasks that they entail and even though many companies encourage their employees to be more proactive and think of ways to improve performance and productivity, few employees are engaged enough in their jobs to do that.
This situation is further complicated in finance organizations where employees are regularly overworked, following processes that are not always optimized, often without an effective internal control environment and accounting systems with frequent posting errors requiring accounting staff to continually chase transactions and correct errors. Finance personnel are not much different, so the end result is a reluctance to innovation with the excuse that there is simply no time to experiment with new ways of doing things.
Managers of finance organizations (CFOs, VPs of Finance, etc.) who are not aware of technology advancements in FP&A software may not realize what these solutions can do for their organizations, especially with an automatically generated forecasted balance sheet. I can only imagine how thrilled they would be to discover such a solution, as was my experience some years ago. When such managers realize that a forecasted balance sheet is within the reach of their group I am sure they will move quickly and make a commitment to implement it within their organization.
Then there is the reliance on spreadsheets for almost everything in accounting and finance. Since pretty much everything in business can be accomplished using spreadsheets, those who are conscientious enough about creating and maintaining a corporate budget, including a forecasted balance sheet, either end up putting together a rudimentary, rough and incomplete approximation of what they believe a future period balance sheet should look like, or implement an equivalent report in their dedicated FP&A software solution.
If done in a spreadsheet, it is performed using very broad, grossly inaccurate assumptions, rendering the results unacceptably erroneous and incomplete.
If done in a purpose-built FP&A software application where users must program formulas, functions and links, just like in a spreadsheet, the results are not much different.
Many who have tried programming a forecasted balance sheet in a spreadsheet, using their corporate budget as inputs, discovered how futile this effort is, especially if any level of accuracy and completeness is attempted.
The balance sheets that are programmed by FP&A software vendors or with some help from their customers are generally no different, except for the consulting fees users of these software applications must pay the software vendor or the consultants. Since the results cannot really be relied on and any changes and maintenance work are expensive and with limited benefit, many users simply give up and choose not to forecast their balance sheets or just don’t rely on such a report.
Can a reliable balance sheet be implemented in a financial plan or budget?
With proper tools, there is a way to achieve that. It is through implementing a technology that provides integrated financial statements that are always synchronized to the underlying budget and rely on the built-in business logic and GAAP rules. The forecasted balance sheet wouldn’t require complex formulas or link placement work – it would be automatically available using known, beginning balances from your actual accounting system and budget data from the financial plan. The output is a forecasted balance sheet for every budget period. It looks like the actual balance sheet but represents accounting events projected to occur according to your budget.
Different versions of the budget will automatically produce different versions of the forecasted balance sheet. “What if” scenarios will instantly show you what the forecasted balance sheet looks like for these scenarios.
With this technology, available today even to SMBs, there is simply no valid excuse why finance organizations continue to avoid forecasting their balance sheets.