Financial Reporting, Planning, and Budgeting As Necessary Pieces of EPM Part One: Executive Summary

Executive Summary

While ERP/accounting back-office systems and analytics have been inseparable ever since the idea of business automation via IT formed way back in the 1960s, they have nonetheless had different user experiences, evolutionary paths, and so on. Namely, although ERP systems have positively transformed many enterprises' business processes, many users have still been left feeling they were oversold due to the overwhelming notion that these systems inhibit access to the vital information "jailed" in the system. Many have inevitably felt that mixing real time back-office transactions with astute reporting is like mixing oil and water.

Business intelligence (BI)/analytics provides an environment in which business users receive information that is reliable, consistent, understandable and easily manipulated (i.e., flexible). C-level executives and middle management have always had a need to understand their business's performance regardless of good or bad economic times—while the output from BI might change, the need is always there. Particularly the recent massive demise of dot-coms, depressed economic times, and the stringent Sarbanes-Oxley Act (SOA) reporting regulatory requirements following up the high-profile corporate fraud scandals (e.g., Enron, Tyco, and WorldCom) have additionally increased executives' focus on understanding and managing corporate performance.

New disclosure rules are prompting companies to share information faster (for example, accelerated filling of 10Q quarterly statements and 10K annual reports, report sales of stock by executives [insider trading] within days of the transaction, expanded list of "significant events" to include changes in debt ratings, inclusion of financial results of partnerships in earnings reports, etc.), and sophisticated data-collection and data-analysis applications come in handy in that regard. Given that the BI tools have neither been terribly complex nor expensive to deploy, but have still been helpful in facilitating the decision-making process, they have become considered necessary rather than only a luxury. Also, decisions are nowadays increasingly made at ever lower levels in organizations.

Increased Need for Financial Reporting

On the other hand, the financial statement reporting process been important ever since the establishment of capitalist business practices. In addition to the tight economy's revelations of many companies' inability to proactively manage their financial performance (thus, repeatedly missing earnings and, in a knee-jerk fashion resorting time and again to last-minute layoffs, restructuring and operational expenditure freezes), its importance has particularly been emphasized with the outbreak of attention now being paid to the above-depicted accurate and certifiable reporting to external markets and government agencies.

However, creation, maintenance, and dissemination/publishing of financial statements (e.g., profit and loss [P&L] statements, balance sheets, and cash flow reports) have traditionally been maintenance-intensive tasks, with users expending significant effort just to meet basic requirements. Not to mention that everyone amongst the top brass always wants something more and different, such as different views, complex comparative reports, and drill-down analyses, but still within the familiar form of the financial statements.

Unfortunately, the financial reporting programs delivered with the traditional back-office financial management and accounting applications have proven only their rudimentary or pesky nature. Consequently, financial savvy users, having a strong preference to see results in the traditional P&L statement or balance sheet form, have long sought for ways to improve the report creation and maintenance process. On the other hand, the formatting and calculation constraints of the above statements, which require user-defined sorting and grouping, have been nearly impossible for generalist BI providers to fully accomplish.

This is Part One of a two-part tutorial.

Part Two will discuss challenges and make user recommendations.

Turning to ERP Systems

Most ERP products have a rich database, but, translating the data stored within the database to information useful for making enterprise decisions has proven difficult. With the availability of software analytic solutions, dozens of ERP providers can supply their customers with a valuable tool for harvesting the business value from the database. For example, the list of current back-office solutions whose GLs have been integrated with FRx financial reporting analytic solutions is impressive, and the following are just some more prominent ones: Advanced Data Systems, Best Software, Epicor Software, Expandable Software, Flexi International, Geac Enterprise Solutions, IQMS, Made2Manage Systems, MAPICS, McKesson, Ross Systems, Softrax Corporation, and naturally MBS Great Plains and Solomon (the integration with Navision and Axapta is under way). Other financial reporting providers like F9 or Timeline have almost as impressive a list of ERP partners.

As an example, MBS for AnalyticsFRx (formerly FRx Financial Reporter), with its spreadsheet-like interface, can consolidate financial data from disparate accounting systems even if they use different code structures, fiscal years, or server sites. By pulling information already set up in the GL, the product automatically understands the fiscal periods, chart of accounts, detail transactions, and various types of balances. Due to built-in accounting intelligence, it even recognizes concepts such as current and year-to-date amounts, debit versus credit balances, positive and negative variances, and posted and un-posted transactions. Furthermore, users can leverage the rows, columns and formulas that they may have created in Excel and import the information, with all data intact, directly into FRx.

The key tenets of FRx's flexibility have been the following three building blocks:

  1. Row format, which lets users specify the data source and what they want to do with each row of a report. By using a link to the GL, users can select individual accounts, a range of accounts or a list of non-continuous accounts to be included in a report. Once created, a row format can be saved and used again as required.

  2. Column layout, which lets users specify the data source and select the type of column they want from a list. Combined with row format, Column Layout lets users include period actuals, budget information, or other types of data in a report, either from the GL or from another data source like a spreadsheet. Math formulas across columns can be applied to identify variances, projections, or percentages. Like with row format, once created, a column layout can be saved and used again.

  3. Reporting trees, which lets users create a hierarchical picture of their organization to understand or change their organizational and reporting structures. An auto-build function constructs reporting trees directly from the organization's chart of accounts, while an intuitive drag-and-drop functionality enables users to create alternative structures and multiple rollups of various accounts without having to make costly modifications to their GL or charts of accounts. Once created, a reporting tree can be saved and used again.

In addition to the on-the-fly reports creation option, application servers provide report scheduling and automatic e-mail report distribution. Using one of many customizable report templates, users can often get started creating relevant financial reports right away using the building-block approach and auto-build functionality, without much help from IT resources or other technically-minded personnel. Then, these reports can be posted to the Web or be sent via e-mail to be accessed immediately by on-site and off-site users alike, while a connection to the GL is not required.

GL Considerations

Despite many commonalities, every GL has its own fingerprint uniqueness. To illustrate, MBS Solomon's (which has long featured a built-in version of the FRx Desktop and FRx Forecaster) GL account and sub-account numbers can be up to thirty characters in length, whereby the main account number can be up to ten characters, and the remaining twenty characters can include up to eight user-defined segments. GL transactions can be entered using several types of transaction batches, including non-recurring, recurring, manual and one-sided adjustment, and the GL account determines whether the transaction will operate in multi- or single-company mode. Transactions can be entered for any prior fiscal period or year as well as for future periods, which allows for things such as installments and prepayments to be managed at a single time, rather than month after month.

On the other hand, MBS Navision's chart of accounts (where integration is slated for Navision 4.0, some time in 2004/2005) lets users define an unlimited number of "dimensions" and "dimension values" at any time. A dimension is data that users can add to an entry as a kind of marker so that the program can group entries with similar characteristics and retrieve these groups for analysis purposes. Dimensions are not limited to the GL accounts, since they can be set on all master records stored in the database such as customers, vendors, items, fixed assets, and so on. Dimension values are sub-units of dimensions. For example, a dimension called department can have sub-units such as sales, administration, and so forth. This is a powerful concept and tool, which allows nearly unlimited configurations to meet a company's needs and business processes, but it will certainly present some challenge to the integration to FRx.

Translating Strategy into Objectives through Forecasting

In fact, planning and budgeting have become a means of translating strategy into a coherent set of objectives, as well as a basis for assessment of achievement. As planning and budgeting should be a collaborative process (a forum on the future direction of the organization), there have been indications that even during unrelenting economic pressures, corporate managers are still seeing value in providing desktop portal views of key business process analytics to an increasing number of corporate workers. As a result, many financial executives have been marking active financial planning tools as a top investment. On the other hand, the majority of those annual plans are still completed in Excel spreadsheets, which wreaks havoc for business analysts and IT personnel as they try to figure out complicated links and how to import and export data to and from the spreadsheets.

Contrary to that, the collaborative capabilities offered by software analytic products should save time and help improve the quality of the final budget, making it more realistic and accurate. Users can collaborate using features such as automatic e-mail notification of upcoming deadlines and a centralized bulletin board where goals, objectives, business tactics and instructions are posted for enterprise-wide access. Through the use of memos, notes and attachments, managers can understand the rationale behind important numbers and assumptions made by other departmental managers, reducing or eliminating time spent in meetings. Furthermore, the software should let department managers interact with each other to insure their budgets complement each other's. For example, if a department budgets for a new program that impacts other departments, all budgets can reflect the impact of the new program. The software should also facilitate the reorganizing of the company's chart of accounts, since rollups are parent-child relationships that control how the posting data is summarized.

Forecasting software streamlines many of the tasks that comprise the budgeting process, including individual creation of budgets, changing the budget model, budget consolidations, and reporting and collaborating with interrelated departments to improve the chances of achieving set goals. This streamlining of tasks gives managers more time to construct a thoughtful budget that is based on valid data and assumptions (e.g., headcounts, project schedules, and costs. Can be changed and simulated to reflect different economic assumptions) and therefore be more predictive of the future. Accessing up-to-date and historical information from the general ledger and existing financial reports, users can budget and plan with greater precision.

Forecasting software should also consider (bearing in mind that this list is by no means complete):

  • Expense budgeting, allows customers to define templates specific to cost centers, and thereby enables managers to focus on the important information.

  • Human resources, which allows a company to better understand the effect of salary adjustments, bonuses, overtime, and benefits given that employees often account for the highest part of the expenses in a company's budget.

  • Capital expenses, which lets the company standardize the accounting of capital expenditures by cost centers.

  • Revenue planning, allows customized accounts and formulas to be used to calculate revenues and cost of sales, whereby formulas can be customized to meet organizational needs such as production, staffing, raw materials, and outside revenue planning.

This concludes Part One of a two-part tutorial.

Part Two will discuss challenges and make user recommendations.

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