The primary focus of budgeting and forecasting at a majority of companies is the Income Statement and associated KPIs (Revenue, EBITDA, Net Income). Significant investments are often made to increase the accuracy of the budget and forecast via driver based modeling for key P&L line items such as Compensation, CAPEX, etc. Planning for the P&L is distributed across the enterprise to collect assumptions that drive business performance. Budgeting and forecasting of Balance Sheet and Cash position is often times done offline by a smaller group in finance.
Meanwhile - Balance Sheet and, more specifically, Cash are critical business variables that need to be understood and closely managed. This is even more important in fast growing companies that may rely on limited sources of funding to help fuel their growth before they achieve break-even point. Any economic growth that is modeled in the Income Statement can only be achieved if there are adequate sources of funding in the long term and cash balance can be sustained. A number of our customers expressed that understanding their cash balance over the medium term was one of their top priorities when installing a new finance system.
An Integrated Financial Budgeting solution that connects the dots across the financials can create a lot of efficiency and increase insight. A simplified example of a model that we used with a number of customers can be seen in this video. Using an interconnected set of inputs and assumptions that are driven by the end user, every financial assumption automatically translates to the P&L and balance sheet and shows the resulting impact on cash. An actual model will support much more depth with a much larger variety of assumptions, some of the sample transactions shown here are the following:
- Modeling of revenue and how that automatically translates into Accounts Receivable
- Relationship between account receivable and cash based on user-driven assumptions for cash collection
- Budgeting for individual line items such as Insurance Prepayments and the related impact of amortizing the balance into expenses over time
- Purchases of individual assets with impact on cash as well as P&L and retained earnings based on user driven payment and depreciation assumptions
- A Balance Sheet walk-forward to explain the changes in balances month-over-month by showing additions and reductions in balances by account line item.
This model is powered by IBM Planning Analytics (TM1), which is uniquely positioned to support such integrated financial modeling. Among many advantages, the key benefits when using IBM Planning Analytics (TM1) are the following
- Real time (in-memory) calculations of results that facilitates effective modeling with changes reflected and aggregated for immediate review and analysis
- Scalability – the model will scale to a significant volume of data and relationships and will support complex modeling needs without any performance impact
- Ability to configure the assumptions and account inter-relationships by the end user to arrive at the desired model without relying on IT for development and system changes
- Scenario planning – IBM PA provides unlimited number of versions and scenarios that can be run in parallel to test various scenarios of assumptions and their respective impact on cash in the short or long term
- Intuitive and friendly user interface with XLS and Web options for analysis, reporting, dashboarding and visualization
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