Why you Need Manual Adjustments in an FP&A Solution

The Necessity of Manual Entries

Does your company make manual entries in its GL? Even without knowing the nature of the business and its industry the answer to this question is a resounding yes. We all make manual entries, every accounting period, every quarter end and every year end, and for reasons that are common to all businesses.

Common Reasons for Manual Journal Entries

Manual journal entries are generally made in order to:

1. Correct erroneous entries previously made, either manually or automatically through a sub-ledger process.
2. Adjust GL accounts that cannot be adjusted through the sub-ledgers (AR, AP Inventory, etc.).
3. Make recurring entries where the accounts remain the same, but the amounts vary.
4. Make reversing entries – entries in a current period that are going to be automatically reversed in the following (or future) period.

A few examples of specific manual journal entries:

1. Period depreciation expense when a fixed assets sub-ledger is not integrated with the accounting software.
2. Issuance or repayment of debt.
3. Sale of equity.
4. Reclassification of GL account balances or activities to other GL account(s).
5. Periodic adjustment to the current portion of a long-term debt.
6. Adjustments to balances of reserve accounts.
7. Allocation entries that are not automatically performed in the GL.
8. Expense accruals.

Similar to your actual accounting, your FP&A software solution should allow you to plan for manual entries in order to affect the balances of certain GL accounts in certain planning and budgeting periods, thus affecting the results of the forecasted financial statements produced by the FP&A software.

The Role of Manual Entries in Actual Accounting

In actual accounting, manual entries are made prior to closing accounting periods and issuing financial statements (e.g. Income Statement, Balance Sheet, Statement of Cash Flows). These financial statements would never be complete and accurate without these entries and in many instances, they will be materially misstated. Likewise, the output from an FP&A software can be made more complete and more accurate by including manual entries or adjustments. This is particularly important when you use an FP&A solution that automatically generates a forecasted balance sheet by synchronizing it to the forecasted income statement and the underlying budget.

Synchronization in FP&A Software

Of course, the FP&A software architecture must allow this synchronization of all financial statements the same way accounting software applications function. By applying manual journal entries, some of which can be driven by system logic you gain access to a more complete and accurate forecasted balance sheet and statement of cash flows, both of which are the ultimate tool in gauging the future financial health of the organization. Since you periodically analyze your actual accounting data against the forecasted data from the budget, you must make an effort to forecast and budget for these entries, at a minimum the most significant ones. Companies, and especially SMBs (Small and Medium Size Businesses), when migrating from spreadsheet planning and budgeting or from first generation dedicated budgeting software solutions, should make sure the software they consider licensing has an Adjustments module. This module is very important for the reasons we saw above.

Ensuring Accurate Forecasted Financial Statements

The main budgeting modules such as revenue and cost, operating expenses and personnel will certainly provide the bulk of the forecasted data used to construct the forward -looking financial statements, but these statements will be incomplete and inaccurate and occasionally materially misstated if you do not allow for adjustments to account balances, accomplished by manual entries.

When choosing an intelligent planning and budgeting software solution make sure that adjustments can be made in all reporting entities (business segments, business locations, revenue and cost centers, etc.) or using any dimension available in the model (e.g. Product Lines, Customer Categories, Territories, etc.). Additionally, existing and newly formed drivers should be available to use when planning these adjustments. Other features available in the main planning and budgeting modules such as applying recognition schedules, spread methods, and using increase and decrease methods should also be available in the Adjustments module.

All this will ensure that the resulting forecasted financial statements are going to be a fair representation of the financial condition and health of the company during the budget period.

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Alan Hart, MBA, is Principal Consultant at Pacific Shine Group in Portland, Oregon, with responsibility for client business development and hands-on client project implementations. Prior to starting Pacific Shine Group, he worked in various executive accounting and finance positions with technology and growth companies. Notable is his 18 years in the hi-tech manufacturing industry where he served as Controller, Vice President of Finance and CFO of several privately as well as publicly held companies in the Hi-Tech industry, such as Hybrid Arts, Inc. Hamilton Bay Associates and Syncronys Software. In his role in management consulting, Alan has worked in diverse industries and with a variety of clients, including fortune 1000 companies such as Boeing, Delta Airlines, Intel, Wyndham Worldwide and others, as well as many mid-market organizations such as Guitar Center, Ducommun AeroStructures, Cypress Semiconductor, TriQuint Semiconductor and others.

Combining his skills and experience in engineering with deep understanding of technical accounting, he is able to assist small and medium-size manufacturing companies establish GAAP compliant accounting and reporting systems.