Why You Should Forecast Your Financial Dashboards – Part 1

Financial dashboards are powerful, more so if they forecast the future‍

We are all familiar with the popular saying, “A picture is worth a thousand words”. It simply means that pictures convey information in a much clearer way than words can, making the understanding of a concept quicker and more effective.

I still remember the days when monthly operational and financial reports were printed and distributed to senior management, division and department heads, and other key personnel in the organization. These reports were collectively referred to as “The Monthly Packet” and were used in meetings or for general management reviews and comments, following the close of an accounting period.

Many of these reports came straight out of the accounting system, and some were custom reports and views prepared by business analysts to be included in the monthly packet. Rarely did these reports include any graphics or pictorial representation of key data. Rarely were these reports read, at least not in any depth or meaningful way. The usual process sequence was this: print, distribute, let the recipients review the reports, discuss operational and financial issues, shred the reports, repeat the process.

The Power of Financial Dashboards

As the saying at the top of this article suggests, it is far easier to read and understand data represented in a graphical format, a chart, a plot, or other visual presentations that engage the reader in really trying to understand and benefit from it. It is for the same reason that children’s books contain many pictures and illustrations, progressively diminishing as the age of their readers increases. Similarly, school textbooks consist of numerous illustrations and charts, making the text a lot more readable and engaging.

Utilizing Concepts in Finance

The same concepts outlined above can and should be used in the finance department as much as possible. Lotus 1-2-3, the first widely useful business spreadsheet, became very popular when it introduced charting functions. We take it for granted now, but this was simply not available in earlier spreadsheet applications.

Microsoft Excel’s charting capabilities and functionality are astonishing, with new features continually added. Its ease of use has progressively increased over the years. There simply isn’t one reason why a person in finance should not use Excel charts when conveying financial results in reports.

Enhanced Capabilities with FP&A Software

These Excel capabilities come into a whole new light if your FP&A (Finance, Planning, and Analysis) software solution has an analytics module that makes use of these Excel formatting and charting capabilities, including the import of a data cube. Here, the analytics module brings all budget and actual multi-dimensional data (through a data cube) into Excel’s pre-formatted report structure where this data can be sliced and diced in any imaginable way, with drill-down and drill-through to source transactions in the originating General Ledger.

Furthermore, there is a profound implication if your FP&A software can turn the budget data into an extension of the actual financial statements into future, budgeted period financial statements and reports.

The Benefits of Synchronized Financial Statements

The premise here is that if you have a complete and accurate budgeted income statement, balance sheet, and statement of cash flows, all synchronized to one another and to the budget, plus the forecasted balance sheet beginning balances, you can gain insight into the future financial health of the company through a variety of financial ratios and other financial KPIs used in your business, forecasted compliance with lenders’ financial covenants, and more.

Building a Financial Dashboard in Analytics Software

Here’s an example of what you can do when you have a forecasted balance sheet:

Let’s assume you have a bank line of credit and an agreement to maintain certain financial ratios at specified time intervals. These are called financial covenants, and you agree to abide by them for the duration of the line of credit agreement. Breaking any of these covenants will trigger default with a range of consequences, something you want to avoid at all costs.

Forecasting Financial Ratios

You can measure your actual period financial covenants and their minimum required ratios as the year progresses, but how can you ensure that these ratios are not going to worsen over time? You may wonder whether there is a way to improve these financial covenants in future periods. By how much? How close will you be to breaching any of these covenants and when?

You can do this by planning and then measuring forecasted financial results over the duration of the plan. This is where your FP&A analytics module forecasted balance sheet comes into play. The data represented in each one of the plan versions is available to analytics and can make use of the incredible formatting and presentation capabilities of Microsoft Excel.

We’ll use a popular financial ratio most lenders include in the business loan agreement, called the Maximum Leverage Ratio, which is usually defined as your total liabilities divided by net tangible assets. All this information is on the forecasted balance sheet, so it will be available to Analytics to build a chart template, where various versions of the budget or actual data can be displayed.

In the next installment of this article, we will be looking at this “must-have” function, where a forecasted dashboard is going to be of critical importance to any organization.

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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.