Why You Should Forecast your Financial Dashboards – Part 2

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

‍In the first installment of this article we examined the importance of representing financial data graphically and monitoring the visual representation over time using financial dashboards. In this installment we will continue our discussion using a practical and very common example and a challenge that many organizations face. Here’s a common scenario:  You finished the first iteration of the budget and everything seems reasonable and ready for the first review. I assume you are using a budgeting software application with Intelligent Planning technology and have your key financial ratios charted in the analytics module. You immediately discover the following condition when viewing your financial dashboards in Analytics:

The chart you see above says that you are likely to breach this financial covenant about two thirds into the budget year. It also shows a very narrow margin of safety in maintaining an acceptable ratio. You must do something to lower this forecasted ratio.

Since the budgeting software allows you to maintain multiple versions of the budget and you can quickly perform “what-if” analyses to see how the output changes with different assumptions or inputs, your financial dashboards will follow your new assumptions and inputs.

In fact, every version of the budget will give you the opportunity to examine its own unique set of financial dashboards. You can have your dashboards set up as simple as one page with one or two charts, or an elaborate array of charts covering many of the popular financial ratios and your own financial KPIs.

So, you tweak your budget by changing assumptions and inputs, including making account adjustments (manual journal entries) in the budgeting application. Your goal is for the budget to produce a complete and accurate balance sheet from which analytics can display the data in your financial dashboards.

‍Finally, you get this:

‍Here we have a reasonable, and growing, safety margin:

This is only one of potentially many charts you can set up in the analytics module’s dashboards. In the above example, you clearly see that if the company executes on its modified plan and budget, you are likely to comply with this financial loan covenant. In fact, the chart shows a steady departure from the threshold (the 2.95 red line above). As you introduce multiple versions of the budget to Analytics you must also look at all the other relevant financial covenants as some of them interact with each other. Improving one can worsen another. Having a dynamic dashboard, sensitive to all budget changes and versions is an incredible tool in finance and will reveal any forecasted changes to such ratios.

As you perform this procedure for every critical ratio or other financial goals or KPIs, each version of the budget will drive the financial statements to provide a different output as seen in the analytics module. In our example above, all it took was looking at an additional (or maybe multiple) versions of the plan / budget and selecting one that will produce the desired results.

Never, in the history of corporate finance, have we had such powerful tools. The good news is that everything I am describing in this post is also available to SMBs (Small and Medium Size businesses) and is not an expensive, custom programmed application, commonly seen in very large enterprises. Now that you have the desired plan, the real hard work is about to begin – meeting or maybe exceeding the budget.

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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.