Budget Maestro’s Automatic Future Period Journal Entries

Built in accounting intelligence allocates all entries to all impacted GL accounts, thoroughly and automatically

By Alan Hart, MBA

One of the most remarkable features of Budget Maestro is its ability to create accurate and up to the minute Balance Sheet and Statement of Cash Flows with no user programing, formulas, manual plugs or need for linking of data inputted tothe income statement accounts to balance sheet accounts. This is in addition, of course, to an Income Statement (and many other user defined reports), updated in real time, as input data changes. Changes tothe budget model, for example, expense items, revenue items, asset and liability items, etc., are immediately reflected in these statements.

Amazing! So how does that work? I remember years ago giving up on preparing a forecasted Balance Sheet for my company when I was VP of Finance. I was using a spreadsheet and just could not get it to work in a way that made sense. I was trying to crudely average customer and supplier payment terms, take into account our payroll and payroll taxes, and cash requirements. During every iteration of this model, when I thought I was getting closer, I discovered new inconsistencies in the calculations and didn’t like the way this Balance Sheet behaved as I was changing the Income Statement inputs. It didn’t take long before I gave up on this endeavor.

How many of us in accounting or finance have time on our hands to tackle projects that are “nice to have”, but that are realistically unattainable with the existing tools and resources we have? This is precisely why, in my opinion, most small or medium size companies, or even larger ones, don’t forecast their Balance Sheet, let alone the Statement of Cash Flow.

When I was introduced to Budget Maestro from Centage Corporation years ago, I found an intriguing, inherent, feature in this software that made forecasting these two important statements extremely trivial. All I had to do is come up with the revenue and expense forecast, add our capital expenditure forecast (and a few other assumptions), and out came a perfectly formatted and accurate Balance Sheet. The same was true for the other statement.

So how do they do that? The secret here is the journal entries that the software makes automatically using your data input in the various areas of your forecast. It’s like having an accounting department inside the software, making all the required journal entries, so, when using the forecasted data you supply, all relevant financial statements are automatically updated in the underlying database. Now, since this is a forecast, which represents anticipated future financial performance, these journal entries are made in the accounting periods where they belong, to the correct GL accounts, and in the correct amounts. I found that remarkable. It allowed me to fulfill an old dream, of having a corporate forecasted Balance Sheet (and a bonus Statement of Cash Flows).

Note that the Income Statement is also derived from your data input, through its own journal entries, although this is easier to accomplish with other forecasting tools. In addition to the system generated double entry journals, you are also free to make manual journal entries, just like you would in a computerized accounting software, except you are using future accounting periods to suit your model.

Here’s a simple example of how this works:

Assume that you have three revenue lines, received from three types of customers: consumers, retailers and wholesale distributors. Consumers pay you cash (or by credit card), with no payment terms. When you sell your products or services to retailers, they are given 30-day terms. Distributors are given 60 days to pay their invoices. Now assume that each group of customers has multiple products (or service lines) you are forecasting. Additionally, assume that there are multiple suppliers with different payment terms. Some are paid in 30 days, some in 60, yet for some you have 90 days, or more, before their invoices are due.

Now let’s see how simple it is to have our forecast of Cash, Accounts Receivable and Accounts Payable balance for any period of the forecast.

First, you enter the various revenue items (lines) and assign customer payment terms to each one. Certain payment terms come with the software but you are free to add unlimited terms of your own. This is also true for Accounts Payable payment terms.

Then you add the various expense lines and assign a supplier (A/P) payment term to each one.

(Note that there are many optional features to use when entering data, such as, “Based Upon”, allocation and spread options.)

As you enter this data into the model, the software goes to work and performs all the required journal entries throughout your budget period. For example, it will record revenue in the period sales are made (and in accordance with revenue recognition rules you specified), debit accounts receivable, and then, automatically, will credit A/R and debit cash in a future period, based on what you selected on the revenue line for the A/R terms. What is more remarkable, these entries are made for each individual revenue line, so forecasted A/R collections occur in the correct accounting periods.

Similarly, journal entries are made for all entered expense lines, with a similar treatment of all supplier liabilities and payments.

In the background, your Income Statement, Balance Sheet and Statement of Cash Flows all get updated in real time as a result of these journal entries. Your cash balance in each forecasted accounting period will precisely reflect all cash receipts and cash payments made during the budget period.

One obvious requirement is that you input your beginning Balance Sheet account balances (and a method to work the balances down) into the model in order for the system to be able to provide correct future balances (which are the beginning balances plus / minus all entries into these accounts during the budget period).

The level of detail is entirely up to you. You can have the same revenue line (item or service sold) represented on two or more lines, projecting sales to customer groups or even individual customers, each with their individually forecasted payment terms (and other optional attributes not described here).

What I discovered, after using this software for a little while was that once you define your GL accounts in Budget Maestro and assign them to the various forecast lines, these “future” journal entries are always made, and always to the correct accounts, in the correct periods, and in the correct amounts. A little added bonus is that you don’t need to rely on a monthly journal entry checklist. (Unfortunately, you’ll still need to maintain one when working on your actual data in your accounting or ERP software.)

Alan Hart - Bio 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 publically 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,

Alan can be reached at (310) 384-1453 or alan.hart@pacificshinegroup.com.