Budgeting & MIS Reporting with latest updates

Introduction:

Definition of Budget: Budgetary control is a system of procedures to ensure that an organization's revenues and expenditures adhere closely to its financial plan.

Definition of Financial Planning is a tactical process in which the long-term direction and vision of the organization are defined. The outcome of this exercise is a financial plan, which generally outlines the organization's financial objectives and a course of action toward achieving those objectives.

Difference between Budgetary Control & Financial Planning: Budgetary controls system is for a short period and is derived from financial planning, which is long term.

Difference between Budgeting & Forecasting: A budget reveals the shape or direction of a company's finances, while the forecast tracks whether the company is meeting its financial goals as outlined.

Advantages of Budgets:

•       Budget is a tool to achieve Strategic goals and think long term. Planning is important not plans as plans can change but planning helps to identify strength and weakness, identify threats and opportunities.

•       It is also a tool for cost reduction and to work in Structure manner.

•       Budget is an opportunity to document assumptions based on which Sales and opex cost are budgeted and then to review at intervals as to whether those assumptions are still held or have changed which will impact on the budgeted P&L.

•       KPI can be linked to Budgets so that all departments work towards achieving one common Strategic goal as budgets are linked with the same.

•       Budget is a tool to allocate scared resources such Funds, Plant capacity, Manhours, etc.

•       Budget is a tool for Tax Planning as budgeted P&L will indicate budgeted profit and thereby implications for tax.

•       Budget is a way to communicate plans of organization for next one year to the Shareholders & Investors.

Disadvantages of Budgetary Control System:

•       Making of budget is a time-consuming exercise.

•       The Assumptions based on which the budgeted P&L is made include Sales needs to be reviewed at regular intervals as business dynamics keep changing due to which those assumptions may no longer hold valid and hence the entire budget may have to be changed several times in a year.

•       Budgets cover only the monetary aspects of business; they do not take into consideration the non-monetary aspects of business.

•       Budgets made based on last year’s performance which may not be guaranteed for future performance. Hence budgets should be made Zero-based from scratch so that past assumptions which do not hold good now are not considered in the construction of the budget.

•       The Functional heads inbuild cushion in budgets leading to consumption of excess resources.

•       Allocation of common overheads to various departments needs to be done properly, otherwise it gives the wrong picture of the department’s cost.

•       Budgets must allocate resources for the achievement of Long-term Strategic goals and not such for short-term goals.

•       Capital Budgeting: Resource should be allocated not such based on the financial feasibility of the Project but based on the achievement of Strategic goal of the organization. For example, R&D expense followed by new Product development is part of Strategy then criteria for capital budget should be strategy and not just financial feasibility.

Various types of Budgets:

•       Incremental Budget: Budgets are made based on past historical performance. Based on last year’s P&L plus or minus are done, or adjustments are made to arrive at the budgeted P&L for the current year.

•       Rolling Forecast: Many significant events might happen affecting the key driving of business because of which the past assumptions and performance do not hold good for forecasting future sales. Hence in this method of budget the Historical forecast is adjusted for such significant events so that budget is realistic.

•       Activity Based Budget: This is a better method of making a budget. Here each activity required to run an organization is ascertained and its cost and revenue is estimated based on those activities. This is a more practical and realistic way of making a budget.

•       Zero Based Budget: This is one of the most effective ways to make budget. In Zero based budget past historical performance is not considered while making budget. Budget is created from scratch as if it is a new business so that every cost incurred can be questioned as to whether it is adding value to the organization.

•       Just-in-time budgeting for a volatile economy: Certain businesses are so volatile and fluctuating that construction of budget needs to be changed frequently due to development of certain business dynamics which change frequently. Just in time method is more effective for making budget for such organizations.

•       Capital Budget: CAPEX budget is mainly made for CAPEX items.

Approach for Making of budget:

Top-down Approach: In this arrangement the top management prepares the budget and ask the middle management and team below that to follow the same.

Bottom-up Approach: In this arrangement the budget is initially made by the middle management and submitted to top management for approval. This method is more effective as gets involvement of lower management in the making and implementation of budget. Budgets need involvement of all departments and not just finance department to ensure that is implemented and achieved.

Construction of Financial Budget:

•       Forecasted Sales: This is the starting point to Prepare budget.  -Revenue growth from Organic growth (Internal activities) and revenue from Acquired entity both need to be taken into consideration while making the budgeted Sales.

•       Start your forecast by breaking it down into its component parts. It is easier to estimate the pieces and add up to the whole.

•       Majority of expenses are % of Sales, but not all expenses are linked with Sales. For example, administrative expenses are not linked with Sales.

•       Cost-volume-profit (CVP) analysis is designed to show how changes in product margins, prices, and unit volumes impact the profitability of a business. It is one of the fundamental financial analysis tools for ascertaining the underlying profitability of a business. Identify Key drivers that will affect the financial numbers substantially. Because business dynamics change very fast it is important to build multiple scenarios and do cost volume profit analysis so that impact of change in one variable can be analyzed on the profitability.

•       What is my break-even point in terms of Sales units and value? It is equally important to estimate your break-even Sales volume and Break-even Sales value while making budget so that the basic thrust-hold limit is known, meaning the bare minimum sales that has to be achieved to break even.

•       Constraints. If there are bottlenecks within the company that interfere with its ability to generate additional sales, does the budget provide sufficient funding to impact these bottlenecks? If not, the company can budget whatever results it wants, but it has virtually no chance of achieving them. For example, a machine in the production area may be a bottleneck that keeps a company from producing any more products – if the bottleneck is not dealt with, sales will not increase, irrespective of improvements anywhere else in the company. Hence such bottlenecks should be take into account while making budgets.

•       Financing. If a company has a hard cap on the amount of funding that it will have available during the budget period, then the requirements of the budget must not exceed that funding limitation. This is one of the more common reasons for budget iteration, especially in small companies, where it may be difficult to obtain new funding.

•       Documentation of Key Assumptions made: It is important to document the key assumptions as when the in future the budgets are not achieved, and management wants to know the reasons for variance then this analysis of these assumptions will tell us the reasons for same. Hence it is important to document the assumptions.

•       Zero based thinking for cost: It is important that zero based budgeting method is followed at least for estimating budgeted cost so that past performance is not assumed and every cost is questioned.

•       Seasonal aspects of business: Budget needs to take into consideration the seasonal aspects of business. For example, your OPEX cost may be the same for the next 12 months, but your sales season will not be the same in every month and this may create bottlenecks for cash flow management. Hence budgeting exercise should identify such bottlenecks so that proactive action can be taken to avoid problems.

•       Trend to keep fixed cost low: In case of start-up having cash flow issues or in case of fluctuating business it is advisable to keep fixed cost low. Hence it is advisable to outsource non-core activity should be outsourced.

•       Budget for R&D and future projects: Budgets should be allocated for the achievement of the long-term Strategic goals of the company. Hence allocating budgets for R& D for developing new products or for doing market research for entering new business should be made if that is part of the long-term Strategic plan of the organization. Similarly, it is important to make budget for Training and development cost for staff if top management has taken strategic decision to enhance the skills of the manpower team.

•       Creating Budgets when you have investors or Bank on board: It is important that when you have investors on board the budgets are created with cushion of at least 20% meaning that if the targeted Sales budget to investor is provided of USD 100 million then budgeted Sales target for Sales team should be USD 120 million.

•       Budget should be allocated for the achievement of long-term Strategic goals of the company.

•       Budget should be allocated for core competency of the group but not for non-core competency. CAPEX should be allocated only for core competency of the group.

Documentation of Key assumptions while making Budgets especially Sales budget:

•       Market Size and Growth Rate

•       Pricing

•       Product Mix

•       Geographical Mix

•       Competitor’s actions /reactions

•       Product life cycle of existing products.

•       New Products introduction

•       Macro-Economic factors like interest rates, GDP growth rates and others.

Key Trends in Budgeting:

•       Due to increasing uncertainty in business because of Globalization, inter-dependency, increased competition, changing business dynamics etc., budgets made initially no longer hold good. Hence it is important to review the budgets at regular intervals and change the budgets. While the overall budget main remains the same as it is linked with the long-term financial plan and Strategy of the organization the budget at segment level or business unit may change to be in alignment with the key trends.

•       It is important to Use technology to track trends, prepare multiple scenarios to adapt considering changing business trends. Historical data needs to be blended with forward-looking forecasts to paint the future.

•       Businesses today must change the planning processes to keep pace with the changes in the key drivers of business. Adopting the right technologies will be key to making this a reality. Enterprises need the ability to properly utilize data to enhance planning and analysis and give decision-makers across the organization everything they need to react quickly and with confidence.

•       Instead of reviewing and changing the budgets at the fixed period it may have to be reviewed and changed as and when the changes happen to key drivers of business to keep the budgets realistic at any point of time.

•       Reporting reasons for non-achievement of Budgets –Teamwork: Traditional CFO should be reporting budget vis-à-vis actuals and reporting the reasons for non-achievement of budgets without taking any further responsibility for non-achievement. However today the board expects the modern CFO to report not only the reasons for non-achievement of budgets for also report the steps taken by finance departments in helping other departments in achieving the budgets. Thus, the board expects the CFO to act as an enabler for other departments to help them in achieving the budgets. Achievement of budget is teamwork and hence every department must contribute towards its achievement.

MIS Reporting:

•       Challenges faced in monthly closing: Need to close books of accounts monthly. Obtaining balance Confirmation from Group Companies doing timely BRS, Updating of Fixed Asset Register and Deprecation monthly, making necessary provisions for expenses, Currency adjustment, obtaining balance confirmation from major customers and vendors.

•       Need for Conso financials at least Quarterly basis; It is important to do consolidation of financials on quarterly basis so that management gets financial picture of group performance.

•       Challenge faced in Consolidation of Financials: Financial year is different, format of P&L is different, currency difference, inter-company reconciliation is not done, inter-company profitability is not eliminated and so on. It is important to set up the system in place and ensure that these obstacles are over so that reporting can be done on a monthly and quarterly basis.

Financial MIS report must consist of P&L, balance sheet, Actual Cash flow, Ageing reports and financial ratios

Way MIS should be presented to the Board:

It is important that the MIS report is presented as per the target audience. If the MIS report is to be presented to the CEO and other functional heads and they are not very number savvy that report should be presented in storytelling form giving them information in graphs, charts and dashboard form so that they understand the performance in a better manner. The report should not only highlight problems but also provide the reasons for the same and give recommendations and solutions for resolving the problem. The presentation should be so friendly so that the audience understands the problem you want them to highlight and its proposed solution. When the MIS report is presented to functional heads it is important to link the financial MIS report with the operational MIS report so that they can relate with the situation.

When the MIS report is presented to board there must be transparency, and only strategic matters should be discussed.             

•       Methology deployed in doing the analysis should be given in the report. Avoid giving negative comments in report.

•       Accountability must be defined and reported.

•       Presentation and communication skills play a very important role in presenting financial performance.

•       Seeking feedback from users of your report should be taken and reports should be improved accordingly.

•       Achievement of short-term targets must be linked with achievement of long-term Strategic goals.

•       Monthly financial ratios should be provided.

•       Linking of Operational MIS with financial MIS: The CFO has access to and is the custodian of all data- Financial and operational. Due to this, the CFO is in a better position to give valuable insights to top management on financial performance, explaining the real reasons for achieving or not achieving budgets and the areas where the company needs to improve. It was important for the CFO to link financial reports with operational reports so that management could better understand and appreciate the performance. It is also equally crucial that the CFO does not present too much data to top management but explains the critical aspects of performance and gives a graphical presentation so that top management, which is not so savvy with financial figures, understands and focuses on key areas where its attention is required and determines the actions that are needed to be taken.

•       Short term objectives of Profitability and other factors must be linked with long-term Strategic goals.

•       Non-Monetary aspects should also be considered while presenting performance such as brand building, etc.

•       Commentary on financial performance. Key takeaways of report, Impact of findings and recommendation regarding steps to be taken now for improving future performance should be given in report. MIS reports should be futuristic in nature. Due to data analytics and other tools, it is now possible to ascertain patterns and based on that give a indicative picture of the future should be given to the top management.

•       Role of Dashboard in presentation. Simplicity is most important in presentation.

•       Financial Ratios should be analyzed monthly, and comparisons should be made with the previous month.

•       P&L should be compared with the same month of previous year, with the previous month and with budgeted month and with the actual YTD vis-vis budgeted YTD.

•       Balance Sheet: This report gives the financial position of the company as on date. Balance sheet is the most important financial as it provides details on capital structure of the company in terms of debt and equity, where the company has invested the money sourced from lenders and shareholders in terms of fixed assets and working capital. It also gives insight into whether the company has diverted long term capital for short term capital which is the working capital. It also helps to calculate the net worth of the company.

•       Balance sheet Schedule: It is important to study the break-up of balance sheet to understand its components in a better manner. 

•       Ageing reports: Inventory ageing report, Debtors and Creditors ageing report, working capital cycle, etc. should be analyzed. 

•       Reporting on ESG: Listed entities and other large organizations are required to report on the actions taken by the organization to improve the environmental factors, creating social impact and ensuring compliance with all applicable corporate laws. The CFO is essential in ensuring this requirement is complied with.

Future-oriented MIS report:

•       Reports should indicate the root cause of problems, overruns, etc.

•       Sales Growth and Return on invested capital are two crucial factors in monitoring performance.

•       MIS reports for business units of the same group having different nature of business must not have uniform format of reports but different depending upon the nature of business and Phase of business.

•       The ability to create business models of future business results can be of great use to the top management in decision making. 

•       Field visit is very important to understand markets, Customer tastes and preferences, operations in better manner.

•       Placing FP&A analyst in Sales and marketing department is highly useful to give better insights to Sales team on Sales performance, better understanding of market trends, customer tastes, etc.

•       The finance team should use technology to execute repetitive and non-value-added tasks and the finance team should focus on more value-added tasks.

•       There must be a central repository of analyzed data and tools so that duplication of work can be avoided and authorized team members can access that data to analyze it further. 

•       Educating the non-finance team on basics of finance helps to explain financial performance in a better manner. Financial jargon should be avoided while presenting performance reports to top management.

•       Six Key drivers of Business: Revenue / Sales growth, Relative Pricing Strength, Operating effectiveness, Capital effectiveness, cost of Capital, and Intangibles.

•       Areas to be looked in to while analysing Annual report: Cash Flows, Investments in Future Growth, Operational Efficiency, Quality of Earnings, Risk Management.

Use of Technology in the preparation of MIS reports:

•       Most traditional businesses still take critical decisions of companies based on Gut feeling.  However, such Decisions taken are not biased-free.

•       Making data-driven decisions: It is essential when the CFO goes to meetings; he analyzes large amounts of data frequently and gives suggestions and ideas based on the data. There is a lot of politics and emotions in the conferences, and hence decisions taken should be based on data. CFO needs to drill down the variables responsible for the outcome so that why factors can be explained in the meetings in a better manner. Secondly, data is spread across different systems in different departments of the organization. Hence, it is essential to consolidate the data and bring it at one place to analyze it correctly.

•       It is important to create a data-driven culture otherwise making investment on data analytics will be wasted as business heads will not be making decisions based on the data analysis done. Hence it is important to have that culture in place.

•       Scenarios: In a world scenario wherein, there is a lot of uncertainty in business, there is a need to build different scenarios based on available data and then make decisions.

•       Both Structured and unstructured data should be cleaned and then analyzed.

•       It is better to analyze the data after defining the purpose for which we need to analyze the data.

•        Pricing decisions are made based on real time data. This is an example taking decisions based on real time data.

•       Target of MIS reports should be to assess, plan, improve, monitor critical Business activities and key drivers of business.  

•       Projecting and modelling future financial performance increases visibility into crucial areas of business performance and enforcing accountability.

•       Identification of unfavorable trends, events, and delivering critical information are important in MIS reports.

Areas where AI can be used in MIS reporting:

•       Conducting repeated tasks such as updating records, validating data, etc.

•       Consolidation of data of various departments and creating a central repository from which data can be accessed for analysis purposes.

•       In logistics industry it is used for Route optimization, for shipment tracking, for moving of goods from one place to another, to track and identify place where respective SKU is stored in large warehouses.

•       In retail & FMCG industry customer data generated is used to understand customer tasks and preferences, to receive their feedback and identify areas of improvement, to seek Customer engagement and for seeking feedback on new Product launches.

In Manufacturing it is used to conduct repeated tasks replacing labor.

•       In Hospital industry it is used to track occupy rate of beds, track consumption of various items used in Operation of patient for smoother billing, track segment-wise Sales performance and profitability.

•       Customer-wise / Project-wise / Commodity-wise/ Showroom-wise/ Dept-wise Profitability can be tracked with the help of AI. 

•       AI can predict future trends based on past historical data and recommend steps to be taken now to improve future. For example, analysis of Demand patterns can help to plan inventory in better manner.

•       Real-time decision making: AI integrates with IOT sensors which helps to capture real time data and analysis of same can help in taking decisions such as pricing, etc.

•       Recommendations given to customer on Ecommerce Platform is provided with AI.

Different types of Data Analysis:

Descriptive analysis: Use of data aggregation and data mining techniques to provide insight into the past and answer: “What has happened?”

Predictive analysis: Use statistical models and forecasting techniques to understand the future and answer: “What could happen?”

Prescriptive analysis: Use optimization and simulation algorithms to advise on possible outcomes and answer: “What should we do?”

•       Diagnostic Analysis: is done to understand as to why certain thing happened.

•       Ratios to used to evaluate performance for New Digital Age business:

Unlike pipeline business in case of digital businesses such as E commerce, Cloud kitchen etc the ratios that need to be analysed to evaluate performance are as follows:

Engagement rate refers to the percentage of active numbers on the platform.

Match quality refers to % of the match between the consumer's requirement and catering to that requirement by the Producer.

Churn rate: It refers to % of users who stop using this platform over some time.

Conversion Rate refers to % of users who visited the platform and made the purchase.

Retention Rate: % of users to renew their subscription and thereby remain customers over some time.

Customer lifetime Value: This refers to estimated customer value over the customer's lifetime on the platform.

Net Promoter score refers to % of customers ready to refer the platform to others.

Customer acquisition cost: This refers to the cost of acquiring new customers.

Lifetime value: Value of goods purchased by the customer from the platform during the customer's entire lifetime on the platform.

Supply Chain reports:

Inventory Levels: Tracking stock levels in real-time to ensure adequate inventory to meet demand while minimizing holding costs. However, identifying and addressing slow-moving and obsolete inventory is necessary to prevent capital from being tied up in unproductive assets.  However, implementing inventory management techniques such as ABC analysis and safety stock to optimize stock levels and minimize the risk of stockouts. 

 Supplier Performance: Evaluating supplier performance based on key metrics such as on-time delivery, quality of goods received, adherence to agreed-upon terms, and responsiveness to inquiries. Moreover, identifying and mitigating potential risks associated with supplier performance, such as disruptions to the supply chain or quality issues. 

Logistics Efficiency: Analyzing transportation costs associated with different modes of transport (e.g., truck, rail, air, sea) to identify the most cost-effective options. Identifying and eliminating bottlenecks in the logistics process, such as delays at warehouses or customs checkpoints, is important. However, implementing technologies such as GPS tracking and real-time shipment visibility also improves logistics efficiency.

 

Order Fulfillment Times: Monitoring order processing times from order placement to delivery, including order entry, picking, packing, and shipping. Additionally, identify and address any delays in the order fulfillment process to ensure timely and accurate delivery to customers.  Implementing strategies to improve order fulfillment accuracy, such as implementing barcode scanning and utilizing warehouse management systems (WMS). 

 Production Costs: Tracking production costs, including labor, materials, overhead, and energy costs. Identifying areas for cost reduction, such as improving production efficiency, minimizing waste, and negotiating better prices with suppliers.

 Implementing lean manufacturing principles to streamline production processes and eliminate waste. 

INDUSTRY-WISE MIS REPORTS:

•       Segment-wise P&L for Retail or manufacturing companies having multiple products or departments.

•       Project-wise P&L for Construction industry.

•       Commodity-wise P&L for Agri commodity industry.

MIS report for Retail industry:

1.      Details of retail space occupied by each brand / dept as % of total retail space vis-à-vis details of their contribution to the total sales of the showroom.

2.     Sales per employee or sales per sq. ft of the showroom.

3. Brand-wise & Category-wise sales performance. 
4. Details of comparison of administrative cost of showroom as % of Sales of that showroom as compared to previous month.
5. MIS on footfall in the showroom during different hours of day and on different days.
6. MIS on giving details of advertisement expenses incurred and sales made in this regard. Here the period of sales must be taken correctly.
7. Open to order report: This report gives insight on how much stock is there, how much is already order but to ship, how much it is in transit. This report helps to determine how much more stock needs to be ordered.

MIS report on Manufacturing industry:

1)    Production report giving details on process loss in terms of input-output ratio for each product produced. Details on waste product re-processed and production sold.

2)    Capacity utilization report on major machinery. 

3)    No of units are produced in each batch.

4)    Quality report giving details of complaints received from customers on account of quality and action taken in this regard.

5) Maintenance report giving details of the nature of maintenance and how can be prevented in future.

6) Scrap generated and sold.

7) Batch-wise cost. In case of customized manufacturing job-wise costing.

8) Report giving break-up of Production overheads.

9) Daily dispatches report.

10) Yearly fixed asset verification report.

11) Age-wise location-wise stock report for each category including packing material.

MIS report on Construction industry:

1)    MIS on labor hours consumed for each different categories of labor for each project.

2)    Project-wise budgeted vis-vis actual P&L.

3)    MIS on allocation of common project overheads to various projects.

4)    MIS on allocation of common administrative overheads to various projects.

5)    Capacity utilization of man-hours for each different category of labor.

6)    MIS on leads received, no of projects for which bids were submitted and no of projects which were awarded.

MIS report on Logistics industry:

•       Product-wise P&L such as Air Export / Air import / Ocean Export / Ocean import / Custom Clearance, IT services, etc. Warehouse-wise P&L.

•       Territory-wise P&L

•       Territory-wise –Product Contribution.

•       In the case of Principal business owning different types of Containers, Container type-wise P&L.

•       Route-wise shipments made, and Net Freight earned.

•       Container Utilization report.

•       Fleet Utilization report.

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