by Trey Pruitt
Financial forecasting and budgeting are critical processes for a company of any size. Many companies outgrow Excel or Google Sheets for budgeting and forecasting. Early-stage startups can get by with spreadsheets but as a company matures, more team collaboration is required and inevitable spreadsheet errors are more costly. There are many budgeting and forecasting software products on the market. If you are ready to upgrade to a software package, here are the features I think are most important for my typical client (e.g., a software company $5MM-$10MM in annual recurring revenue and 30-50 employees).
There are a number of older desktop- and server-based budgeting software packages that have attempted to migrate their legacy products to the cloud. If you have to maintain a server to run their software, it's not a SaaS product. For a midsize, growing company that's a headache you want to avoid. Look for a true multi-tenant cloud-based SaaS application.
It's labor-intensive and a hassle to update a spreadsheet with actual data from your accounting system each month. A native integration to SaaS accounting software such as Quickbooks Online, Netsuite, and Sage Intacct is a big time saver. Uploading a csv output from accounting system every time there's a change in the general ledger doesn't count. Changes to actual data in the accounting system must seamlessly be reflected in the budgeting and forecasting tool.
Comparing versions of actual, plan, and forecast is a nightmare in Excel. How did actual last month compare to plan? How does the current forecast compare to last quarter's updated forecast? Answering these questions by comparing a plethora of spreadsheets (was that version FY24 Plan (Final).xlsx or FY24 Plan (Final) final2.xlsx?). If you're going to the trouble to migrate to a software solution, the ability to make comparisons across versions is a must.
As the company grows, you want the ability to budget and forecast by department. For example, here departments for a typical mid-size SaaS company:
The head of each department needs to have a hiring and expense budget that they can manage. They want to know how much they can spend each quarter and, after each month's accounting close, how much is left to spend. You definitely don't want to go down the road of creating duplicate line items in your accounting system and forecast (e.g., "Salaries - Sales", "Salaries - Engineering", "Salaries - G&A"). That approach quickly becomes unmanageable (I see this often in accounting systems - it's not pretty). You want the ability to plan and report at the department level with limited access for department budget owners who can see financial information for their department only.
PDF reports are great, but external constituencies like investors almost always want financial statements and related information in Excel.
One of the places that spreadsheets are great is the ability to have values driven off of other values. A good budgeting and forecasting solution should offer an intuitive way to set up, manage, and use drivers to determine future values.
Variance reporting is usually standard in most budgeting and forecasting software. You want to be able to compare versions (e.g., Actual vs. This Year's Plan) for a time period (e.g., Q2). This is one of the main features of database-backed SaaS budgeting and forecasting software, so if the solution you're evaluating doesn't have it, look elsewhere.
The following features are not absolutely critical but are very useful.
It's table stakes for a budgeting a forecasting software to offer "three-way" financial statements including Income Statement (P&L), Balance Sheet, and Cash Flow Statement. However, many investors want to see operating expenses grouped by "function" (e.g., R&D, Sales & Marketing, General & Administrative) on the P&L. So the system needs a way to group department-level line items into "functions". For example, the R&D grouping might include Engineering and Product departments.
Two reasons that you might want your company's key performance indicators (KPIs) or metrics in your budgeting and forecasting software.
Many companies struggle with "single source of truth" and finance can (and in my opinion, should) be the arbiter of which systems contain the source of truth for a particular metric
Often KPIs and related metrics can be drivers of the forecast, so it's important to be able to use those metrics directly as drivers of budgets and forecasts
It's useful to have total and new full-time equivalents (FTEs) by month by department for budgets and forecasts. This is important because 60%-80% of expenses for many of my clients are people-based costs.
However, I have found that with many clients, there is confusion amongst the management team about which specific positions to be hired were included in the plan. For example, was the Senior Engineer included in the 20 FTEs in the Engineering department at the end of Q2? How about the backfill position for so-and-so? Being able to budget and forecast employees and contractors at the position level both reduces confusion and allows a management team to be more specific about what people resources are absolutely required by what date.
Many finance-types want to work in Excel. I think that's fine as long as the user interface works for non-finance people as well.
Some of my clients have teams that employees of legal entities outside of the USA. As a result, their accounting system has multiple legal entities that are consolidated to the parent company. If this is the case for your company, having a system to budget and forecast by legal entity in their native currency can save a lot of hassle.
Being able to forecast in multiple dimensions can be very useful, particularly for revenue. Typical dimensions might include by region or by product line.
Because most budgeting and forecasting applications are "horizontal" (i.e., they serve many different "vertical" industries), there are aspects of every business that won't be met by the software. It's useful to integrate niche applications where a company has a specific need and/or read and write data from internal systems to the budgeting and forecasting software. I'm tempted to make this flexibility a must-have requirement, but the reality is that many vendors have not embraced the open API movement, instead insisting that their application be the monolithic solution to all company's budgeting and forecasting needs.
This is my current thinking on what features and capabilities are important for the kinds of clients I serve. If you're interested in which solutions are best for your company, please contact me and we can discuss.
