CPI has its place… That place is not the boardroom

As the end of the year approaches, we as business owners are once again faced with tough decisions about price increases for the new year. Every year, the dread appears around the same time as the Christmas decorations begin appearing in the malls and, for me at least, renewed frustration at the futility of using Consumer Price Index (CPI) as any kind of indicator of where inflation is at for business in the country.

According to Statistics South Africa, “The inflation rate is the change in the CPI for all items of the relevant month of the current year compared with the CPI for all items of the same month in the previous year expressed as a percentage.”

The clue should be in the name – it is a consumer price index – not a business price index. CPI is indeed a very good indication of the average South African consumer and household expense changes, though it is worth looking at who qualifies as the average South African in this context. According to the last census statistics in 2011, the average South African is a black 25 year old woman living in Gauteng, who attended but did not complete high school and has no tertiary education and is employed, but does not have much disposable income.

That said, the average professional person owning or managing or debating price changes for the companies we service, does not qualify as the average South African; and furthermore what we as a business spend our money on is nowhere near similar to what our average South African household spends their money on.

There are 12 categories that are monitored monthly in order to compile the CPI basket and those 12 categories are also weighted to reflect the percentage of monthly expenditure on them. Give a little thought as to which of these are relevant to your business in substantial weighting – Food and non-alcoholic beverages; alcoholic beverages and tobacco; clothing and footwear; housing and utilities; household content and services; health; transport; communication; recreation and culture; education; restaurants and hotels and “miscellaneous goods and services”.

As a business, maybe 25% of the items are relevant to our costs and even then, the weighting they are given in a consumer context is not in line with the weighting they have in a business context. A quick glance at electricity and communications which are weighted as low expenditures to the average consumer (4.1% and 2.6% respectively) clearly illustrates this disparity, as they are generally a significant percentage of a business’s monthly expenditure.

Not to mention the glaring absence of salaries, that in the service industry could be anywhere up to 85% of a business’s expenses. There are not many highly skilled employees that will stay with a company for a salary increase that is in line with or less than that of inflation and, in most cases the expected increase is far higher. Inflation for 2013 is currently sitting at 6% (as of September’s CPI announcement); if your expenses are comprised of even 50% salaries and your staff expects a minimum of a 10% increase at the end of the year, there is no chance your cost increase can be 6% - your business could simply not sustain itself.

The bottom line is that although CPI certainly has its place; that place is not at the boardroom table. When considering your business’s price increases, you need to consider your own categories and weightings and not rely on something that is irrelevant to your expenditures. If you are confronted by resistance from customers citing CPI, take the time to explain why those numbers aren’t relevant to your business and the services you provide.

Note: CPI & Census information was garnered from the latest published documents on the Statistics SA website www.statssa.gov.za

Adapt or Die - The Evolution of Budgeting

Adapt or die – this is as true in business as it is in life. If you keep doing things the same way ignoring the change all around you, others will overtake you and you will be left with nothing to sustain you. Budgeting is no different. If you remain stuck in the old way of doing things, your business will continue to lose money, waste valuable resources and work from old unreliable information that is largely ignored by those who truly manage your company.

A long time ago and far away, businesses operated using ‘top-down budgeting’ - the finance department had to put together an overall budget for the business with strategic input from the FD, which was then broken down into each cost centre and presented to the cost centre managers as a done deal.

Since businesses are greater than the sum of their parts, randomly assigned budgets built from historical information cannot direct or reflect the financial performance of cost centres with any realism. As a result, top-down efforts are largely ignored by cost centre managers, and the business loses the benefits of a budget that accurately reflects their business needs.

Recognising the importance of the budget and having the input of cost centre managers has been a huge step in the right direction for budgeting as a whole and has resulted in ‘bottom-up budgeting’.

This is a collective process that involves cost centre managers providing current individual financial information relevant to their own cost centres. The proven outcome is a more accurate and credible budget, representing a unique expectation for every cost centre, created by an operationally involved manager.

It empowers those in charge of their domains with the tools to set expectations for themselves, that will be critically examined by the financial department and used to hold managers accountable for their performance. With responsibility comes a sense of ownership, leading to accountability, more accurate budgets and good spending practices.

The catch however is that although many companies recognise the value of this approach, their execution often falls short. Businesses still tend to compile budgets using central spreadsheet templates distributed to the cost centres for completion, falling straight back into the seemingly endless cycle of amendments and approvals.

This can quickly create a time and opportunity cost of hundreds of billable hours of operational as well as financial staff, and more often than not and uses a format that alienates non-financial operational managers.

While this version of bottom-up budgeting is at least more accurate than the top-down method, it is hugely wasteful, especially when the organisation has more than just a few cost centres.

The only solution is the final evolution to real-time, online systems that are easy to implement, use and understand by financial and non-financial managers. These systems will support bottom-up budgeting by allowing cost centre managers to input current relevant information into familiar uncomplicated spreadsheets that are available immediately to financial managers; cutting budgeting cycles to three weeks or less and therefore saving valuable resources and money.

In the end, recognising the need to adapt is the first step and then you just need to keep on evolving. Bottom-up budgeting completed with the correct tools results in greater financial empowerment, engagement and knowledge throughout the business. The resulting sense of ownership leads to greater sharing of responsibility and accountability within business domains, allowing their performance to be driven by their own expectations.

The results are not just more efficient and effective budgets, but just as importantly, better use of company resources. Freeing up business managers to run the business and the finance department to strategically guide the company’s performance can only result in a smarter, more upwardly mobile business. Adapting will not only mean your company will live, it will mean it will thrive and grow.

Ten tips for choosing financial budgeting software

There are many companies that offer budgeting software; they will vary greatly in price and in what they can deliver, so how do you know which one is going to be the best fit for your business? There are a few things you can keep an eye out for that will help you filter out the noise.

1. The software needs to be user friendly. Not everyone is a financial whiz; I dare say very few people are. But to get the most benefit from a company budget, financial and non-financial managers within a business need to input on, have access to and understand it.

2. Ideally, the system should automate as much of the data capture as possible. With users not having to manually input information, the budget cycle can be reduced from months to weeks and there is much less room for error.

3. The software should be designed in modules. This shows an understanding that each client has unique requirements and does not expect you to invest in things you do not need and allows for the product to grow in line with your business.

4. It should accommodate a variety of budget types: Itemised Budgeting, Depreciation Budgeting, Grade and Employee Budgeting, Percentage Reallocations and Departmental Transfer Budgets.

5. Users should be able to work offline; it should be a simple exercise to export standard budget accounts into MS-Excel and reload the data into the system via an import at a later stage.

6. Budgets and forecasts should be able to be captured against non-financial accounts (for example headcount and square meters) and the financial budget driven as a result.

7. The system administrator should be able to create multiple user-specific screen layouts, deciding what data is displayed and what calculations can be performed to create different experiences for different groups of users, specific to their requirements.

8. You should be able to review budgets and forecasts in real time at any level within the company during the cycle, allowing users to drill down to the detail without needing data aggregation from outside the system.

9. The system should allow for the flexibility of creating multiple versions of a budget and workflow should enable the tracking and approval of budgets throughout the cycle.

10. Security and access control should be easily set up by the system administrator at an individual user level, defining which cost centres they can see, what areas of the budget they can update, which reports they can run and how their screens will be displayed. The administrator should also have the ability to define password policies and clone similar users.

Variety and choice should be empowering for businesses, not provide further complications and confusion. By knowing the right things to look for and the right questions to ask, you can ensure that you are getting exactly what you need within your price range.

idu Software – The secret to success

idu Software (Pty) Ltd  was founded in 1998 by Kevin Phillips, James Smith and Wayne Claasen with the intention of offering ERP consulting services. With degrees and diplomas in Commerce, Accounting, Financial Information Systems and IT specialising in commercial software development between them, they were perfectly positioned when opportunity knocked.

“One of our first clients asked us to develop a custom budgeting solution that interfaced directly with their underlying financial system and was also user friendly for non-financial staff,” says Kevin Phillips, founder, owner and CEO of idu. “We realised there were few dedicated budgeting tools available, and even fewer that were easy for staff outside the finance department to use. The solution we developed back then remains our core product offering today.”

idu Software grew to deliver a user friendly interface to budgeting and reporting around all standard Enterprise Resource Planning (ERP) and financial systems. Their core product idu-Concept has been designed to streamline management interaction with financial systems. Typical ERP systems are designed with accountants in mind and are generally not user-friendly for the non financial user. idu-Concept addresses this, establishing a platform of ownership and empowerment that leads to vast improvement in the effective management control in any business.

idu are well on their way to realising their vision to be the first choice for delivering accessible, easy to use budgeting, forecasting and reporting solutions for all users, and dominating locally while competing globally.