According to the findings of a recent survey conducted by payroll service provider Paychex, many small businesses are still not prepared for the changes imposed by the Affordable Care Act (ACA). In fact, only a little over half of small businesses understand and are prepared for the changes required by ACA. The rest of these companies either do not understand it at all or only partially understand it, and are not prepared to comply with its complex rules and regulations. It is likely that many larger companies as well are confused or unsure about compliance issues associated with this Act.

This implies that budget activities (particularly additional potential costs and tax credits) that are supposed to reflect these major changes to our healthcare system are probably not performed. Actual financial impact resulting from the changes will not have corresponding budget components and certain variances are likely to develop.

The Affordable Care Act example is a good reminder of the real challenge in incorporating changes to any budget or forecast, which is, being able to quickly and with little effort manage modifications to the process and its details. Unless the budgeting system is open to modifications without having to perform programming or enter an array of new formulas and links to other worksheets or system modules, these modifications, assuming the company understands the changes to its required compliance, are unlikely to be made.

Manufacturing companies are relying on their workforce to build inventory from raw materials and parts and prepare it for shipping to their customers. The workforce, also known as company headcount, which includes direct labor and manufacturing support (indirect labor), is often a function of product demand and sales forecasts.

Forecasting the required number of employees, or direct labor hours and all their associated costs (salaries, overtime pay, vacation pay, holiday pay, payroll taxes, workers comp insurance, health insurance benefits and other expenses) becomes extremely important and requires a well designed and implemented system. The same system must have the ability to allow quick modification to assumptions and drivers, which in turn will cause the software to properly calculate and display all the desired values.

Of all payroll-related expenses, those associated with the new Affordable Care Act are of great importance since major changes are expected to the way many organizations are going to forecast and ultimately incur these expenses.

While ACA is complex and its implications are larger than the scope of this article, it is a useful example of why it is important to be able to modify certain values in the planning software and have the output automatically change, to accurately reflect these changes.

More than ever before, a manufacturing company must rely on its information system to not only accurately account for all manufacturing activities and complete its internal and external financial reporting in a timely fashion, but also properly plan and forecast its entire operation.

Payroll and payroll-related expenses are always a significant portion of total expenses and likewise, a large portion of the organization’s budget. As a result, modern planning, forecasting and business intelligence software applications are implemented daily in manufacturing companies.

A capable solution will have dedicated business modules, which are pre-programed sections of the main application and will be equipped with business rules and menu selections and will be ready to quickly implement and put to use. Typical planning/forecasting modules are revenue with cost, operating expenses, capital budgeting, loans and liabilities and of course, a dedicated personnel module.

Modifications in the personnel module should be fairly simple and straightforward. The power of driver-based budgeting, one of the main features of such application, becomes evident when simple changes cause the output to change in real-time without any modifications to the system and ideally without entering a single formula or link.

Here’s a simple example: Since a well-designed personnel planning module allows unlimited user assigned drivers, one can set up specific drivers to address employee health insurance costs such as: cost per hour worked, cost per $ of salary expense, etc. These drivers will automatically affect personnel payroll and additional payroll related expenses. Expenses defined as payroll-related expenses (e.g., health insurance costs) automatically change as the drivers and the main payroll expense budget lines change.

The ultimate benefit here is that everything that occurs in the personnel module (same as in all other modules in the software), in every budget expense category (which health insurance costs are part of), automatically flows into the projected financial statements, ideally with no user programming required (depending on the chosen solution). As mentioned above, there are no formulas, links or functions, just like the actual financial statements coming out of the ERP or accounting system.

Seemingly complex changes can be implemented with little effort and with the highest efficiency and accuracy. This is especially noticeable when setting up employee benefits and especially health insurance benefits. With the new rules imposed by the Affordable Care Act, such changes should be relatively simple to implement and any subsequent changes will be just as simple.

With the availability of automated planning, forecasting and business intelligence software that is interfaced with the actual accounting or ERP software, even smaller manufacturing companies can have a complete system up and running within days or weeks and at a much lower cost than traditional systems where custom programing and consulting fees make these systems cost prohibitive for all but the largest organizations.

Similar to changes caused by the Affordable Care Act, any modifications to assumptions in a company’s budget should be straightforward to implement and immediately put to use without having to embark on a lengthy design, programming, testing and debugging project.


Alan Hart is a former CFO with nearly 20 years of experience in accounting, finance and management.He works with Centage Corporation to evangelize driver-based budgeting and forecasting solutions.