Perspectives on Microsoft, SQL, Business Intelligence, and other things : Business Intelligence

Business Intelligence Basics: Having a Target/Goal (Part 4)

jhuschka — Mon, 02 Oct 2006 21:44:00 GMT

Subtitle: "An Incredibly Simple Example of Budget Modeling"

Most budget versus actual comparisons reduce down to the comparison of two fully-qualified account balances:

Although there are many variations, a “fully-qualified account” is defined within most business accounting systems as a combination of an organizational identifier called a “cost center” and a financial “bucket” called an “account”.

Many of your reading this probably have some concept of a budget. Your budget probably has one cost center such as “Ward’s House”, and it probably has multiple accounts such as “Automotive Expense”, “Food Expense”, and “Income”.

Now, think about what is going through your mind as you are building your budget for the next year. You almost certainly do not automatically know what the charges to your “Automotive Expense” account are going to be each month. Rather, something like the following is probably going through your head:

Ok. It looks like the cost of gasoline is going to be coming down a bit. Therefore, I can probably plan for a bit less fuel expense per month ($125).

But, the Toyota is about to hit 100,000 miles, so we are going to have to get its scheduled maintenance ($725) in February…and it looks like it is going to need tires ($350) around March.

Welcome to the world of budget modeling.

You are taking the facts that you know (scheduled maintenance required for the Toyota in February) and translating them into account activity ($725 in “Automotive Expense” in February).

After February is history, you will be able to see how much you actually spent on “Automotive Expense” and compare it to your budget.

Well, businesses do the same thing.

Let’s assume that “Generic Corporation” has two employees for which it wants to budget. (It will ultimately need to budget for all its employees, but let’s focus on these two.)

	Position	Annual Salary
Joe Acme	Developer	$50,000.00
Frank Smith	Analyst	$65,000.00

Both employees work for the “Information Technology Department”, cost center 5200.

Since Generic Corporation tracks results for each month, the first step of our modeling is to translate annual salary to monthly salary. (Remember, we need to compare actual to budget for the same time periods.)

	January	February	March	April	May	June	July	August	September	October	November	December
Joe Acme	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67
Frank Smith	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67

One of the accounts that we need to calculate is “Salary Expense”, account 3201. This one is pretty straightforward. It is the sum of the salaries:

	January	February	March	April	May	June	July	August	September	October	November	December
Joe Acme	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67
Frank Smith	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67
Salary Expense	$9,583.33	$9,583.33	$9,583.33	$9,583.33	$9,583.33	$9,583.33	$9,583.33	$9,583.33	$9,583.33	$9,583.33	$9,583.33	$9,583.33

So, for example, the fully-qualified budget for cost center 5200, account 3201, for February is $9,583.33.

Another account that we need to calculate is “Retirement Tax”, account 3205. It is charged at a rate of 1.45%, for the employee’s initial $55,000 of income. (For those of you acquainted with Social Security, this is similar to Social Security, but I have intentionally not made it exactly the same.)

	January	February	March	April	May	June	July	August	September	October	November	December
Joe Acme	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67	$4,166.67
YTD Salary	$4,166.67	$8,333.33	$12,500.00	$16,666.67	$20,833.33	$25,000.00	$29,166.67	$33,333.33	$37,500.00	$41,666.67	$45,833.33	$50,000.00
Retirement Tax	$60.42	$60.42	$60.42	$60.42	$60.42	$60.42	$60.42	$60.42	$60.42	$60.42	$60.42	$60.42

Frank Smith	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67	$5,416.67
YTD Salary	$5,416.67	$10,833.33	$16,250.00	$21,666.67	$27,083.33	$32,500.00	$37,916.67	$43,333.33	$48,750.00	$54,166.67	$59,583.33	$65,000.00
Retirement Tax	$78.54	$78.54	$78.54	$78.54	$78.54	$78.54	$78.54	$78.54	$78.54	$78.54	$12.08	$0.00

Total Retirement Tax	$138.96	$138.96	$138.96	$138.96	$138.96	$138.96	$138.96	$138.96	$138.96	$138.96	$72.50	$60.42

Notice how our budgeted expenses for November for Frank Smith decrease because his salary has surpassed the initial income threshold of $55,000.

Therefore, for example, the fully-qualified budget for cost center 5200, account 3205, for November is $72.50.

Seems pretty simply, doesn’t it. Well, this example is simple, but for a typical business, budget modeling can become very complex.

Imagine modeling expected sales revenue for a corporation. What do we know about our customers’ purchase patterns? Are there outside factors such as the weather or economy that are going to impact our sales? Will our sales revenue be capped by our ability to produce our product? Is our new marketing campaign going to boost sales?

Imagine modeling expected expenses associated with making and selling the products: What is the cost of fuel going to be? Are our suppliers going to change the prices they charge us for our raw materials? What is cost of labor (people) for making the products going to be? Are we going to have to raise their salaries to keep them?

Business Intelligence Basics: Having a Target/Goal (Part 3)

jhuschka — Thu, 28 Sep 2006 00:23:00 GMT

Last entry, I discussed how budgeting is, in essence, a modeling process. Today, I want to talk about some of Microsoft’s modeling products for business.

Before I start, I need to give the caveat that Microsoft has a large number of products, many of which could have a role in the business budgeting process. My intent is to focus on those that provide modeling capabilities. (Please feel free to comment if I miss something.)

Microsoft Excel is easily the dominant player in corporate budgeting. Recent surveys by CFO Research Services have shown that between 70 and 80 percent of companies use spreadsheets for budgeting, of which Excel is, by far, the dominant player.

Excel has a number of advantages:

1) It is completely generic and flexible, providing a blank slate by which an analysis can model his/her business exactly as he/she feels appropriate.

2) It also has built-in charting and reporting functionality.

3) The knowledge base of the product is immense.

Some work essentials for budgeting in Excel may be found at http://office.microsoft.com/en-us/FX011961621033.aspx.

The upcoming Microsoft PerformancePoint Server 2007 is a server-based product for scorecarding and analysis as well as budgeting and planning. As with Excel, it provides the customer with extremely powerful modeling capabilities. In addition, it adds the power of centralized SQL Server and Analysis Server technologies to support corporate-level modeling (e.g. summarization across levels of the organization). For more information on PerformancePoint, see http://office.microsoft.com/en-us/FX101550371033.aspx.

Microsoft Forecaster, the product on which I work, is a server-based product for budgeting and planning. It is aimed at the mid to small size companies that generally do not have full-time staff dedicated to business planning. Out-of-the-box, it comes with models for human resources, capital, and revenue. It also provides centralized SQL Server storage and processing capabilities. For more information on Microsoft Forecaster, see http://www.microsoft.com/forecaster/default.mspx.

Microsoft Dynamic AX is an enterprise-level Enterprise Resource Planning (ERP) software package. As part of its suite of budgeting functionality, it provides budgeting and modeling capabilities. One of the significant advantages of budgeting with Dynamics is that budget data and functionality are hosted within one integrated package, laying a robust foundation for budget versus actual performance monitoring. For more information on Microsoft Dynamics AX, see http://www.microsoft.com/dynamics/ax/default.mspx.

Microsoft Dynamics GP is an ERP software package. It supports budgeting via its tight integration with Excel. For more information on Microsoft Dynamics GP, see http://www.microsoft.com/dynamics/gp/default.mspx.

Business Intelligence Basics: Having a Target/Goal (Part 2)

jhuschka — Mon, 11 Sep 2006 22:20:00 GMT

Last entry, I began discussing the importance of a target to business intelligence (BI). Today, I continue.

Before an organization can establish the specific numeric targets suitable for use in a BI application, it needs a mission and the goals that derive there from. Given that this blog is focused on systems-related issues rather than the strategic planning issues of mission and goals, I’m not going to tackle the topic of how the mission and strategic goals of an organization should be established. If you want to explore those topics, see Basics of Developing Mission, Vision and Values Statements and Basics of Action Planning.

Once mission and goals are set, they must be translated into specific values at the appropriate organization level, time dimension, and unit of measure consistent with the actual values from the operational systems such that the BI applications can do meaningful comparisons of target and actual performance.

This translation process is called “budgeting”.

I like the definition of budgeting published by (somewhat surprisingly) the National Park Service (see http://home.nps.gov/applications/budget2/glossary.htm):

The process of translating planning and programming decisions into specific projected financial plans for relatively short periods of time. Budgets are short-range segments of action programs adopted that set out planned accomplishments and estimate the resources to be applied for the budget periods in order to attain those accomplishments.

So, how do we do budgeting?

Budgeting is, in essence, a modeling process: Starting with the things we know, we use a model to translate that into specific financial figures consumable by our business intelligence application in comparison to actual performance figures.

A sample of some things we may know:

1) Our manufacturing capacity and costs: How much capital equipment, facilities, people, and raw materials do we have available? If you are an energy-intensive business such as an airline or a steel foundry, the recent price change in energy is very relevant to your planning process.

2) Our sales capacity, focus, and costs: Are we expanding to new markets? Do we have the people to sell to new markets? What will it cost to acquire the resources required to sell to new markets? Many companies are facing this issue today with the growth of Asia and China specifically, and it significantly impacts their planning.

3) Macro economic forecasts: What are the prospects for the housing market, inflation, consumer spending, and resource costs, for example? If you are a realtor or builder, the recent downturn in the housing market has great relevance to your planning processing.

4) Our customer forecasts: Are our customers expanding or contracting their businesses? If you are in the power business in the northwestern U.S. these days, the plans of your customers—Microsoft, Google, and Yahoo—are extremely relevant to your planning process. (See http://www.datacentres.com/research/google.asp.)

5) Government regulation changes: Are government regulations changing such that your market size is changing? Are government regulations changing such that your cost structure is changing? If you are a California-based business emitting high levels of greenhouse gases, recent government regulation is very important to your planning process. (See http://www.signonsandiego.com/news/state/20060831-1826-ca-xgr-globalwarming.html.)

Next entry: More about this translation process and how Microsoft products assist in it.

Business Intelligence Basics: Having a Target/Goal

jhuschka — Tue, 15 Aug 2006 22:41:00 GMT

“Business intelligence” can be a term that has a rather generic meaning, meaning many different things to many different people. Throughout all these definitions there is generally one central theme: That of providing timely information to decision makers such that they can make decisions that help drive the organization towards its goals.

You can see this in documents such as http://www.microsoft.com/office/preview/solutions/bi/top10.mspx and http://www.microsoft.com/sql/solutions/bi/overview.mspx

One of the popular implementations of business intelligence today is the “Balanced Scorecard”. The “Balanced Scorecard” concept was introduced by Kaplan and Norton and focuses on measuring the performance of the organization versus goals in four areas: Financial, Customer, Internal Business Processes, and Learning and Growth. (See http://www.valuebasedmanagement.net/methods_balancedscorecard.html.)

A basic example of a balanced scorecard, showing a comparison of actual and target, as implemented by Microsoft Office Business Scorecard Manager 2005, can be seen here.

So, we know that business intelligence is supposed to help us make decisions in line with our goals. We know that our scorecards probably need to show the goals against which performance is being measured. Yet, it seems that the goals are so often taken for granted or even completely ignored.

As an employee and consultant outside of Microsoft, I have worked with organizations for which their goals in very important areas were at best ambiguous and at worst missing. They may have the concept of managing to the minimum. “Get the bug list as small as possible,” for example. But they may not have a concept of what is acceptable. “We will ship when the bug list is x size.” (This is not Microsoft.)

They may manage to a trend. “Is it going up?” for example. But they may not have a concept of an acceptable rate. If your high-tech company had been returning a relatively healthy growth rate of twenty percent in 1998, you would have still been under-performing your competition. (See NASDAQ Rate of Change.)

Tracy Brinkmann, goal setting and success coach, says 'You must have an aim, a vision, a goal. For the man sailing through life with no destination or "port-of- call', every wind is the wrong wind'.

We can also take goals for granted at a technical level. If you create an automated scorecard that compares goal versus actual, you are going to need the goal. You are going to need the goal at an organizational level, time dimension, and unit of measure consistent with the actual value from your operational systems. Where is that going to come from? Does it exist in an accessible data store? How is it being collected? Who is responsible for it?

In subsequent blog entries, I’m going to explore goal setting in the context of business intelligence a bit more.

I welcome your comments.