Effective budgeting is important for a family office, as it helps to ensure that the family's mandates are being followed in the most efficient and effective way possible. The setting up and tracking of budgets, allows the family office to control operational costs, plan for and achieve long-term financial goals, and ensures transparency and accountability among family members. Frequently multi levelled family offices need to distinguish the allocation of budgeted costs between different classes of beneficiaries.
Given the importance of this task, it is surprising that we often find that budgeting is also one of the most manual and time-consuming efforts for a family office. Excel spreadsheets are a customary tool, with data being pulled out of multiple systems manually to provide the information required to match actual costs and revenues versus budget.
But the story does not end there. Budget control needs to be accompanied by forecasting to also look into the future - not just the past.
The estimation of future revenue based on the existing portfolio allocation of fixed and variable income, is a powerful tool in “what if” analysis for the purpose of planning for the future. Forecasts also need to include the cash effect of capital transactions such as the redemption of bonds or the call on Private Equity investments.
With the rise of inflations and global interest rates, the cost of finance of leveraged assets and other borrowing has become an important criterion in the evaluation of investment activities and future performance of asset managers. It may also be necessary to include the effects of the fluctuation in FX rates, which can have a sizeable impact on the accuracy of the forecast of these elements.
To make this possible, budgeting and forecasting tools need to be integrated to the mainstream family office management systems, in a “single source of truth” approach. With such complexity the manual extraction of numbers from diverse systems into Excel spreadsheets to do the number crunching, becomes a cumbersome and unreliable task. Add to that the need to carry out multiple versions and iterations of the process and you can see that automation is the only way out of this maze.
The combination of a good reporting tool in the armoury of a good family office software solution is also a very important element in the budgeting and forecasting operations. Giving users the ability to extract information from pre-set templates and to visually enhance the numbers with graphics and charts, can enable the assessment and alerting of undesirable events that may occur in the future, as well as the evaluation of past activities.