Predictive Accounting: Driver-Based Budgeting and Rolling Financial Forecasts
Author: Gary Cokins
||2 hours for CPAs
This presentation focuses on the shift from historical reporting to predictive costing such as rolling financial forecasts, what-if analysis, and marginal cost analysis (e.g., pricing). The annual budgeting process is being criticized as obsolete soon after it is published, prone to gamesmanship, cumbersome to consolidate cost center spreadsheets, not being volume sensitive, and disconnected from the strategy. The challenge is how to resolve these deficiencies.
Today organizations are shifting to rolling financial forecasts, but these projections may include similarly flawed assumptions that produce the same sarcasm about the annual budgeting process. What is the solution to these poor budgeting and rolling financial forecast methods? Four components of the enterprise performance management (EPM) framework can be drawn on to resolve these limitations. They are a strategy map, a risk management matrix, capital projects, and activity-based costing principles.
The first three are project based and the last for recurring operational expense projections. Ideally, the correct and valid amount of future spending for capacity and consumed expenses should be derived from two broad streams of workload that cause the need for spending – demand driven and project driven. Demand-driven expenses are operational and recurring from day to day. Their requirements are typically from customers.
Only computer automation that integrates several of the methods of the enterprise performance management (EPM) framework, including good predictive analytics, allows an organization to produce valid, derived, rolling financial forecasts.
Publication Date: October 2016
Managers or practitioners who have previously struggled at promoting rolling financial forecasts as an advance to the annual budget or intend to “champion” driver-based budgeting and rolling financial forecasts, and they need a compelling call to action.
- A basic primer on costing and EPM
- What is broken with budgeting?
- The shift to rolling financial forecasts
- Dealing with resource capacity planning
- Getting buy-in to overcome resistance
- Recognize the deficiencies with the traditional annual budget
- Apply unit-level consumption rates with forecasts to project operational expenses
- Identify strategic and risk mitigation projects in expense projections
- Apply "predictive accounting" for driver- rolling financial forecasts, what-if analysis, and outsourcing decisions
- Recognize how to shift from bottom-up cost center consolidations to top down modeling
- Identify when the use of a general ledger is best when using decision analysis
- Distinguish when you would classify within the ABC/M cost assignment network as a final cost object
- Identify the main focus of a company which employs the ABC/M model
- Recognize which step produces the most accuracy of final cost objects in a well-designed ABC system
- Differentiate the best steps to implementing rolling financial forecasts into the performance management process
- Identify necessary adjustments companies would need to employ
- Recognize costing in the current business environment
- Describe when ABC costing is analogous
- Identify the most important considerations when applying ABC costing to your organization
- Distinguish between features that characterizes Activity-Based Planning from Activity Based Costing
- Recognize how to most effectively use forecasting when applying monitoring to a business
- Identify predictive accounting characterized by a closed-loop information flow
- Describe the shift to Enterprise Performance Management (EPM) in the intelligence hierarchy
- Identify the biggest reason organizations have been slow to adopt Enterprise Performance Management (EPM)
NASBA Field of Study
Accounting (2 hours)