Predictive Accounting: Driver-Based Budgeting and Rolling Financial Forecasts (Currently Unavailable)

Author: Gary Cokins

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: May 2015

Learning Objectives

• 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.

Level
Overview

Instructional Method
Self-Study

NASBA Field of Study
Accounting (2 hours)

Program Prerequisites
None

Advance Preparation
None