Predictive Accounting: Driver-Based Budgeting And Rolling Financial Forecasts

This presentation involves the shift from historical reporting to predictive costing such as capacity-sensitive driver-based rolling financial forecasts, what-if analysis, marginal cost analysis (e.g pricing), and target costing for new products and services.

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. It can be done through driver-based expense projections also useful for decision analysis.

The annual budget is often perceived as a fiscal exercise done by the accountants that is: (1) disconnected from the executive team’s strategy, and (2) does not adequately reflect future volume drivers. The budget exercise is often scorned as being obsolete soon after it is produced, and biased toward politically muscled managers who know how to overstate and “pad” their budget request. To complicate matters, traditional budgets are typically incremented or decremented by a small percent change from each cost center’s prior year’s spending level. This “use it or lose it” behavior by managers in the last few months of the fiscal year unnecessarily pumps up their prior year’s costs and consequently confuses analysis of who really needs how much budget in the coming year.

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.

This presentation provides a solution to poor budgeting and rolling financial forecast methods.

• To understand the deficiencies with the traditional annual budget
• How to apply unit-level consumption rates with forecasts to project operational expenses?
• How to include strategic and risk mitigation projects in expense projections?
• How to apply “predictive accounting” for capacity-sensitive driver-based rolling financial forecasts, what-if analysis, and outsourcing decisions?
• How to shift from bottom-up cost center consolidations to top-down modeling?
• How to apply target costing for new products and services?

• How effective is our annual budgeting process? Does its benefit exceed the administrative effort and costs to produce it?
• Is the budget out of date within a few months after it is published?
• Do experienced managers “pad” their department’s budgets?
• Is consolidating cost center budget spreadsheets bottom-up cumbersome?
• Do we understand incremental/marginal expense analysis classifying the behaviour of our resource capacity expenses as sunk, fixed, step-fixed, or variable based on the planning time horizon?

• CxOs
• CFOs
• Financial officers and controllers
• Managerial and cost accountants
• Financial and business analysts
• Budget managers
• Strategic planners
• Marketing and sales managers
• Supply chain analysts
• Risk managers
• CIO and information technology staff
• Board of Directors

Gary Cokins is an internationally recognized expert, speaker, and author in advanced cost management and performance improvement systems. He is the founder of Analytics-Based Performance Management, an advisory firm located in Cary, North Carolina at www.garycokins.com . Gary received a BS degree with honors in Industrial Engineering/Operations Research from Cornell University in 1971. He received his MBA from Northwestern University’s Kellogg School of Management in 1974.
Gary began his career as a strategic planner with FMC’s Link-Belt Division and then served as Financial Controller and Operations Manager. In 1981 Gary began his management consulting career first with Deloitte consulting, and then in 1988 with KPMG consulting. 1992 Gary headed the National Cost Management Consulting Services for Electronic Data Systems (EDS) now part of HP. From 1997 until recently Gary was in business development with SAS, a leading provider of enterprise performance management and business analytics and intelligence software. His two most recent books are Performance Management: Finding the Missing Pieces to Close the Intelligence Gap (ISBN 0-471-57690-5) and Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics (ISBN 978-0-470-44998-1). His most recent book co-authored with Larry Maisel is Predictive Business Analytics (ISBN 978-1-118-17556-9) published by John Wiley & Sons. Mr. Cokins can be contacted at gcokins@garycokins.com .