As an introduction, it is essential to understand how OIS differs from the traditional budget’s planning activities. These differences are the essence of what creates OIS’s functionality.
- Cause and effect: The traditional income statement is an effect; it is a derivative of the budget. OIS is the opposite; it causes the operational budget. (OB). OB = OIS plus firm’s strictly fixed costs
- Budget detail: The budget is the sum of the departments’ budgets. OIS is the sum of the departments’ activities.
- Profit’s currency detail: The budget’s departments’ budgets can’t be modeled. So, the budget’s detail is only valid on day 1 of each new year. After that, the only way to update profit is predicatively at the grossest level. Profit outlook = revenue minus total costs. Conversely, OIS’s profit is always current at the line item detail of the firm’s income statement.
- Analytics: The budget’s is predictive: What is result if X happens. OIS’s is prescriptive: what is the best possible result
Phase I: The CEO and CFO will be using OIS to provide insights into improving the firm’s profit and related aspects of the firm’s financial performance without disrupting the traditional budget’s process and utilization. It will be, in effect, a “second opinion” income statement. The author’s suggestion is that OIS support should be provided by small CHQ department reporting to the CFO.
It’s a small department because OIS is a model so the turn around is quick and the staff requirements are modest. Another way to think about the department is that it becomes, in effect, a prescriptive analytics financial “wheel house” for the CFO/CEO. In fact, such function was out-looked in 2014 by the then CEO of Deloitte. In addition, in 2016 Thomas Davenport published another article in CMO describing Finance as currently behind in advanced analytics’. Certainly, something OIS will address!
Examples of the financial planning support the department provides the CFO and CEO include:
- OIS is updated any time a new forecast is generated for what ever reason (e.g., new product slip). If OIS identifies new profit opportunities , the CFO/CEO can make “in flight” course corrections to the budget to improve profit.
Data is readily available to assess the extent of the budget’s misalignment. Simply compare OIS’s departments’ costs with the appropriate departments’ budgeted costs and adjust the budget as appropriate. Such adjustments are obviously done only if the profit opportunity warrants the adjustments.
- OIS’s forecast is within 90 days of actual demand.
- OIS uses a rolling forecast. It is a dynamic financial planning tool that continuously updates projections over a fixed future time horizon (e.g., 12-18 months). In the case ofOIS, the only projection needed is an updated forecast. OIS then computues all the other projections needed.
- OIS allows evaluating business models other than profit
- OIS provides sophisticated analytics for evaluating mergers/acquisitions
- OIS provides customer and product profitability
- Best possible scenario analyses
If there are cross-silo squabbles that could frustrate OIS’s implementation, they are the ones who should take the lead in reconciling.The department will also be supporting the CFO’s efforts to share OIS’s profit good news with the firm’s Wall Street analysts
Phase II: Phase I is also the time during which the department with the CEO/CFO develop the plans to replace the current budget and all its costs and widely acknowledged limitations in Phase II. It is suggested Phase II proceeds in a cautious and incremental fashion. One obvious increment would for the department managers to use the activity-based costing data available to shift focus from controlling its costs to improving its efficiency.