Phase I introduces the CEO and CFO to OIS’s exhilarating quantitative advantages

OIS provide insights into improving both the firm’s profit and related aspects of the firm’s financial performance without disrupting the traditional budget’s processes. The author’s suggestion is that OIS’s support be provided by a small CHQ department reporting to the CFO. It’s a small department because OIS is a model and it’s straight forward to formulate the changes necessary in a current model or develop a new one to address the issues in which the CFO/CEO are interested.

Another way to think about the department is that it becomes, in effect, an advanced analytics “wheel house” for the firm under CFO/CEO leadership.

In fact, such a function was out-looked in 2014 by the then CEO of Deloitte. In addition, in 2016 Thomas Davenport published another article in Chief Marketing Officer magazine describing Finance as currently behind in advanced analytics. Certainly, something OIS fixes definitely.

Among the variety of advanced analytic advantages OIS provides the CFO/CEO the most important is its forecasting capability. It sets a new best practices forecasting standard by providing a forecast and associated income statement that is the most profitable one possible. 

OIS provides are a variety of opportunities for new profit for the CFO/CEO. They include:

A.  Compute most profitable forecast for next year’s budget

1. update OIS Phase 0 with appropriate changes from next year’s budget and optimize. “The result is a new forecast and income statement that are the most profitable one possible.”
2. create next year’s budget by summing activity costs of each department to create each department’s budget for next year.

B.  Identify profit opportunities that emerge during the next year Unfortunately, OIS and the traditional budget are the same for only a very few weeks as unpredicted economic dynamics unfold:

1. making the budget’s forecast increasingly “out of step”
2. making, in turn, the demands placed on the departments’ budgets’ just as “out of step” with the unpredicted demands placed on them
3. also, firm’s profit are only updated-able during the year at the highest levels of aggregation: Revenue – costs = profit. Significantly, profit is an effect. Thus, it is not possible to identify profit opportunities that emerge during the year!

Fortunately, OIS provides the CFO/CEO with a forecast and income statement during the year that is always current. Thus any new profit opportunities are identify as they occur! Also, all the incremental departmental resources required to make and fulfill the new forecast and its best possible profit. So, if the new profit warrants pursuing,  the CFO/CEO have all the information they need to achieve the new profit.

This is all made possible because OIS is updated during the year:

• whenever OIS’s forecast’s assumptions change importantly. For example:
  • new product delivery  product slips
  • more aggressive competitive pricing announced
  • a strike
  • et al.
• Also, at the current quarter’s end:
  • a comparison is made of the demand OIS had forecast-ed for that quarter with that quarter’s actual demand.
  • for those differences deemed significant, the associated response functions are updated.
  • OIS then computes a new income statement including a new most profitable forecast

NOTE: This process makes it very attractive for the forecast folks to report to the CFO. If not, he must have the cooperation of whomever the forecasting department does report to. Otherwise, the new profit opportunities go unrecognized.

C. Plan for uninstalling budget in Phase II

The plan involves a creative use of the rolling forecast. Traditionally, at the end of budget’s first quarter  a rolling forecast is developed for the first quarter of next year. But not at OIS’s detail.  See IBM for traditional details.

However, rather than use the IBM approach, at the end of the first quarter of the current year, a quarterly OIS forecast is developed. The model is run and a new best profitable income statement is developed. Then, that process is repeated at the end of all future quarters. As a result, the CFO/CEO will have a most profitable rolling year of 4 quarters of OIS’s income statements to guide them, complementing the detail provided by the traditional budget’s process.

So, this allows the CFO/CEO to continue this “side by side” financial planning for the firm until they are comfortable discontinuing the traditional budget.

The OIS Phase II implementation team of CFO/CEO/most senior Operations executive will also being working out all the additional details involved in eliminating the traditional budget including bonuses which are frequently associated with the departments’ budgeted expenditures.

D. An additional benefits for discontinuing the budget. 

Budgets generically have a variety of objectives. So, developing an OIS-based plan in Phase I to address them is an essential part of preparing for Phase II’s implementation. As a perspective, AccountingTools cites seven. Here is a generic mapping of OIS’s functionality to address the seven.  Importantly, it enhances all of them.

E. For other financial opportunities of possible interest to the CFO/CEO during Phase I:  See”Additional advantages for client’s CFO/CEO” tab on OIS home page