S&OIS is updated when ever a new forecast is required. There are three scenarios that require a new forecast:
- Quarterly and, maybe, less often. In healthcare, particularly pharmaceuticals and biotechnology, the process looks different by brand within the same company. The largest brands are reviewed quarterly, but there is a shift to move to monthly updates. The smaller brands are reviewed 1-2x per year.
For the largest brand, typically representing x% of the S of SG&A, a comparison is made of the demand S&OIS had forecast-ed for that quarter with that quarter’s actual demand. For those differences deemed significant, the associated response functions are updated. S&OIS then computes a new income statement including a new most profitable forecast.
Thus, S&OIS’s forecast-ed demand for the next quarter for the largest brands is currently the same as the actual demand, lagged by three months. As technology shrinks the three months, the forecast-ed demand gets closer and closer to the real demand! A goal forecasters have dreamed of achieving will be at hand!
The remaining brands will be updated 1-2 times/per year as is the case now.
Finally, as S&OIS is adopted by additional SC codes, it will be determined how closely those demands will track the real demand.
- Quarterly: At the end of the third quarter, a judgement-based forecast for the fourth quarter is added to the current three quarters of the judgement based forecast. This ensures S&OIS’s forecast is a rolling forecast at which point, S&OIS is updated. The rolling forecast ensures the firm never has an an planning horizon of less than nine months. That’s a significant advantage compared with the traditional budget and income statement which, by the end of the year, has shrunk to zero months.
- Any time: The judgment-based forecast is updated any time any of S&OIS’s model’s assumptions change. At which point, S&OIS is updated and a new, most profitable income statement is developed. Example include:
-
- New product’s shipment date slips
- Economic conditions change
- Competitive assumptions change
- New production equipment doesn’t perform as well as was projected
- Facilities are damaged by fire, weather, etc.
- Production equipment breaks down
In such situations, it is important to remember such updates are only possible because of S&OIS’s unique functionality. Specifically, S&OIS has the line items details explicit so the update details cited above can be affected.
Such updates are impossible with the traditional budget and income statement. Quoting Accountingtools Budgeted Financial Statements:
“Budgeted financial statements are usually limited to a summary-level income statement and balance sheet, and are compiled within the budget model.”