It is important to remember for financial planning purposes,the S&OIS is modeled at the firm’s income statement’s line item detail. Thus, it is actionable at that level of detail.
This is a very important consideration when compared with the traditional, budgeted income statement’s updates for which there is little actionable. Quoting Accountingtools Budgeted Income Statement article:
“Budgeted financial statements are usually limited to a summary-level income statement and balance sheet, and are compiled within the budget model.”
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Continuing, the S&OIS is updated when a new forecast is required. There are three S&OIS scenarios that require a new forecast:
- Quarterly: Update required to some of S&OIS’s response functions after quarterly variance analysis
At the end of each quarter, an analysis is made of the demand S&OIS had forecasted 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 most profitable forecast for the next 12 months including all the associated income statement’s resources required to make and fulfill the new forecast.
Thus, S&OIS’s forecast-ed demand for the next quarter is the same as the actual demand, lagged by three months.
- Quarterly: A judgement-based forecast for the fourth quarter is added to the current judgement based forecast to ensure S&OIS’s forecast is a rolling forecast
- Any time: The judgment-based forecast is updated any time key S&OIS’s model’s assumptions change. For example:
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- 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