OIS Phase II: (a) At the beginning of Year 1, an OIS baseline model is created from Year 1’s budget.
When solved, a new income statement (OIS) is created for Y1 including a forecast with the most profit possible. A new Y1 budget is then created by adding the departments’ activity costs plus any strictly fixed costs.
OIS Phase II: (b) Unfortunately, the budgeted income statement and OIS are the same for only a very few weeks as unexpected economic dynamics unfold as they always do. They make the budgeted income statement increasingly “out of step” underscoring the budget’s widely acknowledged limitations.
However, OIS provides the CFO/CEO with a shadow income statement/forecast that is always current; updated whenever the current OIS’s forecast assumptions change importantly and a new forecast is created. NOTE: For this update to occur, it’s preferred the forecasting department reports to the CFO. If not, whomever it does will honor he CFO’s request. Obviously, without this update, the new profit opportunity will not be identified.
For example:
- important new product delivery slips
- more aggressive competitive pricing announced
- strike
- economic outlook improves or deteriorates
- et al.
A second update also occurs at the end of each of the current year’s quarters:
- a comparison is made of the demand OIS had forecasted 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
Thus any new profit opportunities are identify by this shadow income statement as they occur! So, if the new profit opportunities warrant pursuing, the CFO/CEO have all the information at the income statement line item detail they need to make the necessary budget changes to achieve the additional profit.
OIS Phase II (c): This final section of Phase II implements a new form of the rolling forecast: the “rolling OIS.” It is a new best practice that is, in fact, the OIS that will be implemented in OIS Phase III. One that eliminates A) the traditional rolling forecast’s first 12 moths and all its problems.
The new best practice is a OIS 12 month rolling forecast that is continually updated at the line item detail of the firm’s income statement. And, not at the detail of 3 to 7 key variables in the rolling forecast; see (A) above.
Continuing with the rolling OIS process description, at the end of the first quarter of the Year 1, a quarterly OIS will be developed for the first quarter of Year 2 extending OIS back to a 4 quarter model.. It will include a forecast incorporating anticipated events as opposed to the actual events described in OIS Phase II (b). Also, the appropriate response future cast will be developed. This process continues for the next three quarters
Then, at the end of Year 1, if the Admin Support, below ,hasn’t been completed, the 4 quarters of the rolling OIS are replaced by the budget for Year 2 and the processes described in OIS Phase II (b) and OIS Phase II (c) repeat themselves.
OIS Phase II Admin Support
- Forecasting department should work for the CFO. If not, the forecasting department will provide the CFO with a forecast upon his request.
- Enough time will be provided before implementing Phase III for CFO/CEO to familiarize themselves with OIS’s Phase III’s “rolling OIS” functionality.
- The CFO/CEO team will also be working out all the additional details involved in eliminating the traditional budget in Phase III. For example, bonuses which are frequently associated with the departments’ achieving their budgeted expenditures.
- They will also assess whether:
- other applications like S&OP could also be discontinued.
- Given budgets generically have a variety of objectives, developing an OIS-based plan in Phase II to address them is an essential part of preparing for Phase III’s implementation. As a perspective, AccountingTools cites seven. Here is a generic mapping of OIS’s functionality to address the seven. Importantly, it enhances them all.