demand driven not forecast driven
Assumption changes
Currently, an updated budgeted income statement contains very limited detail. Frequently, limited to updated revenue and profit projections
Since it’s a model, OIS can be updated immediately with any assumption(s) change. Further, OIS’s update has complete income statement detail no matter what the change including:
- New forecast
- New product ship date delayed
- Change in economic outlook
- Unexpected competitive activity
This is important since these changes can occur at any time during the year; not just quarterly which is most often the case for the budgeted income statement updates
OIS model structure variance analyses
There are two functions in an OIS model related to cost.
- Cost functions CFs) which describe how the COGS and G&A costs vary as a function of the forecast volumes.
- Enterprise response functions (ERFs) which describe how the forecast volumes vary as a function of the S of SG&A.
Both these functions are created from historic data reflecting the relationships between actual expenditures and actual volumes.
Using proprietary variance analyses, the forecasted costs for CFs and the forecasted demand for ERFs are constantly being assessed against the actual costs for CFs and actual demand for ERFs as they materialize. If any discrepancies are material, the CFs and/or ERFs are updated in OIS and a new, most profitable forecast is developed
Result is OIS’s most profitable forecast is continuously updated as the actual demand materializes