Option 1

As we are discovering, Cost Benefit Analysis is based on assumptions about financial forecasts of future cash flows and expenses. Since the future is unknown, getting consensus on inputs can often be the most challenging part of running a Cost Benefit Analysis.

In Assignment 2, we find five colleagues who each have very different views of the future. Referencing our readings this week and drawing on your own personal experiences, answer the following questions:

• Why do skilled professionals working in the same business often have significantly different forecasts and views of the future? Share an example from your own work experience where your colleagues had very different forecasts for the same item.
• How can we make better use of data (past performance, industry outlook, etc.) to improve our forecasts and resolve disagreements?
• Would “sensitivity analysis” have helped Management understand the potential variations driven by changes in assumptions?
• After the forecast is complete, describe the communication process you would use to convey results and successes to stakeholders, lenders, and employees.

– OR –

Option 2

As you’re learning in Assignment 2, a key technique in managerial accounting/finance is the use of “Cost Benefit Analysis” to help management make better business decisions.

• Define this approach in your own words and discuss 2 applications of this concept in your current work environment (examples might include make vs. buy, plant location, new product or packaging, downsizing, acquisition/divestiture, etc.).
• Discuss a variable or assumption within the project where the data was difficult to obtain — and what you did to develop a reasonable assumption for the project economics.
• Additionally, share or create one example where using financial data and cost benefit analysis that did, or could have, led to a better decision.

https://www.fundingcircle.com/us/resources/financial-forecasting/

https://www.projectguru.in/publications/quantitative-qualitative-forecasting-techniques-logistics/

https://www.entrepreneur.com/article/246592

https://www.investopedia.com/investing/compound-annual-growth-rate-what-you-should-know/

https://www.businessmanagementideas.com/management/strategic-management-its-characteristics-formulation-types-and-other-details/472

https://financialrhythm.com/a-reliable-financial-forecast-powerful-tools-in-business-for-improving-profitability-and-cash-flow/

https://www.linkedin.com/learning/finance-foundations-2/forecasting-financial-statements?u=57878161

example:

Hi Class,

I have chosen Option 1 for this week’s post because I want to share my experiences of building a 5-year business plan for a troubled division of DaimlerChrysler. I was the third Controller assigned to this distressed, money-losing division of DaimlerChrysler, and I was chosen for my abilities to dig into the details and produce meaningful variance explanations. By the time I arrived at this division, the losses of over $500 million per year had become daily concerns of the Board of Management. The pressure was on all of us to get to the bottom of the reasons for the losses quickly.

I arrived at this division in early November, on the same day as the new General Manager. We had 3 weeks remaining in the regular business planning cycle. We had a lot of work to do in those 3 weeks, so we started with the expense forecasting first.

Our new general manager called a meeting with my Finance team, and all 12 department heads the first week. I blocked off an entire day in our board room, brought in whiteboards and flip charts. We provided presentation books with 3 years of actual spending data for each department as well as the proposed 5 years of spending with the base business plan assumptions (stretch goals were used). We tackled one department budget at a time, and all department managers were allowed to challenge line items in any budget. Most department managers wanted to sacrifice some of their sacred cows in the downturn of the business, to rebuild the company into a healthy one.

The second task was the sales budget, which meant the acquisition of financing contracts from dealers. Each department manager had a different perspective on the customer strategy for the division. Did we want to rebrand and rebuild the financial products we offered to large fleet customers that continuously produced losses for us? Should the division pursue the smaller fleet customers more, where pricing was much better, but the cost of the sales function would be higher? Could the division break out of the fleet business more with new sales channels that connected us to owner-operators? Every manager wanted to be heard, and the general manager was happy that they were all prepared to contribute their perspectives.

My Finance team ended up running 12 business plan scenarios driven off the many customer mix strategies that came out of that one all-day session. The spending cuts were painful for all, but the managers all wanted to help identify a path to return to profitability. It would end up taking this division 3 more years to return to profitability because our average contract term was so long.

With the context of my experience above, here is how I would answer the prompt questions for Option 1:

1. Why do skilled professionals working in the same business often have significantly different forecasts and views of the future? Share an example from your own work experience where your colleagues had very different forecasts for the same item.

Each functional department manager has his or her own perspective of the value chain for customers of a business or organization. Sales managers are focused on the front end service, signing contracts, arranging deliveries, and service, following up for customer satisfaction surveys. Marketing managers are outwardly focused on the size of the market, the customer base, and what the competitors are doing. Production managers are inwardly focused, working closely with designers and engineers to develop smooth production operating processes to minimize downtime and maximize product quality. Accounting is focused on telling the story of the entire business cycle, one month at a time and after the fact. Engineers are focused on the problem areas of the product design and use and production processes and work hard to problem solve.

2. How can we make better use of data (past performance, industry outlook, etc.) to improve our forecasts and resolve disagreements?

Accounting and Finance can provide two key services to improve forecasts and reduce disagreements. The first key service is to provide an “early look” at budget variance reports to department managers to prepare them for the monthly close process and answer their questions.. The second key service is to dedicate some resources to each department manager during the annual budget creation process to keep them on track with deadlines.

3. Would “sensitivity analysis” have helped Management understand the potential variations driven by changes in assumptions?

Yes, sensitivity analysis always helps to provide a range of values for the net present value and economic value addition for each key budget or project. Ranges of values help managers to judge the range of possible outcomes, depending on internal and external factors.

4. After the forecast is complete, describe the communication process you would use to convey results and successes to stakeholders, lenders, and employees.

I would use a preemptive approach at each stage of the budget process to get department managers on board and keep them on board until the budget is approved. For shareholders, I would leverage the rules of non-GAAP disclosures to communicate business results that are meaningful, with the required reconciliations to GAAP measures. For lenders and employees, I would include them in the quarterly earnings release webcasts and allow them to submit questions in advance for the executive team, posting answers to all questions on a website in case the call is not long enough to answer every question.