Forecasting and CBAOption 1As 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 2As 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.
Post your initial response by Wednesday, midnight of your time zone, and reply to at least 2 of your classmates’ initial posts by Sunday, midnight of your time zone.
1st person to respond to
RE: Week 9 Discussion COLLAPSE
I chose Option 2 this week.
Forecasting and cost-benefit analysis are two words that are often associated with Acquisition and Government Contracting. As stewards of the taxpayers’ dollars, interested parties (EoP, 1) must exercise due diligence in establishing government estimates by looking at previous buys, historical data, and market changes. In 2020 DoDs Inspector General reported on ten operational or management challenges; Challenge #9 (2) was among them.
Acquisitions from a government perspective are the procuring of a product, service, and construction at a fair and reasonable price (Best Value). Many layers and steps go into this process. The following is a snapshot of generating and shaping a requirement and benefit analysis is the critical part of the process. This process can involve a PDT (Project Development Team) or a few individuals based on complexity.
Buy vs lease is another application and can be viewed as a subset of the overall acquisition process. Leasing by the government can be broken down into two types:
a capital lease (lease to ownership) and an operating lease (lease with an option-to-own). Typical examples are vehicle fleet and office space.
Lease agreements may be unbreakable, and in many cases, the organization must continue to pay for it for the duration of the lease. In our present office, the pandemic made it difficult for management to identify assumptions (Boitnott, 3) on whether we needed the current space or decreased due to many staff teleworking 100%. With back-to-work policies looming, consideration had to be given on how small, or large the office footprint (50%, 75%, etc.) would be. Confirming and committing to a percentage, we could then use our experience that we had to go through to recommend to our customers’ ways to modify contracts at their locations to decrease occupancy and lease rates and terminate for convenience as a last resort.
The government does not do a great job of providing reasonable estimates for work to be done; therefore, much waste accumulates. Understanding the budget and the expenses combined with a steady utilization rate could have led to a better decision and a timely one.
1. JWI530. Week 9. Video. Forecasting.
2. Inspector General Report (2020). Top DOD Management Challenges. Retrieved from https://media.defense.gov/2020/Mar/11/2002263093/-1/-1/1/TOP%20DOD%20MANAGEMENT%20CHALLENGES%20FISCAL%20YEAR%202020.PDF
The Mary Story
When Mary took over the General Manager role, she knew that this day would come!
The Finance Department just sent a memo asking for her perfume division’s Financial
Forecast for the next fiscal year. Some of her peers had complained about this
annual task, but she knew from listening to a WelchCast and reading several of Jack
Welch’s articles about Budgeting and Forecasting that this didn’t have to be a painful
process, it could actually be a positive way to think about the future and develop
As Jack said, it is important to get “every brain in the game”. Mary didn’t want this
to be a top down mandate based on the thoughts of a few senior managers. Rather,
she wanted to tap into the employees “on the front line” who really understand the
trends and the competitive challenges and opportunities.
Mary also knew not to turn this task into a negotiation…where her managers propose a
“low ball” number, the CFO would then throw out an unreasonably high number, and
they would end up somewhere in the middle. Rather, she wanted to get all the
business building ideas on the table…to be discussed and debated…and then make
choices about where to focus the business (and the supporting resources). In other
words, a “business discussion” versus a “ horse trading session”.
Mary decided to treat this task as an opportunity to develop a realistic forecast of
where the financials should end up…..and resulting in a budget that is based on
investment and priority choices…so that funds are allocated to the areas that
generated the highest ROI.
Mary was ready to use what she had learned from Jack and Suzy about good
forecasting and budgeting. She called her Finance Manager and said with confidence
“Nancy, let’s get together to talk the Financial Forecast…it is going to be a great