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SWTCH by Pigment
Three days of predictions, insights, and advice from leaders in finance, sales, HR, supply chain and more
Register now here
By Alan Dybvig, Managing Partner at Dybvig Consulting
Alan Dybvig
Alan Dybvig is the managing partner of Dybvig Consulting. His intellectual property was implemented to create the operational budget (OB). His business experience includes 32+ years with IBM as a director and senior manager, primarily in supply chain and sales/marketing assignments, and then four years with a Warburg Pincus-financed supply chain startup where the idea for the OB germinated. He has had five articles published in the Journal of Corporate Accounting and Finance, two articles in the Institute of Management Accountants’ Strategic Finance and one each in the Institute for Business Forecasting's blog and INFORMS’ magazine, "OR/MS Today".
Alan Dybvig's LinkedIn profile: https://www.linkedin.com/in/alan-dybvig-0a374ois/
This is the last article in a series of eight articles about the Operational Budget (OB) and its associated Operational Income Statement (OIS). These articles have described the significant enhancements the OB and OIS provide to the traditional budget and related financial processes and techniques.
All eight articles described the prescriptive Operational Budget and how it enhances related financial applications. As is illustrated in Figure 1 below, prescriptive analytics are the most powerful analytics; they can answer the question: “what is the best possible outcome?” Predictive analytics can only answer the question: “what is the outcome if we do X?”
Figure 1. Gartner Analytics Maturity Model
In one of the recent Global FP&A Trends webinars, Stefan Spiegel, CFO at Swiss Railway Freight Logistics, described the use of prescriptive analytics to optimize the railroad’s whole logistics network. Illustrative of the power of prescriptive modelling techniques, he commented: “As a result, more than 25% of cost optimizations theoretically possible!”
Among the OB’s important benefits as an advanced ZBB are:
This concluding article has three sections: i) demonstrating the OB is a ZBB, ii) how the OB addresses some of the traditional ZBB’s shortcomings and iii) conclusion.
The zero-based budget is defined by Accountingtools.com as:
“A zero-base budget requires managers to justify all of their budgeted expenditures. This is opposed to the more common approach of only requiring justification for incremental changes to the budget or the actual results from the preceding year. “
The OB is a ZBB because it has nothing at all to do with the traditional budget. Further, as described in the Part 1 article, the OB is a prescriptive driver-based model of the firm’s activities with only one driver, the current forecast.
The OB’s activity-based and single driver resonates very nicely with some current FP&A articles which describe activities and drivers as the essence of a ZBB.
The ZBB shortcomings listed are taken from Accountingtools.com and recent FP&A articles. Some of them are similar to those of the traditional budget (see Part 2 article for more details).
The Operational Budget 1) upgrades the predictive analytics of those planning processes and techniques depicted in Figure 2 to prescriptive analytics and 2) allows a basis for four more financial processes and techniques to be similarly updated (see Figure 3).
Figure 2. Zero-Based Budgeting
Figure 3. Operational Budget Enhancements
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