Knowledge is power in predictive accounting

Thursday 26 November, 2015 | By: Default Admin | Tags: predictive accounting, historical accounting

Have you ever thought about the fact that while your financial figures and reports might give you an accurate picture of past performance in numbers, they don’t always help you make serious decisions that affect your business’s future?

Ulton Partner Jason Krenske says historical accounting is, of course, an essential part of running a business. But it does have its limitations.

To provide an example, think about how well your profit and loss report would inform you if you were considering taking one of these opportunities:

•             Taking on a new project.

•             Signing a new big contract.

•             Hiring several new employees.

•             Buying new equipment.

•             Making a new investment.

•             Acquiring a new business.

You will notice that there is one word that is consistent in all of the above – and that word is ‘new’.

Historical accounting on the other hand is ‘old’ – it is based on what happened last month or period rather than the present or the future.

As such, it may not be the best information available for making decisions that affect the future.

Enter predictive accounting

As its name indicates, predictive accounting is based on predicting what will happen. So essentially it is about what is expected rather than what has happened before.

However, it is not founded on fanciful thinking, guesswork, or crystal ball stuff, but rather on the premise of event sequence.

In other words, that what happened before dictates what happens next. This means that it is formulated on real statistical probabilities.

The benefits of predictive accounting include that it relies on the rigorous statistical models rather than arbitrary numbers or guesses, and that this information can be used as a decision model by testing various scenarios regarding any new opportunities or ventures being considered.

This should give you a much clearer picture of the financial risks involved in the decisions you are considering.

Predictive accounting techniques

Accountants have often made use of Excel for predictive accounting analysis, such as by entering ‘what if’ questions to test various scenarios.

These days, there are better models available that also overcome the risk of human error when entering numbers into spreadsheets.

At Ulton, we are now using a rigorous forecasting tool known as Castaway, which has built-in checks for reducing the data entry error risk.

It can provide your business with various models based on a range of assumptions, so that you can make fully informed financial decisions.

Castaway is very flexible in that as the time for decision-making looms closer, data inputs can be adjusted to provide an even more accurate prediction regarding risks and benefits.

Predictive accounting can also be used for more mundane decisions as well as the big strategic ones – for instance those regarding marketing strategies, inventory management, when to employ extra staff on a temporary basis, and so on.

Predictive accounting can enable you to use your time more efficiently and effectively, help you make financial decisions with greater confidence, and give you the information you need to plan ahead for various scenarios in your business.

We recommend that you seriously consider predictive accounting in your SME.

While historical accounting can provide an SME with a picture of past performance, it is predictive accounting that is usually more relevant when it comes to future decision-making.

Read Ulton's article on LinkedIn on why you should consider using predictive accounting in your business.

Join Jason Krenske for Ulton's webinar, Forget the past, let's look to the future and embrace predictive accounting, hosted by CCIQ on December 2. Register here

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