Financial Forecasting

Sponsored Research Funding

RAC Forecast Survey –Rank the Following Items By Perceived Benefit

1. Historical Win/Loss Rates for Departmental Proposals By Sponsor By PI

2. Sponsor/Agency Profiles

3. Forecasting Tools/Technology

4. Better Communication from PIs on Future Funding

5. Assumptions from CMU Administration Based on Government Funding or Outlooks By Funding Agency

Survey Responses – Top 3 Responses

# 1 Technology# 1 Technology 50% of responses indicated that the greatest

benefit would be achieved through new forecasting technology

# 2 Increased PI Communication# 2 Increased PI Communication

# 3 Win/Loss Ratios# 3 Win/Loss Ratios

Note: Only 7 responses were analyzed.

Forecasting Research Funding – Presentation Introduction

Dispel Forecasting Myths Definition Develop a Process – “Beginning to

End?” Self-Evaluation Discussion/RAC Feedback

Top 3 Forecasting Myths

Forecasts are 100% accurateForecasts are 100% accurate: : A forecast is not meant to be perfect, but rather a guide.

The Forecasting process is a “one person” The Forecasting process is a “one person” operationoperation

Forecasting requires in-depth statistical analysis:Forecasting requires in-depth statistical analysis: Mathematical “wizardry” is not required. Number crunching is important, however,

“knowing your business” is key.

Definition

Definition of “Financial Forecast”Definition of “Financial Forecast” Estimate of future financial results based on

the information that you have today. CharacteristicsCharacteristics

High level view point. Based on historical business trends. Assumption based. Not detailed---Not an ANNUAL BUDGET.

Goals of Forecasting

Goal 1: Reduce Future UncertaintyGoal 1: Reduce Future Uncertainty Identify and gauge the magnitude of

future risks. Avoid surprises

Goal 2: Improve Budgeting ProcessGoal 2: Improve Budgeting Process

Goal 3: Improve Decision-Making TodayGoal 3: Improve Decision-Making Today

Forecasting Process – Sponsored Research – The Beginning

Develop a “Plan” to “Forecast” Develop a “Plan” to “Forecast” Review Financial Calendar Obtain management instructions/assumptions Develop a forecasting process that is comfortable

for you. “Top Down” Analysis Approach “Hybrid Approach”

Develop a Timeline (Set Critical Milestones)Develop a Timeline (Set Critical Milestones) Communicate – Engage others in the Communicate – Engage others in the

processprocess PIs, Business Managers, SRO

Phase I: Gather Information

Gather Department Specific InformationGather Department Specific Information Current Data

Where are we today (FY06 YTD-Budget)? Spending/Funding

Historical Trended Data Where have we been?

Pending Proposals/PI Input Where are we going in research activities?

Note: “Forecast” answers the question: How are we going to get there?

Resources

Oracle Financials Operating Statements Grants Management

Data Warehouse SPEX PIs, BMs, SRO, CMU Planning Office FMP website RAC Training Sessions/HR Training Sessions Other?

Phase II: Analyze – Current Activity

Start with what you know best....FY06!Start with what you know best....FY06! Analyze operating expenses supported by active awards - YTD Adjust FY06 Y-T-G for known changes:

Labor Changes Subcontracts Changes in Funding Cost-sharing Capital

If your organization is extremely large---Pareto is the way to go! 80/20 Rule – Focus 80% of your time on the 20% that matters Labor accounts for 80% of direct costs..

Highlight Red Flags Items or Issues Note Major Variances

Identify funding “gaps” or deficits Where will the funding come from? Identify during conversation with PI.

Phase III: Start Building a Forecast Model FY07 & FY08

Build a preliminary FY07/FY08 model based on FY06 Build a preliminary FY07/FY08 model based on FY06 Make sure that all new information is incorporated into

FY06 full year outlook (base). Create a high level financial model in excel/ADI/OtherCreate a high level financial model in excel/ADI/Other

Model the data at a high levelModel the data at a high level By Funding Source/By PI/By Project By Funding Source/By PI/By Project

Major Expense Items (Labor, Op Exp, Capex, F&A)Major Expense Items (Labor, Op Exp, Capex, F&A) Include HistoryInclude History

Apply inflationary growth factors to future years Apply inflationary growth factors to future years Inflationary factors Fringe Rates F&A

Phase IV: Analyze – Historical Activity (Exploratory Analysis)

Analyze revenue trends Analyze revenue trends What direction is the trend moving?What direction is the trend moving?

Look at growth cycles (growing, mature, declining)Look at growth cycles (growing, mature, declining) Analyze year to year increases & annual growth ratesAnalyze year to year increases & annual growth rates

Eliminate “Noise” or “Anomalies” that are unique to a specific year (non-recurring)

Detail funding source revenue trends Understand patterns/changes

Look for consistencies & inconsistencies in the data.

Phase V: Incorporate Historical Findings into FY07/08 Forecast Model

Develop FY07-08 high level assumptions based Develop FY07-08 high level assumptions based on historical trends.on historical trends.

Base assumptions on consistent patterns of change Use reality based assumptions Document assumptions.

Apply assumptions to preliminary FY07/FY08 Apply assumptions to preliminary FY07/FY08 forecast model – forecast model –

Extrapolate trends to future years by expense type.Extrapolate trends to future years by expense type. Analyze Forecast-Does it make sense?Analyze Forecast-Does it make sense?

Adjust forecast.Adjust forecast.

Phase VI: Assess – Future Activity

Note: The forecast timetable is tight so, Phase VI Note: The forecast timetable is tight so, Phase VI should be revisited throughout the planning horizon.should be revisited throughout the planning horizon.

Pending ProposalsPending Proposals What proposals are in the queue?

Win/Loss RatiosWin/Loss Ratios What is the PIs/Departments past track record?

Communicate with PICommunicate with PI Open a dialogue. Continue the dialogue.

PI Communication – Future Activity

Have a conversation with the PI....Have a conversation with the PI.... You are “here” today.....You are “here” today.....

Focus around the specific sub-areas of research Show a trajectory of the short-term for the PI’s

funding (6-months to 1-year) Highlight funding issues (surpluses/deficits)

What is your research strategy?What is your research strategy? Which sub-areas are going to continue? Identify new sub-areas?

How do you intend to get there?How do you intend to get there? What are the funding plans?

Become A Business Partner

Strategically partner with your PIStrategically partner with your PI Help to identify alternative funding sources Provide information on current or upcoming

Broad Agency Announcements (BAAs) of interest Communicate Key Funding Deadlines

Be Proactive!Be Proactive!

Phase VII: Incorporate PI Feedback

Incorporate PI feedback into future forecastsIncorporate PI feedback into future forecasts Make notes of PI funding strategy Adjust forecast for any material findings Spend the most time discussing the immediate

future (6 months – 1 year) Detail the PI’s resource strategy

New positions/Eliminations/Effort Changes Utilize Future Funding Source Use information to validate high level

assumptions in forecast

Phase VIII: Evaluate Forecast

Re-Evaluate Forecast Re-Evaluate Forecast Analyze High Level trends (include FY07-FY08)

Analyze year to year growth? Do you see large variances? Compare the CAGR from FY03-FY05 to the CAGR for

FY05 – FY08

Revisit Assumptions Do the assumptions make sense to you?

An assumption should not be so complex that you can not explain it to someone else.

Phase IX: Self-Evaluation

Evaluate Your Previous ForecastsEvaluate Your Previous Forecasts Track Record of Past Forecasts

Identify forecast misses? Assess degree of accuracy. Explain variances.

Review Assumptions Were the assumptions valid/predictive?

Incorporate Process Improvement Prepare for next forecasting cycle

Phase X: Go Back to Phase I

Forecasting should be a continuous Forecasting should be a continuous process...today’s forecast evolves into a future process...today’s forecast evolves into a future detailed budget.detailed budget.

Where are we today?Where are we today? Where are we going?Where are we going? How are we going to get there?How are we going to get there?

Remember

Forecasting is a continuous process.Forecasting is a continuous process.

A forecast is never 100% accurate.A forecast is never 100% accurate. However, you must explain variancesHowever, you must explain variances..

Forecast accuracy is dependent upon the Forecast accuracy is dependent upon the planning horizonplanning horizon

A proper forecast requires communication.A proper forecast requires communication. Engage others in the processEngage others in the process

Three great quotes about forecasting...

"Forecasting is the art of saying what will happen, "Forecasting is the art of saying what will happen, and then explaining why it didn't! – Anonymousand then explaining why it didn't! – Anonymous

"He who lives by the crystal ball soon learns to eat "He who lives by the crystal ball soon learns to eat ground glass.“ --Edgar R. Fiedler in The Three Rs ground glass.“ --Edgar R. Fiedler in The Three Rs of Economic Forecasting-Irrational, Irrelevant and of Economic Forecasting-Irrational, Irrelevant and Irreverent , June 1977. Irreverent , June 1977.

" It is often said there are two types of forecasts ... " It is often said there are two types of forecasts ... lucky or wrong!!!! “ -- in "Control" magazine lucky or wrong!!!! “ -- in "Control" magazine published by Institute of Operations Management published by Institute of Operations Management

Compound Annual Growth Rate Calculation (CAGR) - Excel

Question: What is the compounded average growth Question: What is the compounded average growth rate for Total Revenues from 1990 – 2005?rate for Total Revenues from 1990 – 2005?

1990 $200,0001990 $200,000 2005 $1,549,000 2005 $1,549,000 Enter the data into excel:

Cell A1: 1990 Cell B1: $200,000Cell A2: 2005 Cell B2: $1,549,000

Enter Formula in Cell B3=RATE(A2-A1,0,-B1,B2)Answer = 15%