Predictive Accounting

Predictive accounting projects future financial performance using a statistical understanding of an organizations processes. Predictive accounting seeks to understand the future. It is based on the observation that much of an organizations work is
repeatable. The work steps of these activities have been well thought out and provide an invisible hand that guides daily work.

There are two phases to predictive accounting. In Phase one an organization formally incorporates process data into its
accounting system to produce the fourth financial statement. This process statement quantifies an organizations macro process performance and the key factors that demonstrate their ability to create value.

There are several essential elements of the process statement that make it forwardlooking. To begin with, the process statement is organized by process. Processes reflect how management has chosen to structure its work to deliver an organizations strategic objective. It is the repetitiveness of daily activities that brings order to an organization.

The second part of the process statement records the current and targeted process outcomes. An outcome is the performance resultsthe consequenceof a process. An organization must explicitly identify what is expected from every process. This requires a thorough understanding of how each individual process outcome will achieve the strategic mission of the organization. Organizations that are close to achieving their targeted process
outcomes will create more future value than those with less
effective processes.

The third section of the process statement communicates process velocity. Process velocity measures the speed with which process outputs are converted into cash. Advocates of economic value stress the importance of free cash flow in creating value. Money tied up in working capital decreases the amount of free cash flow.

The fourth segment of the process statement displays process variation. The amount of process variationthe standard deviationis computed for each process. The above equation demonstrates that actual cost is predictable when process variation has been methodically reduced to a low level. Conversely, actual cost is unpredictable where process variation remains high.

The fifth and final part of the process statement is the inventory of value created (lost) by process. The value inventory represents the storehouse of value created from past and current operations. Every process creates or destroys value. The inventory of value is unrealized value that is available for future operations.

In the second phase of predictive accounting an organization creates forward-looking statements. The concepts that underpin predictive accounting are very simplefuture cost and performance is the consequence of certain events that have already occurred.

These events become the basis to:

Understand the workflow to project upcoming activities that will follow. Events have a sequencecertain events precede and other events follow,
Understand activity standards to project cost using the process resource consumption rate (standard cost),
Understand process variation to constantly reduce process variation, and to use control charts to measure whether a process is in control.

Predictive accounting develops statistical probabilities of the future financial and non-financial results by understanding the organizations processes and the conditions under which the process operates.

Under predictive accounting, the accounting profession is poised to take one of its most significant leaps forward by increasing the relevancy of financial information. Accounting information will focus on managing upcoming events rather than reporting past history.