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Financial Forecasting Sponsored Research Funding

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  • 1. Financial Forecasting Sponsored Research Funding
  • 2. RAC Forecast Survey –Rank the Following Items By Perceived Benefit
    • Historical Win/Loss Rates for Departmental Proposals By Sponsor By PI
    • Sponsor/Agency Profiles
    • Forecasting Tools/Technology
    • Better Communication from PIs on Future Funding
    • Assumptions from CMU Administration Based on Government Funding or Outlooks By Funding Agency
  • 3. Survey Responses – Top 3 Responses
    • # 1 Technology
      • 50% of responses indicated that the greatest benefit would be achieved through new forecasting technology
    • # 2 Increased PI Communication
    • # 3 Win/Loss Ratios
    • Note: Only 7 responses were analyzed.
  • 4. Forecasting Research Funding – Presentation Introduction
    • Dispel Forecasting Myths
    • Definition
    • Develop a Process – “Beginning to End?”
    • Self-Evaluation
    • Discussion/RAC Feedback
  • 5. Top 3 Forecasting Myths
    • Forecasts are 100% accurate : A forecast is not meant to be perfect, but rather a guide.
    • The Forecasting process is a “one person” operation
    • Forecasting requires in-depth statistical analysis:
      • Mathematical “wizardry” is not required .
      • Number crunching is important, however, “knowing your business” is key.
  • 6. Definition
    • Definition of “Financial Forecast”
      • Estimate of future financial results based on the information that you have today.
    • Characteristics
      • High level view point.
      • Based on historical business trends.
      • Assumption based.
      • Not detailed---Not an ANNUAL BUDGET.
  • 7. Goals of Forecasting
    • Goal 1: Reduce Future Uncertainty
      • Identify and gauge the magnitude of future risks.
        • Avoid surprises
    • Goal 2: Improve Budgeting Process
    • Goal 3: Improve Decision-Making Today
  • 8. Forecasting Process – Sponsored Research – The Beginning
      • 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)
        • Communicate – Engage others in the process
          • PIs, Business Managers, SRO
  • 9. Phase I: Gather Information
      • Gather 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?
  • 10. 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?
  • 11. Phase II: Analyze – Current Activity
      • 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.
  • 12. Phase III: Start Building a Forecast Model FY07 & FY08
      • 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/Other
        • Model the data at a high level
          • By Funding Source/By PI/By Project
        • Major Expense Items (Labor, Op Exp, Capex, F&A)
        • Include History
      • Apply inflationary growth factors to future years
        • Inflationary factors
        • Fringe Rates
        • F&A
  • 13. Phase IV: Analyze – Historical Activity (Exploratory Analysis)
      • Analyze revenue trends
        • What direction is the trend moving?
          • Look at growth cycles (growing, mature, declining)
        • Analyze 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.
  • 14. Phase V: Incorporate Historical Findings into FY07/08 Forecast Model
      • Develop FY07-08 high level assumptions based on historical trends.
        • Base assumptions on consistent patterns of change
        • Use reality based assumptions
        • Document assumptions.
      • Apply assumptions to preliminary FY07/FY08 forecast model –
        • Extrapolate trends to future years by expense type.
      • Analyze Forecast-Does it make sense?
        • Adjust forecast.
  • 15. Phase VI: Assess – Future Activity
      • Note: The forecast timetable is tight so, Phase VI should be revisited throughout the planning horizon.
      • Pending Proposals
        • What proposals are in the queue?
      • Win/Loss Ratios
        • What is the PIs/Departments past track record?
      • Communicate with PI
        • Open a dialogue.
        • Continue the dialogue.
  • 16. PI Communication – Future Activity
      • Have a conversation with the PI....
      • 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?
          • Which sub-areas are going to continue?
          • Identify new sub-areas?
        • How do you intend to get there?
          • What are the funding plans?
  • 17. Become A Business Partner
      • Strategically 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!
  • 18. Phase VII: Incorporate PI Feedback
      • Incorporate 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
  • 19. Phase VIII: 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.
  • 20. Phase IX: Self-Evaluation
      • Evaluate 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
  • 21. Phase X: Go Back to Phase I
      • Forecasting should be a continuous process...today’s forecast evolves into a future detailed budget.
      • Where are we today?
      • Where are we going?
      • How are we going to get there?
  • 22. Remember
      • Forecasting is a continuous process.
      • A forecast is never 100% accurate.
        • However, you must explain variances .
      • Forecast accuracy is dependent upon the planning horizon
      • A proper forecast requires communication.
        • Engage others in the process
  • 23. Three great quotes about forecasting...
      • "Forecasting is the art of saying what will happen, and then explaining why it didn't! – Anonymous
      • "He who lives by the crystal ball soon learns to eat ground glass.“ --Edgar R. Fiedler in The Three Rs of Economic Forecasting-Irrational, Irrelevant and Irreverent , June 1977.
      • " It is often said there are two types of forecasts ... lucky or wrong!!!! “ -- in "Control" magazine published by Institute of Operations Management
  • 24. Compound Annual Growth Rate Calculation (CAGR) - Excel
      • Question: What is the compounded average growth rate for Total Revenues from 1990 – 2005?
      • 1990 $200,000
      • 2005 $1,549,000
      • Enter the data into excel:
        • Cell A1: 1990 Cell B1: $200,000
        • Cell A2: 2005 Cell B2: $1,549,000
      • Enter Formula in Cell B3
      • =RATE(A2-A1,0,-B1,B2)
      • Answer = 15%