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Financial Forecasting Sponsored Research Funding

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Financial Forecasting Sponsored Research Funding

  1. 1. Financial Forecasting Sponsored Research Funding
  2. 2. RAC Forecast Survey –Rank the Following Items By Perceived Benefit <ul><li>Historical Win/Loss Rates for Departmental Proposals By Sponsor By PI </li></ul><ul><li>Sponsor/Agency Profiles </li></ul><ul><li>Forecasting Tools/Technology </li></ul><ul><li>Better Communication from PIs on Future Funding </li></ul><ul><li>Assumptions from CMU Administration Based on Government Funding or Outlooks By Funding Agency </li></ul>
  3. 3. Survey Responses – Top 3 Responses <ul><li># 1 Technology </li></ul><ul><ul><li>50% of responses indicated that the greatest benefit would be achieved through new forecasting technology </li></ul></ul><ul><li># 2 Increased PI Communication </li></ul><ul><li># 3 Win/Loss Ratios </li></ul><ul><li>Note: Only 7 responses were analyzed. </li></ul>
  4. 4. Forecasting Research Funding – Presentation Introduction <ul><li>Dispel Forecasting Myths </li></ul><ul><li>Definition </li></ul><ul><li>Develop a Process – “Beginning to End?” </li></ul><ul><li>Self-Evaluation </li></ul><ul><li>Discussion/RAC Feedback </li></ul>
  5. 5. Top 3 Forecasting Myths <ul><li>Forecasts are 100% accurate : A forecast is not meant to be perfect, but rather a guide. </li></ul><ul><li>The Forecasting process is a “one person” operation </li></ul><ul><li>Forecasting requires in-depth statistical analysis: </li></ul><ul><ul><li>Mathematical “wizardry” is not required . </li></ul></ul><ul><ul><li>Number crunching is important, however, “knowing your business” is key. </li></ul></ul>
  6. 6. Definition <ul><li>Definition of “Financial Forecast” </li></ul><ul><ul><li>Estimate of future financial results based on the information that you have today. </li></ul></ul><ul><li>Characteristics </li></ul><ul><ul><li>High level view point. </li></ul></ul><ul><ul><li>Based on historical business trends. </li></ul></ul><ul><ul><li>Assumption based. </li></ul></ul><ul><ul><li>Not detailed---Not an ANNUAL BUDGET. </li></ul></ul>
  7. 7. Goals of Forecasting <ul><li>Goal 1: Reduce Future Uncertainty </li></ul><ul><ul><li>Identify and gauge the magnitude of future risks. </li></ul></ul><ul><ul><ul><li>Avoid surprises </li></ul></ul></ul><ul><li>Goal 2: Improve Budgeting Process </li></ul><ul><li>Goal 3: Improve Decision-Making Today </li></ul>
  8. 8. Forecasting Process – Sponsored Research – The Beginning <ul><ul><li>Develop a “Plan” to “Forecast” </li></ul></ul><ul><ul><ul><li>Review Financial Calendar </li></ul></ul></ul><ul><ul><ul><li>Obtain management instructions/assumptions </li></ul></ul></ul><ul><ul><ul><li>Develop a forecasting process that is comfortable for you. </li></ul></ul></ul><ul><ul><ul><ul><li>“Top Down” Analysis Approach </li></ul></ul></ul></ul><ul><ul><ul><ul><li>“Hybrid Approach” </li></ul></ul></ul></ul><ul><ul><ul><li>Develop a Timeline (Set Critical Milestones) </li></ul></ul></ul><ul><ul><ul><li>Communicate – Engage others in the process </li></ul></ul></ul><ul><ul><ul><ul><li>PIs, Business Managers, SRO </li></ul></ul></ul></ul>
  9. 9. Phase I: Gather Information <ul><ul><li>Gather Department Specific Information </li></ul></ul><ul><ul><ul><li>Current Data </li></ul></ul></ul><ul><ul><ul><ul><li>Where are we today (FY06 YTD-Budget)? </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Spending/Funding </li></ul></ul></ul></ul></ul><ul><ul><ul><li>Historical Trended Data </li></ul></ul></ul><ul><ul><ul><ul><li>Where have we been? </li></ul></ul></ul></ul><ul><ul><ul><li>Pending Proposals/PI Input </li></ul></ul></ul><ul><ul><ul><ul><li>Where are we going in research activities? </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Note: “Forecast” answers the question: How are we going to get there? </li></ul></ul></ul></ul>
  10. 10. Resources <ul><ul><li>Oracle Financials </li></ul></ul><ul><ul><ul><li>Operating Statements </li></ul></ul></ul><ul><ul><ul><li>Grants Management </li></ul></ul></ul><ul><ul><li>Data Warehouse </li></ul></ul><ul><ul><li>SPEX </li></ul></ul><ul><ul><li>PIs, BMs, SRO, CMU Planning Office </li></ul></ul><ul><ul><li>FMP website </li></ul></ul><ul><ul><li>RAC Training Sessions/HR Training Sessions </li></ul></ul><ul><ul><li>Other? </li></ul></ul>
  11. 11. Phase II: Analyze – Current Activity <ul><ul><li>Start with what you know best....FY06! </li></ul></ul><ul><ul><ul><li>Analyze operating expenses supported by active awards - YTD </li></ul></ul></ul><ul><ul><ul><li>Adjust FY06 Y-T-G for known changes: </li></ul></ul></ul><ul><ul><ul><ul><li>Labor Changes </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Subcontracts </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Changes in Funding </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Cost-sharing </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Capital </li></ul></ul></ul></ul><ul><ul><ul><li>If your organization is extremely large--- Pareto is the way to go! </li></ul></ul></ul><ul><ul><ul><ul><li>80/20 Rule – Focus 80% of your time on the 20% that matters </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Labor accounts for 80% of direct costs.. </li></ul></ul></ul></ul><ul><ul><ul><li>Highlight Red Flags Items or Issues </li></ul></ul></ul><ul><ul><ul><li>Note Major Variances </li></ul></ul></ul><ul><ul><ul><ul><li>Identify funding “gaps” or deficits </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Where will the funding come from? </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Identify during conversation with PI. </li></ul></ul></ul></ul></ul>
  12. 12. Phase III: Start Building a Forecast Model FY07 & FY08 <ul><ul><li>Build a preliminary FY07/FY08 model based on FY06 </li></ul></ul><ul><ul><ul><li>Make sure that all new information is incorporated into FY06 full year outlook (base). </li></ul></ul></ul><ul><ul><li>Create a high level financial model in excel/ADI/Other </li></ul></ul><ul><ul><ul><li>Model the data at a high level </li></ul></ul></ul><ul><ul><ul><ul><li>By Funding Source/By PI/By Project </li></ul></ul></ul></ul><ul><ul><ul><li>Major Expense Items (Labor, Op Exp, Capex, F&A) </li></ul></ul></ul><ul><ul><ul><li>Include History </li></ul></ul></ul><ul><ul><li>Apply inflationary growth factors to future years </li></ul></ul><ul><ul><ul><li>Inflationary factors </li></ul></ul></ul><ul><ul><ul><li>Fringe Rates </li></ul></ul></ul><ul><ul><ul><li>F&A </li></ul></ul></ul>
  13. 13. Phase IV: Analyze – Historical Activity (Exploratory Analysis) <ul><ul><li>Analyze revenue trends </li></ul></ul><ul><ul><ul><li>What direction is the trend moving? </li></ul></ul></ul><ul><ul><ul><ul><li>Look at growth cycles (growing, mature, declining) </li></ul></ul></ul></ul><ul><ul><ul><li>Analyze year to year increases & annual growth rates </li></ul></ul></ul><ul><ul><ul><ul><li>Eliminate “Noise” or “Anomalies” that are unique to a specific year (non-recurring) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Detail funding source revenue trends </li></ul></ul></ul></ul><ul><ul><ul><li>Understand patterns/changes </li></ul></ul></ul><ul><ul><ul><ul><li>Look for consistencies & inconsistencies in the data. </li></ul></ul></ul></ul>
  14. 14. Phase V: Incorporate Historical Findings into FY07/08 Forecast Model <ul><ul><li>Develop FY07-08 high level assumptions based on historical trends. </li></ul></ul><ul><ul><ul><li>Base assumptions on consistent patterns of change </li></ul></ul></ul><ul><ul><ul><li>Use reality based assumptions </li></ul></ul></ul><ul><ul><ul><li>Document assumptions. </li></ul></ul></ul><ul><ul><li>Apply assumptions to preliminary FY07/FY08 forecast model – </li></ul></ul><ul><ul><ul><li>Extrapolate trends to future years by expense type. </li></ul></ul></ul><ul><ul><li>Analyze Forecast-Does it make sense? </li></ul></ul><ul><ul><ul><li>Adjust forecast. </li></ul></ul></ul>
  15. 15. Phase VI: Assess – Future Activity <ul><ul><li>Note: The forecast timetable is tight so, Phase VI should be revisited throughout the planning horizon. </li></ul></ul><ul><ul><li>Pending Proposals </li></ul></ul><ul><ul><ul><li>What proposals are in the queue? </li></ul></ul></ul><ul><ul><li>Win/Loss Ratios </li></ul></ul><ul><ul><ul><li>What is the PIs/Departments past track record? </li></ul></ul></ul><ul><ul><li>Communicate with PI </li></ul></ul><ul><ul><ul><li>Open a dialogue. </li></ul></ul></ul><ul><ul><ul><li>Continue the dialogue. </li></ul></ul></ul>
  16. 16. PI Communication – Future Activity <ul><ul><li>Have a conversation with the PI.... </li></ul></ul><ul><ul><li>You are “here” today..... </li></ul></ul><ul><ul><ul><ul><li>Focus around the specific sub-areas of research </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Show a trajectory of the short-term for the PI’s funding (6-months to 1-year) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Highlight funding issues (surpluses/deficits) </li></ul></ul></ul></ul><ul><ul><ul><li>What is your research strategy? </li></ul></ul></ul><ul><ul><ul><ul><li>Which sub-areas are going to continue? </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Identify new sub-areas? </li></ul></ul></ul></ul><ul><ul><ul><li>How do you intend to get there? </li></ul></ul></ul><ul><ul><ul><ul><li>What are the funding plans? </li></ul></ul></ul></ul>
  17. 17. Become A Business Partner <ul><ul><li>Strategically partner with your PI </li></ul></ul><ul><ul><ul><li>Help to identify alternative funding sources </li></ul></ul></ul><ul><ul><ul><li>Provide information on current or upcoming Broad Agency Announcements (BAAs) of interest </li></ul></ul></ul><ul><ul><ul><li>Communicate Key Funding Deadlines </li></ul></ul></ul><ul><ul><li>Be Proactive! </li></ul></ul>
  18. 18. Phase VII: Incorporate PI Feedback <ul><ul><li>Incorporate PI feedback into future forecasts </li></ul></ul><ul><ul><ul><li>Make notes of PI funding strategy </li></ul></ul></ul><ul><ul><ul><li>Adjust forecast for any material findings </li></ul></ul></ul><ul><ul><ul><li>Spend the most time discussing the immediate future (6 months – 1 year) </li></ul></ul></ul><ul><ul><ul><li>Detail the PI’s resource strategy </li></ul></ul></ul><ul><ul><ul><ul><li>New positions/Eliminations/Effort Changes </li></ul></ul></ul></ul><ul><ul><ul><li>Utilize Future Funding Source </li></ul></ul></ul><ul><ul><ul><li>Use information to validate high level assumptions in forecast </li></ul></ul></ul>
  19. 19. Phase VIII: Evaluate Forecast <ul><ul><li>Re-Evaluate Forecast </li></ul></ul><ul><ul><ul><li>Analyze High Level trends (include FY07-FY08) </li></ul></ul></ul><ul><ul><ul><ul><li>Analyze year to year growth? </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Do you see large variances? </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Compare the CAGR from FY03-FY05 to the CAGR for FY05 – FY08 </li></ul></ul></ul></ul><ul><ul><ul><li>Revisit Assumptions </li></ul></ul></ul><ul><ul><ul><ul><li>Do the assumptions make sense to you? </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>An assumption should not be so complex that you can not explain it to someone else. </li></ul></ul></ul></ul></ul>
  20. 20. Phase IX: Self-Evaluation <ul><ul><li>Evaluate Your Previous Forecasts </li></ul></ul><ul><ul><ul><li>Track Record of Past Forecasts </li></ul></ul></ul><ul><ul><ul><ul><li>Identify forecast misses? </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Assess degree of accuracy. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Explain variances. </li></ul></ul></ul></ul><ul><ul><ul><li>Review Assumptions </li></ul></ul></ul><ul><ul><ul><ul><li>Were the assumptions valid/predictive? </li></ul></ul></ul></ul><ul><ul><ul><li>Incorporate Process Improvement </li></ul></ul></ul><ul><ul><ul><li>Prepare for next forecasting cycle </li></ul></ul></ul>
  21. 21. Phase X: Go Back to Phase I <ul><ul><li>Forecasting should be a continuous process...today’s forecast evolves into a future detailed budget. </li></ul></ul><ul><ul><li>Where are we today? </li></ul></ul><ul><ul><li>Where are we going? </li></ul></ul><ul><ul><li>How are we going to get there? </li></ul></ul>
  22. 22. Remember <ul><ul><li>Forecasting is a continuous process. </li></ul></ul><ul><ul><li>A forecast is never 100% accurate. </li></ul></ul><ul><ul><ul><li>However, you must explain variances . </li></ul></ul></ul><ul><ul><li>Forecast accuracy is dependent upon the planning horizon </li></ul></ul><ul><ul><li>A proper forecast requires communication. </li></ul></ul><ul><ul><ul><li>Engage others in the process </li></ul></ul></ul>
  23. 23. Three great quotes about forecasting... <ul><ul><li>&quot;Forecasting is the art of saying what will happen, and then explaining why it didn't! – Anonymous </li></ul></ul><ul><ul><li>&quot;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. </li></ul></ul><ul><ul><li>&quot; It is often said there are two types of forecasts ... lucky or wrong!!!! “ -- in &quot;Control&quot; magazine published by Institute of Operations Management </li></ul></ul>
  24. 24. Compound Annual Growth Rate Calculation (CAGR) - Excel <ul><ul><li>Question: What is the compounded average growth rate for Total Revenues from 1990 – 2005? </li></ul></ul><ul><ul><li>1990 $200,000 </li></ul></ul><ul><ul><li>2005 $1,549,000 </li></ul></ul><ul><ul><li>Enter the data into excel: </li></ul></ul><ul><ul><ul><li>Cell A1: 1990 Cell B1: $200,000 </li></ul></ul></ul><ul><ul><ul><li>Cell A2: 2005 Cell B2: $1,549,000 </li></ul></ul></ul><ul><ul><li>Enter Formula in Cell B3 </li></ul></ul><ul><ul><li>=RATE(A2-A1,0,-B1,B2) </li></ul></ul><ul><ul><li>Answer = 15% </li></ul></ul>

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