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communication of strategy so that By verifying the forecast against
employees can effectively deliver on it. A
recent AICPA & CIMA report, Reimagining actual performance, credibility is
Performance Management, indicated that
95% of employees do not understand their built in the quality of the forecast.
organisation’s strategy.

Longer-term forecasting
The forecast should be prepared to cover
all the periods to the point after which
using an industry-based growth-in-
perpetuity rate is judged to be appropriate; Variation on Argyris and Schön’s double-loop learning model
for most organisations the common range
is five to ten years. After that period,
a terminal or continuing value calculation Take actions
should be completed to reflect the Resource
ongoing value-creation potential of the Operational health Track
Backward looking.
•
business (see the sidebar, “Terminal or • Tends to be produced more Set results
Analyse
Continuing Value”). • frequently. targets variances
Aims to improve control.
The terminal value may be based on the to forecast
normalised earnings, WACC (weighted Develop
average cost of capital), and an industry forecast Assess
growth rate to derive a terminal value of consequences
the business by utilising McKinsey and Strategic health
Co’s “value driver formula” referred to in Develop and Develop • Forward looking.
the first article in the February FM. communicate strategic • Needs: Shared vision and
•
Having developed the forecast, the net strategic capital strategic intent.
management
present values of future financial themes map • Limited set of leading
indicators.
transactions and balances should be Understand • Enabling process to
ensure decision-taking
calculated by discounting at the company’s governing and action occur.
WACC and hence create a DCF valuation. variables • Aims to improve strategic
leadership.
This approach creates a justified
valuation with target values on underlying Variation on Argyris and Schön’s double-loop learning model
drivers that need to be met to deliver the
specified value.
of the integrated forecast model provides strategic change. Double-loop learning
Learning feedback loops valuable learning in two areas. Firstly, helps ensure this becomes an ongoing,
The development and ongoing utilisation variance analysis provides insight into continuous process.
performance issues and adjustments to Improved business value is achievable
forecasting methodology, ensuring the through the development and effective use
Terminal or operational health of the business. of informative forecasting processes.
continuing value Secondly, the resulting insights can be fed Organisations that have started developing
into organisational strategy.
in-house expertise will already be
This approach facilitates finance benefiting from the insights gained,
The terminal value or continuing value partnering with the business to manage invariably gaining advantage at their
is the present value of the free cash both its operational and strategic health competitors’ cost. ■
flows after the point where any explicit and value in an aligned manner.
forecast ends and can represent a This two-level review was described by
significant proportion of a company’s Argyris and Schön as double-loop learning
overall value. This is not (see the chart “Variation on Argyris and Paul Ashworth, FCMA, CGMA, is a
unreasonable, as it can reflect Schön’s Double-Loop Learning Model”). Jersey, British Isles-based practising
improved cash flows from higher- Through the integration of the management accountant providing
than-normal return on investments in management of strategic health, this strategic insight and enabling business
the near term. An explicit forecast highlights that intellectual capital is a intelligence systems in financial and
should be prepared for the period critical resource to be invested in, not a business services, and public-sector
until the company is expected to reach cost to be reduced. organisations. To comment on this
an equilibrium state, which is likely to In the rapidly evolving digital world, article or to suggest an idea for
be in line with average industry sustainable business advantage can be another article, contact Drew Adamek
performance. achieved and maintained through the at Andrew.Adamek@aicpa-cima.com.
monitoring of real-time data to inform

12 I FM MAGAZINE I April 2022