There are several essential elements of the process statement that make it forward looking. To begin with, the process statement is organized by process. Processes are how an organization converts resources into products and services to meet customer needs. There is no better way to understand an organization's ability to create value than to assess how effectively and efficiently they carry out their work.

The second part of the process statement records the current and targeted process outcomes. Each process exists to deliver an outcome. An organization must explicitly identify the desired process outcome. This requires a thorough understanding of how each individual process outcome will achieve the organization-wide strategic goals.

An organization's value creation potential depends on how well an organization executes their processes to bring about the desired outcomes. Highly effective processes (minimal gap between the target and the actual outcome achieved) can be relied on to deliver future value. Highly ineffective processes cause business events to spiral out of hand creating self-induced crises that reduce value creation.

The third section of the process statement communicates process velocity. Process velocity measures the speed with which the process converts resources into cash. Economic Value thinking has taught us that free cash flow equates to shareholder value. Take for example, the procurement process. A perfect process velocity will reduce work in process to zero meaning that the required material is delivered directly to the requester--exactly when required, with perfect quality along with the proper quantity. Any deviation to these requirements necessitates the need for working capital (less free cash flow) to be tied up in financing the raw material inventory.

Organizations that have streamlined their processes to improve process velocity will create more free cash flow and thus value than those that have slower process velocity. The inevitable conclusion is that organizations with effective processes are better positioned to create free cash and thus have a greater value creation potential.

The fourth section of the process statement is the Six Sigma segment. The standard deviation of each process is displayed. A high standard deviation, with a value over 2 or 3, indicates a stable and predictable process. A 6.0 standard deviation is referred to as Six Sigma and is the objective of many leading organizations. A low standard deviation indicates an unstable and unpredictable process.

The less a process varies the greater its predictability. The better the predictability, the greater the value creation potential of an organization.

The fifth and final part of the process statement is the value inventory. 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 the unrealized value that is available for future operations. The total value of all processes approximates the organization's overall value.

An organization that has created a storehouse of unrealized value is in a strong position to prosper in the future. An organization must carefully balance the short-term performance results with making investment in future value.

Predictability and the accountant

Repeatability equates to predictability. An accountant does not come to work in the morning wondering how they should process a customer receivable. The procedures have been established, the information systems and work area are in place and the accounts receivable (AR) accountants have been trained. The workers would not have it any other way. Establishing a routine work environment is vital to the sense of security of a worker. Exceptions to the routine cause tension and anxiety.

Predictive accounting develops statistical probabilities of the future financial and non financial results by understanding the organization's processes and the conditions under which the process operates. Actual process results are comprised of two primary components:

Actual cost = (Standard resource consumption +/; process variation)

The above equation demonstrates that actual cost is predictable when process variation has been methodically reduced to a low level (approaches zero). Conversely, actual cost is unpredictable where process variation remains high. The distinction between predictability and unpredictability is important because prediction is the essence of making a profit. Predictability enables organizations to shape their future. Managers can anticipate events and thus put themselves in a position to act. Unpredictability will repeatedly undermine management efforts to achieve strategic objectives. It is difficult for management to shape the future when they are constantly responding to crises caused by unpredictable processes. It becomes an adventure every time an unstable process is executed. Preemptive action, rather than reactive action, keeps profits up.

An important element of predictive accounting is to ensure action is initiated at the earliest possible point but no earlier. Action taken too late is costly to the organization will have wasted time and resources needlessly by ignoring early warning signals. It is equally serious to take action too quickly. Changing the process will only disrupt performance and create problems that did not exist prior to the change.

Predictive accounting relies on Statistical Process Control (SPC) to provide the information needed to trigger action. Action is required where the predicted results are not within statistical limits of actual results. The root cause of the problem must be identified and the process improved in order to reduce its variation.

The key to predictive accounting is to focus management on the future rather than the past. An executive needs to know of problems before they become variances on financial reports that must be explained. Predictive accounting provides management with an "early warning" signal of an impending performance problem. Timely signals enable managers to take proactive corrective action aimed at altering potentially undesirable results. This goal is feasible because predictive costs are potentially changeable (as is not the case with historical reporting).

Process Management Foundation

The tools that make up predictive accounting already are in use at leading companies Six Sigma, root cause analysis, ISO 9000, balanced scorecard, lean enterprise, activity based costing and process mapping. All of these tools and techniques concentrate on the process they measure and improve process performance. However, these techniques remain a collection of independent process management tools. Little or no work has done to integrate these tools into a comprehensive management system. In particular, financial accounting has done little to evaluate the relevance of processes (activity costing) to financial reporting. This flies in the face of the extensive use of process information to manage an organization.

Predictive accounting provides a framework for institutionalizing the use of process tools into a comprehensive management system. The framework provides managers with data needed to identify opportunities and problems as a continuous process that is built into the management system. It cannot and must not allow processes to be managed as a series of one-time exercises. Instead management must continuously analyze the root causes once a warning signal has been detected. Most importantly, the process must be improved and new solutions implemented.

Predictive Accounting

The concepts that underpin predictive accounting are very simple future cost and performance is the consequence of certain events that have already occurred. These events become the basis to:

• Understand and project the workflow of the upcoming activities that will follow,
• Understand activity standards employed 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.