Sensitivity analysis and other Trends in Management Accounting

What is Sensitivity Analysis?

Sensitivity analysis assesses how a specific outcome (e.g., profit) changes depending on variations in key input
variables (e.g., sales volume, costs). It helps answer "what-if" questions to understand the potential effect of
different business scenarios.

Example "what-if" questions about financial predictions:

 What if sales volume drops by 10% due to unforeseen circumstances?

 What if raw material costs increase by 5% due to supply chain disruptions?

 How would a 2% price increase affect our profit margin?

By answering these questions, we gain valuable insights into the potential risks and opportunities associated with
different business scenarios.

Key Applications in Managerial Accounting:

1. Cost-Volume-Profit (CVP) Analysis:

Imagine a company producing widgets. With CVP analysis and sensitivity analysis, they can:

 Identify the break-even point: What sales volume is needed to cover all costs (fixed and variable)?

 Optimize production levels: How does each additional unit sold impact profit?

 Assess profit sensitivity to sales fluctuations: What if sales drop by 10%? What's the profit impact?

Example:

 Fixed costs: 10,000/month

  Variable cost per unit: 5

 Selling price per unit: 10

Scenario: What if sales volume increases by 20% (from 1,000 units to 1,200 units)?

Impact: Profit increases by 2,000.

This example demonstrates how sensitivity analysis quantifies the impact of sales volume changes, aiding informed
production and pricing decisions.

2. Capital Budgeting:

Before investing in a new project, companies use sensitivity analysis to:

 Evaluate different investment scenarios: How does varying the initial investment, expected sales, or
interest rates affect profitability?

 Quantify potential risks: What if sales fall below projections? What's the downside risk?

 Make informed investment decisions: Is the project likely to generate a positive return on investment?

Example:

 Project cost: $1 million

 Expected annual revenue: $200,000

 Project life: 5 years

Scenario: What if the project cost increases by 10% due to unforeseen circumstances?

Impact: The project payback period increases by 6 months.

By understanding the impact of cost variations, sensitivity analysis helps assess project risk and guide investment
decisions.

3. Pricing Decisions:

Setting the right price is crucial. Sensitivity analysis helps:

 Understand the relationship between price and demand: How does a price increase affect sales volume?

 Optimize pricing strategies: What price maximizes profit, considering demand elasticity and competition?

 Assess the impact of competitor pricing changes: How would a competitor's price cut affect your sales
and profitability?

Example:

 Current price: 10

 Current demand: 1,000 units

 Variable cost per unit: 5

Scenario: What if the price is increased by 5%?

Impact: Demand decreases by 10%, but profit still increases by 2% due to the higher margin per unit.

This example showcases how sensitivity analysis informs pricing decisions by predicting the impact of price
changes on both demand and profitability.
Case Studies
Case Study 1: New Product Launch

Company: A clothing company is launching a new line of eco-friendly athleisure wear.

Challenge: They need to determine the optimal pricing and sales volume to achieve their desired profit margin
before launching the product.

Sensitivity Analysis:

 Formulas:

Contribution margin ratio = (Selling price per unit - Variable cost per unit) / Selling price per unit

Break-even point = Fixed costs / Contribution margin ratio

 Software tools: Microsoft Excel, Crystal Ball, Open Solver

 Scenario: They analyze three scenarios: a low, medium, and high sales volume forecast, with two different
price points for each.

 Results: The analysis shows that the high volume/high price scenario offers the highest potential
profit, but also carries the highest risk. The medium volume/medium price scenario provides a good
balance between risk and reward.

Insights: Based on the results, the company decides to set a slightly higher price than the medium price point
initially, expecting to adjust based on actual sales volume. This approach allows them to maximize potential profit
while mitigating downside risk.

Case Study 2: Capital Budgeting Decision

Company: A manufacturing company is considering investing in a new automated production line.

Challenge: They need to evaluate the project's profitability under different economic conditions.

Sensitivity Analysis:

 Formulas:

o Net present value (NPV) = Present value of cash inflows - Present value of cash outflows

o Internal rate of return (IRR) = Discount rate that makes NPV equal to zero

 Software tools: @Risk, Monte Carlo simulation tools

 Scenario: They analyze four scenarios: optimistic, base case, pessimistic, and extreme case, each with
variations in project cost, sales volume, and input material prices.

 Results: The analysis shows that the project is profitable in the optimistic and base case scenarios, but
becomes marginally profitable or even unprofitable in the pessimistic and extreme cases.

Based on the results, the company decides to implement additional cost-saving measures and contingency plans
to mitigate downside risks. They also postpone the project by a year to monitor economic conditions before
making a final decision.

It is a useful tool for many good reasons:

In-depth analysis: What-if analysis studies the relationship between the independent and the dependent variables.
It also studies the sensitivity of the dependent variable to changes in independent variables. In doing so, the cause-
and-effect relationship is established, which helps to improve the conclusions drawn from the model.

Managing uncertainty: Models are rife with uncertainty. Simulation analysis aids in identifying, attributing, and
analyzing the effects of uncertainties from different sources in a model.

Importance of variables: Users can determine the importance of different independent variables depending on
how sensitive the output is to them. They can then focus on the key variables to work towards the best possible
outcome.

More reliable outcomes: Studying inputs and their effects on the outcome thoroughly can help in making
predictions that are more consistent and reliable.

Decision-making: Simulation analysis helps make predictions backed by data as a wide range of possible inputs and
outcomes are studied. This provides decision-makers with a holistic picture, thus helping better decision-making.

Improving models: A thorough analysis of the inputs can help identify and fix the model's shortcomings to make it
more reliable. It lays out the limitations and the scope of a model, thereby helping fix errors. It also helps verify
whether the underlying assumptions behind the model are sound.

Adds credibility: Testing models with wide input ranges adds credibility to models and predictions.

Some of the disadvantages are:

Too many inputs: Some models can be extremely complex, making analysis of the relationships between each
input and the output infeasible. Screening may reduce the dimensionality (by reducing the number of inputs)
before running a what-if analysis.

Multicollinearity: This analysis ignores the interrelationship between the independent variables. For instance,
outcome m may depend on variables x and y, which may be correlated. However, these variables will be examined
separately under simulation analysis, and their correlation will be ignored.

Historical data: It uses historical data to establish relationships. However, that leaves plenty of room for errors, as
it may not be a good way to make estimates for the future. In addition, there can be new external factors that did
not impact the relationship in the past but may impact it going forward.

Assumptions: We must make assumptions since it is based on historical data. The assumptions may not be
rationally sound at times, so they must be verified before being used in the model.

Requires time: Running the simulations requires a lot of time and computing resources. Accelerating the model
and reducing the number of runs can reduce the total time. This can be achieved through metamodels, also known
as emulators.

Trends in Management Accounting

1. Expansion from product to channel and customer profitability analysis

Expansion from product to channel and customer profitability analysis means moving beyond simply looking at
how much profit each product makes, to understanding how profitable different channels (e.g., online store, retail
partners) and different customer segments (e.g., high-value customers, new customers) are.
That is, In the past, businesses prioritized product profitability, or the amount of profit that each unique product
brings in.

Nowadays, businesses understand that they must take the big picture into account, which includes:

Channels: What is the profitability of selling through each channel, such as an internet store or retail partner?

Clients: Which customer categories—such as new or high-value clients—are the most lucrative?

Management accounting must help the sales and marketing functions. A company needs to know the best types of
customers to retain, grow, win back, and acquire – and those who aren’t.

2.Management accounting’s expanding role in enterprise performance management (EPM)

Here's how it works:

 Management accounting: This system tracks the company's financial health, like its income and expenses.
Think of it as the engine of the machine, providing the power.
 Enterprise performance management (EPM): This is like the control panel of the machine. It uses various
tools and methods (like strategy maps, budgets, and customer data) to help company leaders understand
how the company is doing and make better decisions.
 Integration: The key here is that the information from management accounting (the engine) feeds directly
into the EPM system (the control panel). This allows leaders to see how their decisions impact the
company's financial health and make adjustments as needed.

Examples

 A company uses a balanced scorecard to track financial and non-financial metrics aligned with its strategic
goals.

 A team uses real-time sales data to adjust marketing campaigns and optimize resources.

3.The shift to predictive accounting

Now Managers are looking beyond historical data (what happened) towards predicting future costs and impacts of
decisions. This shift involves:

 Moving from cost reporting to decision support: Analyze how costs change with factors like
volume, processes, and customer behavior.

 Building predictive models: Forecast future costs based on different scenarios and decisions.

 Becoming business partners: Help managers make data-driven decisions for future financial success

Examples

 A factory analyzes how production increases might impact staffing and material costs.
 A company uses sales forecasts to predict future revenue and adjust its budget accordingly.
Tools Beyond Sensitivity Analysis: Trending Options in Managerial Accounting
While sensitivity analysis remains a valuable tool in understanding the impact of variables on financial outcomes,
several other trends are gaining traction in managerial accounting:

1. Scenario Planning.

2. Monte Carlo Simulation

3. Activity-Based Costing (ABC)

4. Beyond Budgeting (BB)

5. Big Data Analytics

1. Scenario Planning:

What It Is:

Scenario planning is a strategic tool that helps businesses prepare for diverse future possibilities. It involves
creating plausible scenarios based on assumptions about key market drivers, both positive and negative. This
enables leaders to:

 Identify potential outcomes and their impact on the business.

 Evaluate and plan responses for various situations.

 Make informed decisions in both crisis and non-emergency situations.

Importance:

 Competitive Advantage: Reacting quickly and decisively to unforeseen events thanks to pre-
contemplated scenarios.

 Enhanced Decision Making: Provides context for non-emergency decisions by factoring in future drivers
and potential impacts.

 Knowledge Management: Captures insights and recommendations from key personnel during the
planning process.
  Preparedness: Provides documented plans for extreme situations, even if key personnel are unavailable.

Advantages:

 Improved understanding of potential event impacts.

 Prepared initial responses from various teams.

 Captured knowledge and recommendations.

 Documented plans for extreme situations.

Disadvantages:

 time-consuming and resource-intensive.

 Plans require updates due to evolving factors.

Types of Scenario Planning:

 Quantitative: Financial models showcasing best/worst-case scenarios with adjustable variables. Often
used for annual forecasts.

 Operational: Explores immediate impacts and short-term strategic implications of specific events.

 Normative: Describes desired future states or preferred operating modes. Used as goals or summation of
changes.

 Strategic Management: Imagines broader environmental contexts for product/service consumption. It

challenges leaders to consider external factors and encourages creative brainstorming.

Examples:

 Retailer: Plans for potential economic downturns, changing consumer preferences, or supply chain
disruptions.

 Technology company: Considers scenarios involving rapid technological advancements, cyberattacks, or

data privacy regulations.

 Airline: Develop plans for fuel price fluctuations, natural disasters, or pandemics.

Industry cases applying Scenario Planning

Retail - Walmart Embraces Omnichannel:

Challenge: Facing competition from online retailers, Walmart needed to adapt its brick-and-mortar model.
Scenario Planning: They developed scenarios ranging from "omnichannel dominance" to "physical store
decline." This helped them anticipate customer behavior shifts and invest in online ordering, click-and-collect
options, and store renovations.
Result: Increased online sales, improved customer satisfaction, and market share gains despite the challenging
retail landscape.

Technology - Shell Prepares for Energy Transition:

Challenge: The future of fossil fuels was uncertain due to climate change concerns and policy shifts.
Scenario Planning: Shell envisioned scenarios like "rapid decarbonization" and "business as usual." This
prepared them for potential regulations, renewable energy advancements, and changing consumer preferences.
Result: Shell diversified its portfolio towards renewable energy, invested in carbon capture technologies, and
positioned itself for a low-carbon future.
 Airline - Emirates Navigates Global Crises:
Challenge: The airline industry faces numerous risks, including economic downturns, pandemics, and
geopolitical instability.
Scenario Planning: Emirates regularly updates its scenarios, considering events like oil price fluctuations,
regional conflicts, and disease outbreaks. This allows them to adjust capacity, pricing, and network strategies
proactively.
Result: Emirates maintained profitability throughout various crises, adapting its operations quickly and
minimizing disruptions.

In conclusion, scenario planning is a valuable tool for businesses to navigate uncertainty and make informed
decisions. By considering potential future scenarios and their impacts, companies can be better prepared for
whatever comes their way.

2. Monte Carlo Simulation

What It Is:

Monte Carlo Simulation is a computational technique that utilizes random sampling to model the impact of diverse
factors on key outcomes. Imagine throwing virtual dice instead of relying on single-point estimates, this method
provides a probability distribution of potential outcomes, empowering businesses to:

 Quantify financial risks and uncertainties: Understand the likelihood of various financial scenarios and
their effect on profitability, investments, and other decisions.

 Evaluate the effectiveness of risk mitigation strategies: Test different approaches to managing risk and
assess their impact on outcomes before implementation.

 Make informed decisions under uncertainty: Choose strategies with optimal risk-reward profiles based
on a comprehensive understanding of potential outcomes.

Importance:

 Improved Risk Management: Quantifying and understanding risk enables proactive and data-driven
strategies for mitigation.

 Enhanced Decision-Making: Provides a wider range of potential outcomes, supporting more informed
and confident choices.

 Better Resource Allocation: Allocate resources based on a clearer understanding of risks and potential
returns.

 Stress Testing: Simulate extreme scenarios to test the resilience of business plans and identify critical
vulnerabilities.

Advantages:

 Quantitative Analysis: Provides numerical results and probability distributions, facilitating data-driven
decision-making.
  Versatility: Applicable to various business problems involving uncertainty, from project management to
investment analysis.

 Flexibility: Allows customization with different probability distributions and variables to reflect specific
situations.

Disadvantages:

 Data Requirements: Accuracy depends on quality and completeness of input data.

 Computational Complexity: Simulations can be resource-intensive for complex models.

 Misinterpretation: Results need careful interpretation to avoid overconfidence or misinformed

conclusions.

Types of Monte Carlo Simulation:

 Risk Analysis: Assesses the likelihood of negative outcomes for projects, investments, or financial
portfolios.

 Sensitivity Analysis: Identifies critical variables with the greatest impact on outcomes and helps prioritize
risk mitigation efforts.

 Optimization: Optimizes decision variables by evaluating various combinations within risk and return
constraints.

Industry Cases:

Pharmaceutical Companies:
 Example: Pfizer used Monte Carlo simulations to assess the risks and potential benefits of a new cancer
drug, enabling them to optimize R&D investments and make informed go/no-go decisions. The
simulations helped them quantify the probability of success and potential return on
investment, leading to better resource allocation and ultimately, faster drug development

Airlines:
 Example: Emirates utilizes Monte Carlo simulations to model flight demand fluctuations, considering
factors like seasonality, economic conditions, and competitor pricing. This allows them to optimize
pricing strategies, adjust flight schedules, and manage fuel costs more effectively. Simulations helped
them predict demand changes with greater accuracy, resulting in reduced empty seats, increased
revenue, and improved operational efficiency.

Financial Institutions:
 Example: JPMorgan Chase employed Monte Carlo simulations to stress test their loan portfolios
against various economic downturns and assess potential credit losses. This proactive approach helped
them identify vulnerabilities, strengthen risk management practices, and maintain financial stability
during adverse economic conditions. Simulations enabled them to anticipate potential losses and
prepare necessary reserves, minimizing financial risks and ensuring long-term sustainability.

Monte Carlo Simulation is a powerful tool for navigating uncertainty and making informed decisions in a complex
business environment. By quantifying risks and providing a range of potential outcomes, it empowers businesses
to be more strategic, proactive, and ultimately, successful. Remember, this technique is most effective when
combined with domain expertise, careful data analysis, and sound judgment.
3. Activity-Based Costing (ABC):

What It Is:

Activity-based costing (ABC) is a method that shifts cost allocation from traditional department-based approaches
to identifying and assigning costs to specific activities within a business. By considering the true cost drivers, ABC
empowers businesses to:

 Gain a deeper understanding of cost behavior: Identify hidden costs and their relationship to
activities, products, or services.

 Improve cost management: Target cost reduction efforts and optimize resource allocation for activities
with the highest impact.

 Enhance product profitability analysis: Accurately assess the profitability of individual products or
services based on their true cost drivers.

 Support strategic decision-making: Make informed decisions on pricing, product mix, and outsourcing
based on accurate cost information.

Importance:

 Traditional costing limitations: Traditional methods often fail to accurately allocate overhead
costs, potentially leading to misleading product cost information and ineffective decision-making.

 Improved accuracy: ABC provides a more precise picture of costs, ensuring informed and data-driven
decisions.

 Competitive advantage: Understanding true cost drivers can help businesses optimize pricing, resource
allocation, and product offerings, gaining a competitive edge.

Advantages:

 Cost transparency: Identifies hidden costs and their impact on specific activities, products, or services.

 Improved product costing: Provides accurate cost information for individual products, aiding in pricing
and profitability analysis.

 Cost management insights: Enables targeted cost reduction efforts by focusing on activities with the
highest cost drivers.

 Strategic decision support: Informs strategic decisions like outsourcing, product mix optimization, and
process improvement.

Disadvantages:

 Implementation complexity: Requires careful planning, data collection, and system

development, potentially resulting in higher initial costs.

 Data requirements: Relies on accurate and detailed data, requiring ongoing data collection and
maintenance efforts.

 Complexity for smaller businesses: May be less suitable for smaller businesses with limited resources or
simpler cost structures.

Types of Activity-Based Costing:

  Process-based ABC: Costs are assigned to activities within business processes, then to products or
services that utilize those processes.

 Resource-based ABC: Costs are assigned to shared resources used by activities, then to products or
services that utilize those resources.

 Hybrid ABC: Combines elements of both process-based and resource-based approaches for greater
flexibility.

The ABC calculation is as follows:

1. Identify all the activities required to create the product.

2. Divide the activities into cost pools, which includes all the individual costs related to an activity—such as
manufacturing. Calculate the total overhead of each cost pool.

3. Assign each cost pool activity cost drivers, such as hours or units.

4. Calculate the cost driver rate by dividing the total overhead in each cost pool by the total cost drivers.

5. Divide the total overhead of each cost pool by the total cost drivers to get the cost driver rate.

6. Multiply the cost driver rate by the number of cost drivers.

As an activity-based costing example, consider Company ABC which has a $50,000 per year electricity bill. The
number of labor hours has a direct impact on the electric bill. For the year, there were 2,500 labor hours worked,
which in this example is the cost driver. Calculating the cost driver rate is done by dividing the $ 50,000-a-year
electric bill by the 2,500 hours, yielding a cost driver rate of $20. For Product XYZ, the company uses electricity for
10 hours. The overhead costs for the product are $200, or $20 times 10.

Industry Cases

Harley-Davidson:
The iconic motorcycle manufacturer used ABC to identify that customizing bikes significantly increased costs
due to the additional setup and quality control activities required. This insight helped them adjust pricing for
customized models and prioritize streamlining the customization process.
Cleveland Clinic:
The esteemed healthcare provider employed ABC to understand the cost drivers behind different cancer
treatment options. This analysis revealed that targeted therapies, while initially more expensive, could be more
cost-effective in the long run due to reduced hospital stays and complications. This information informed
treatment recommendations and resource allocation decisions.
Amazon:
The e-commerce giant leverages ABC extensively to understand the cost drivers behind different sales channels,
product categories, and fulfillment options. This analysis helps them optimize pricing, inventory management,
and fulfillment processes for maximum efficiency and profitability.

By uncovering hidden cost drivers and gaining a deeper understanding of cost behavior, ABC empowers businesses
to make informed decisions, optimize operations, and achieve strategic goals in a competitive marketplace.
Remember, the effectiveness of ABC hinges on accurate data, clear cost drivers, and ongoing refinement to adapt
to changing circumstances.
4. Beyond Budgeting

What It Is:

Beyond Budgeting challenges the conventional approach to budgeting by advocating for a more agile and
decentralized system. It aims to overcome the limitations of traditional budgeting, such as:

 Time-consuming and costly processes: Traditional budgeting can be resource-intensive, requiring

significant effort and resources to develop and maintain.

 Lack of strategic focus: Budgets often fail to align with the company's long-term goals and
priorities, leading to misalignment and inefficiency.

 Limited value creation: Traditional budgeting may not incentivize or support value creation, potentially
hindering innovation and growth.

 Resistance to change: Rigid budgets can create roadblocks to adaptation and hinder responsiveness to
changing market conditions.

 Centralized power structures: Traditional budgeting often concentrates power within specific
departments, limiting agility and decision-making flexibility.

Rationale:

The rise of Beyond Budgeting reflects a shift from traditional, bureaucratic models towards agile business
structures. In today's dynamic and competitive environment, businesses need to be adaptable and responsive to
change. Beyond Budgeting provides a framework to achieve this agility by:

 Decentralizing decision-making: Empowering operational managers with the authority and responsibility
to make informed decisions based on real-time information.

 Focusing on value creation: Aligning performance measures and incentives with the company's overall
strategy and value drivers.

 Adopting continuous planning: Replacing annual budgets with rolling forecasts and scenario planning to
adapt to changing market conditions.

 Promoting transparency and communication: Fostering open communication and information sharing
across all levels of the organization.

 Embracing continuous improvement: Encouraging a culture of experimentation and learning, constantly

seeking ways to improve processes and performance.

Key Principles:

The Beyond Budgeting framework is built on six leadership principles and six management process principles,
emphasizing:

 Leadership: Setting clear strategic direction, fostering a culture of trust and accountability, and
empowering managers.
  Management processes: Focusing on value creation, continuous improvement, rolling forecasts, and
performance management based on external benchmarks.

Techniques:

While there's no single recipe for Beyond Budgeting, several techniques can support its implementation:

 Rolling forecasts: Replacing annual budgets with more frequent (monthly or quarterly) forecasts to
enhance adaptability.

 Key performance indicators (KPIs): Aligning performance measures with strategic objectives and value
drivers.

 Benchmarking: Comparing performance against external benchmarks for continuous improvement.

 Empowered managers: Providing operational managers with the authority and resources to make
decisions and react to market changes.

 Collaboration and communication: Fostering open communication and collaboration across all levels of
the organization.

Industry Cases

ABB: The engineering giant adopted Beyond Budgeting in 2000, empowering operational managers with
decentralized decision-making and rolling forecasts. This resulted in:
 20% reduction in cost of capital
 15% improvement in operating cash flow
 Increased employee engagement and innovation

Spotify: The music streaming service embraced Beyond Budgeting principles in 2012, focusing on value creation
and continuous improvement. This led to:
 Faster decision-making and market responsiveness
 Increased employee ownership and accountability
 Improved performance against key metrics like subscriber growth and engagement

Royal Dutch Shell: The energy giant implemented Beyond Budgeting in 2006 to enhance cost management and
strategic alignment. This achieved:
 Reduced fixed costs by 20%
 Improved transparency and communication across the organization
 Better alignment between performance measures and strategic objectives

Challenges and Considerations:

 Cultural change: Shifting from a traditional, siloed approach to a decentralized and collaborative culture
can be challenging and require significant effort.
  Leadership commitment: Successful implementation requires strong leadership buy-in and commitment
to driving the change process.

 Communication and transparency: Open communication and information sharing across all levels are
crucial for effective collaboration and decision-making.

 Metrics and performance management: Aligning performance measures with strategic objectives and
utilizing relevant benchmarks are essential for effective evaluation and continuous improvement.

 Data and technology: Access to timely and accurate data, as well as technology systems to support rolling
forecasts and other Beyond Budgeting practices, are critical.

 Resistance to change: Some employees may initially resist the change, highlighting the importance of
clear communication and training.

Beyond Budgeting is an ongoing journey, not a one-time fix. Continuous improvement, adaptation, and
commitment to the core principles are crucial for unlocking its full potential and achieving long-term success.

5. Big Data Analytics: Transforming Industries Through Insights

What It Is:

Big data analytics involves analyzing vast and complex datasets, traditionally too large and intricate for
conventional processing methods. It leverages advanced tools and techniques to extract valuable insights, enabling
data-driven decision-making across industries.

Impact:

Big data analytics is revolutionizing businesses by:

 Identifying hidden patterns and trends: Unearthing previously unknown insights from massive data sets.

 Optimizing operations and processes: Streamlining workflows, reducing costs, and improving efficiency.

 Personalizing customer experiences: Tailoring products, services, and marketing strategies based on
individual preferences.

 Predicting future outcomes: Proactively addressing potential risks and opportunities.

 Driving innovation: Developing new products, services, and business models based on data-driven
insights.

Examples of Successful Implementations:

Amazon's Recommendation Engine:

Challenge: Personalizing product recommendations for millions of customers with diverse preferences.
Solution: Big data analytics analyzes massive amounts of customer data, including purchase history, browsing
behavior, and product reviews. This enables Amazon to recommend relevant products in real time, boosting
sales and customer satisfaction.
 Finance - Fraud Detection by JP Morgan Chase:
Challenge: Identifying and preventing fraudulent transactions in real-time across vast financial networks.
Solution: Big data analytics analyzes transaction data, identifying suspicious patterns and behaviors. This helps
JP Morgan Chase prevent fraud attempts, saving millions of dollars annually.

Geisinger Health Reduces Readmissions:

Challenge: Reducing hospital readmissions, which incur high costs and impact patient outcomes.
Solution: By analyzing patient data, including medical history, social determinants of health, and post-discharge
behavior, Geisinger Health predicts patients at risk of readmission and implements preventive measures,
leading to a significant reduction in readmission rates.

Predictive Maintenance by Rolls-Royce:

Challenge: Minimizing downtime and maximizing efficiency in complex aircraft engine operations.
Solution: Big data analytics analyzes sensor data from engines, predicting potential failures before they occur.
This allows for proactive maintenance, reducing downtime and costs for airlines.

Scope:

Big data analytics applies across all industries, from retail and finance to healthcare and manufacturing. Here are
some examples:

 Retail: Recommend the perfect outfit based on browsing history, optimize store layouts based on
customer flow, and predict peak shopping seasons.

 Finance: Detect fraudulent transactions in real-time, personalize financial products based on individual
needs, and assess creditworthiness more accurately.

 Healthcare: Predict patient readmissions, identify potential epidemics early, and personalize treatment
plans for better outcomes.

 Manufacturing: Predict equipment failures and schedule maintenance proactively, optimize production
lines for efficiency, and improve product quality.

Challenges and Considerations:

 Data integration and quality: Ensuring accuracy, consistency, and accessibility across diverse systems and
sources.

 Skills and expertise: Building a team with the analytical skills and knowledge to interpret and utilize big
data effectively.

 Ethical considerations: Protecting data privacy and ensuring responsible data governance practices.
Big data analysis is not just a trend; it's a fundamental shift in how businesses operate and make decisions. By
embracing this transformation, businesses can unlock significant value, gain a competitive edge, and thrive in the
data-driven future.

References

Sensitivity analysis https://corporatefinanceinstitute.com/resources/financial-modeling/what-is-sensitivity-

analysis/

Trends in Management Accounting https://www.cchcpelink.com/top7trends

Scenario Planning. https://www.netsuite.com/portal/resource/articles/financial-management/scenario-

planning.shtml

Monte Carlo Simulation https://www.investopedia.com/terms/m/montecarlosimulation.asp

Activity-Based Costing (ABC) https://www.investopedia.com/terms/a/abc.asp

Beyond Budgeting (BB) https://corporatefinanceinstitute.com/resources/fpa/beyond-budgeting/

Big Data Analytics https://www.tableau.com/learn/articles/big-data-analytics