Robert Kugel's Analyst Perspectives

Finance Analytics Innovation

Posted by Robert Kugel on Jul 21, 2011 8:48:08 AM

Our recently completed benchmark research on how finance departments use analytics makes clear that while they have a distinct competence in this area and execute the basics well, a majority of companies are immature in their use of advanced finance analytics. Regardless of industry or geography, few finance departments use predictive analytics or delve into important areas such as strategic profitability management. This is of note because these undertakings are no longer difficult to pursue: With the growing availability of in-memory processing and the improved ability to work with large data sets, information technology now makes it possible for finance departments to embrace these to enhance the effectiveness with which they execute core functions.   

 Predictive analyticsis a powerful tool that most companies can use, but our benchmark research on finance analytics finds that only 11 percent of finance departments employ this technique. To be sure, predictive analytics typically are embraced to help plan and forecast, but they also are an especially effective monitoring tool that executives and managers could be using to focus attention on potential problems rather than always fighting fires after they’ve broken out.  

 For example, almost all companies have a receivables aging process to collect overdue amounts from customers. Why not take this a step further? If analysis shows that a specific customer reliably pays within, say, 28 days, why not set an alert if payment is not received by day 32 that would trigger an automated process for contacting the customer? The message can and should have a positive tone, thanking him or her for past prompt payments and asking if there is some problem that needs resolving. Not only will that speed collections (or start a problem resolution process sooner), it also means that the first dunning communication will not have a negative tone.  

 Predictive analytics also can be used to improve the accuracy of cash forecasting by providing a finer-grain approach to projecting receipts. But the point here is that rather than consigning financial analytics to a rear-view-mirror view, more companies should be routinely analyzing accounts proactively to identify slow and fast payers to see if there are systemic issues that should be addressed (for example, higher-than-average billing disputes or partial shipments) or actions that could be taken (such as providing or withholding incentives) to manage receivables.  

 Analytics can be used to optimize payables as well. In today’s low-interest-rate environment there is limited value to holding onto excess cash, especially since incentives for early payment can provide a high return. Does your company manage payables? Can it?  

 Analytics also are a key requirement for managing profitability strategically, which I believe ought to be a core function of effective finance organizations. To be sure, a corporation usually has a strategy and almost always has profit objectives, but the two may not be well aligned. Individual departments and business units typically focus on their own profit or cost objectives, but few companies have a process for systematically managing profitability across the whole business using a consistent analytical framework. So, product organizations try to maximize product profitability, sales organizations may try to maximize revenue, call centers may try to minimize costs. Individually, each of these moves may be rational, but collectively they can work at cross-purposes, and few companies focus on managing the sometimes-conflicting objectives of individual parts of the business. Analytics provide the rational framework for optimizing the tradeoffs. 

 Information technology is, as is so often said, a necessary but insufficient component of making finance departments more of a strategic resource for companies. Today’s analytics are made possible by improvements that have taken place in software and technology, but they also must be incorporated into consistent processes and managed properly. Moreover, I believe that the ultimate prerequisite is a CFO sincerely committed to making a difference who has the necessary organizational skills to make change a reality. 


 Robert Kugel – SVP Research 

Topics: Predictive Analytics, Office of Finance, Finance Analytics, Analytics, Business Analytics, Business Performance Management (BPM), CFO, Financial Performance Management (FPM)

Robert Kugel

Written by Robert Kugel

Rob heads up the CFO and business research focusing on the intersection of information technology with the finance organization and business. The financial performance management (FPM) research agenda includes the application of IT to financial process optimization and collaborative systems; control systems and analytics; and advanced budgeting and planning. Prior to joining Ventana Research he was an equity research analyst at several firms including First Albany Corporation, Morgan Stanley, and Drexel Burnham, and a consultant with McKinsey and Company. Rob was an Institutional Investor All-American Team member and on the Wall Street Journal All-Star list. Rob has experience in aerospace and defense, banking, manufacturing and retail and consumer services. Rob earned his BA in Economics/Finance at Hampshire College, an MBA in Finance/Accounting at Columbia University, and is a CFA charter holder.