Finance types have been using analytics literally for centuries. Analysis of balance sheets and income statements has long been the bedrock of credit and lending decisions. Financial analysts have developed extensive business models to assess the health of companies. As the keeper of the budget, the finance department provides other parts of the business with feedback about their performance relative to the budget.
Yet analytics is not a static thing. The scope of data that finance departments have to work with has expanded considerably over the past two decades. New applications have proliferated, enabling corporations to collect more and more detailed information about a range of corporate functions. More open standards have made data far more accessible than it once was. In addition, increased processing power and the continued push to make sophisticated applications more accessible have given managers greater ability to harness the power of analytic software. Predictive analytics that borrows a variety of techniques from statistics, game theory and data mining to improve forecasts of future business outcomes can be used with a richer set of operating and financial data to improve the quality, accuracy and timeliness of information to support business activities.
Finance departments cannot stand still – they must continue to take advantage of a widening range of data – especially more operating data – to provide deeper analysis of company results. The use of analytics will be important in the emerging recovery, since companies will be challenged to maintain or improve their profitability in more competitive and volatile environments.
Corporations thus will need to pay increased attention to managing profitability. Analytics should be at the center of this effort. Having a clearer picture of the profitability of products and customers is critical to crafting strategies and establishing objectives, as well as measuring results and providing the incentives necessary ensure these objectives are met consistently. Today, operating units have only a vague idea of the impact their strategies will have on the bottom line, and much of the financial analysis done in this area does not incorporate enough data from those operating units.
The fact is that few finance departments are mature enough to translate existing data and technology capabilities into meaningful insights and visibility into company operations. For this reason, increasing the scope and capabilities of their analytic role in the company must be an ongoing priority for finance departments over the next three years.
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Robert D. Kugel CFA – SVP Research