The recent economic conditions have been a rude awakening for many finance functions. Unprecedented changes in macro-economic conditions resulted in a level of stock market volatility never witnessed before. Weaknesses in systems, data structures and processes were exposed as budgets and forecasts became less accurate. Previously strong stock prices lost significant value almost overnight. Clearly, very few could have predicted what has happened in the global economy in recent times, but it is the ability to predict the impacts and outcomes of certain events that determines business success or failure.
Often relied on for providing frequent, reliable and robust business information for strategic decision making, many finance functions were caught unaware and failed to provide an explanation and bring reassurance to various stakeholders. As a result, many relations were compromised. To ensure that they do not find themselves in a similar position again, finance functions need to be better prepared of what lies ahead. They need to:
• Have robust scenario planning processes and systems: Your systems should help you quickly run multiple customer demand scenarios, understand the value and inherent risk across the entire product range of your business and the impact on liquidity and cash flow. Subjecting your business model to various economic conditions such as mild recession, serious recession and a depression will help you develop and update contingency plans, containing all the details about the necessary steps you need to take to protect earnings and cash flow.
• Use flexible forecasts: The days of annual rigid forecasts are long gone. In an unstable economic environment, you need to ensure that the impact of any changing market conditions are adequately reflected in the latest financial forecasts. This means being in a position to understand the impact of huge swings in commodity prices, consumer demand, exchange rates, inflation rates, interest rates and availability of funds on business performance. Delivering accurate forecasts of future performance will help your business succeed in turbulent times.
• Have a mindset shift: When assessing the impact of volatility on business performance, focus on the impact on cash flow and liquidity, not just margin and profitability. You need to balance the emphasis between profit forecasting and cash flow forecasting. This calls for a thorough understanding of the drivers of business results and the difference between overtrading, cash flow and profit.
• Take advantage of Business Intelligence and Analytic tools: In today’s uncertain economic environment, having the right information, at the right time and in the right format ensures that strategic, well informed decisions can be made, thereby mitigating risk. In fact, research undertaken by Gartner indicates that by 2012, more than 35% of global companies will fail to make informed decisions about changes in their business and markets owing to a lack of information, processes and tools.
Business Intelligence solutions help you integrate crucial data, turn information into a useful asset, identify and manage business risk, identify key under-performing areas as well as anticipate internal and external opportunities. This puts you in a better position to plan ahead and make decisions that reduce the impact of risks on the business. Through this early risk identification, you can also capitalise on the issues that have been identified as potential risk and turn these into opportunities.
By implementing advanced analytics, you will be able to segment strategically large amounts of existing business data and spot patterns and trends that aid the decision-making process.