In today’s competitive global marketplace, analytics is an essential element of staying competitive. Financial analytics help an organization understand past and current performance, predict future performance and enable smarter decision-making.
Here are five prime financial analytics that every organization should be tracking.
Predictive Sales Analytics
Sales revenue is the driver of any company, so projecting how much revenue a company will receive has strategic implications. In its report, McKinseyOpens a new window shows that predictive sales analytics calculates how accurate a sales forecast is and provides insights into how to improve future sales. In addition, these financial analytics reveal trends in past sales or use predictive methods, such as correlation analysis.
Financial managers use this tool to plan for and handle the peaks and troughs that sometimes happen. For instance, many retailers experience approximately 25 percent of annual sales during the weeks between Thanksgiving and Christmas. With prior knowledge of sales trends, staff and budget planning is more effective.
Customer Profitability Analytics
All customers may be right, but not all customers represent profit for a business. Typically, customer profitabilityOpens a new window proves the 80/20 rule, which states that 20 percent of an organization’s customers produce 80 percent of the profit. Determining which customers fall into that profitable 20 percent is key.
By analyzing the profitability of specific segments of customers, a business can extract useful, actionable insights. Customer profitability analytics can identify which customers respond to which marketing campaigns by revealing what they purchase. This helps to direct future marketing efforts.
Product Profitability Analytics
To remain competitive, organizations must analyze the source of their profits as well as the source of their losses. Product profitability analyticsOpens a new window can produce insights into specific products rather than those of the company as a whole. Each product and its costs could be examined individually, or an entire product range may be analyzed. In addition, apportioning costs across a variety of products that share production processes can be done more accurately.
One word of caution: A company may use loss leaders as attractive marketing elements. These products need to be identified rather than eliminated from the line.
Cash Flow Analytics
Day-to-day operations require a certain amount of cash on hand to run efficiently. Wages, utilities and vendors must be paid. Tracking the workflow within an organization is essential for measuring the health of a company. Cash flow analyticsOpens a new window use real-time or retrospective indicators like the Working Capital Ratio and the Cash Conversion Cycle. It may also use tools such as regression analytics to estimate future cash flow.
In addition to managing cash flow, analytics supports an array of corporate functions. This includes providing insights for accounts receivable to determine which customers are likely to pay on first contact by collection staff.
Value Driver Analytics
Many organizations have a vision, sense of direction and primary objectives. Frequently, these objectives are front and center on the strategy map, which pinpoints the value drivers. These value driversOpens a new window act as important levers the organization needs to optimize if it’s to meet the strategic goals.
Value drivers may frequently be based on assumptions. These assumptions must be tested for validity. For instance, if price is a value driver, the organization assumes that price influences revenue and sales. However, that hypothesis should be tested to determine its correctness.
These five financial analytics represent only a few of the options available. However, they are five of the most important for any organization to track and address.