Use past, present and future data to get a complete view of your business
I have always had a keen interest in physics and while I was an engineering student I took a great number of physics courses, ranging from classical physics to contemporary subjects of quantum mechanics and other theories. I remember that the greatest challenge of the time (and still is) for physicists was to find the “Theory of Everything”.
According to a definition in Wikipedia The Theory of Everything is a hypothetical, single all-encompassing, coherent theoretical framework of physics that fully explains and links together all physical aspects of the universe. This is regarded the single greatest unsolved problem in physics, yet many believe we are closer than ever to solving it.
While I had very little use of physics theory during my years as an engineer in several technology companies, I have even less use of it now in my particle of accounting and finance as they relate to management consulting. Nevertheless, I am still fascinated by the subject and continue to read up on the latest developments in the field.
The field of accounting and finance is often regarded as necessary for internal management reporting as well as compliance purposes such as financial statement preparation and distribution, tax compliance, etc. One important function of any finance department is to provide management with a complete view of the business, past, present and future through ideally employing a process I call “Analysis of Everything”.
Any experienced manager of an enterprise (CEO, CFO, Managing Director, etc.) knows that in order to be able to navigate the company though whatever storms come its way, while growing it to meet investors’ and owners’ objectives, there must be a clear and timely understanding of information generated by the business in response to actual operations and results.
There must also be information representing planned and anticipated results. Other data in areas such as sales prospecting and marketing should supplement the actual results and together provide insight to planning and forecasting future revenues, growth or expansion.
The first set of data is available through actual accounting transactions that take place in each accounting period (e.g., a month in a fiscal year). This comes from the accounting or ERP software database.
The second set of data is the output of the planning and budgeting function that each organization must have and continuously maintain. This comes from the planning and budgeting database.
The third set of data is the output of the CRM database.
Imagine a system that looks at the CRM data output and assists the planners in preparing a revenue budget with associated costs. Using established industry and company specific metrics and KPIs, this data can affect the way important parts of the budget are assembled. With drivers that use data from the CRM, and in conjunction with specific KPIs and metrics, the data that populates the revenue portion of the budget can be established with a higher degree of confidence.
The same goes for expenses that depend on these expected revenues. In a products sales scenario, cost can be driven by sales. In a manufacturing company cost, raw material and WIP inventory can be derived from forecasted revenue. Employee headcounts can be forecasted based on this data, as well as other variable and semi-variable expenses.
Then, in an intelligent and automated planning and budgeting system, future period financial statements are completely and accurately produced. From a future period Balance Sheet and Statement of Cash Flows, one can see the future financial health of the organization; its cash needs along the way with the need to borrow, the ability to retire debt, the need to acquire new fixed assets and so on.
As many pieces of the budget are interconnected and are affected by drivers and KPIs, changes can quickly be made when actual results are available. These changes will trickle through the planning model and automatically update every single budget line and GL account already assigned to it. All defined reports and financial statements will also automatically update.
Now imagine a control center where you see data from all the three sources listed above, arranged in a way meaningful to you, only displaying the data you really need to see and understand, in a format you are most comfortable with when viewing and analyzing. This information is puled out of the terabytes of data flowing around the enterprise, only showing you what you really need and giving you the ability to slice and dice this data in any way you desire.
Now, since this process is nearly 100% automated, with the majority of dependencies and business rules already established and locked in, your data becomes so much more reliable and credible, almost in real time, updated when the actual results come in through a seamless interface with the ERP database, while the planning data is waiting for its actual counterpart to be available for analysis and comparisons.
When the actual data arrives through the pre-established interface or data-bridge, it instantly becomes visible in the control center. You immediately see and understand how you did compared with what was anticipated. You can drill back through to the source data and see what caused certain results to be different than anticipated. You can make decisions and take corrective action before the situation worsens. You may decide to revise the forecast once you understand the new actual results. You may make decisions that will immediately affect growth or take advantage of new opportunities as revealed by the data available to you.
At the same time you can continue to monitor the “Future Financial Health” of your organization, see if you need to increase borrowings in a future period, validate that you will meet your banker’s loan covenants, or realize that you won’t be able to tap more than a certain mount of the credit line available to you in certain future periods.
You may decide to make changes that will improve these future anticipated financial results, dispose of assets sooner, minimizing future losses, acquire new assets in anticipation of future production needs, plan to recruit additional employees; just about any business decision can be made with a lot more confidence.
And while the “Theory of Everything” is still a hypothetical theoretical framework with many physicists full of hope and aspiration of reaching a definitive conclusion of its existence and finding proof of its workings, “Analysis of Everything” is becoming a reality today, driving enterprises to excellence never before possible. As with most new technology, this surely is to become widespread and affordable to even smaller organizations.