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The Evolution of Financial Modeling and Budgeting Through Predictive Analytics

At the fast pace that the world is changing, it seems hard to keep up with the latest trends in technologies, the newest software updates, and the must-have applications that make your life easier.

For Chief Financial Officers (CFOs), this speed of change is making financial information outdated in a matter of minutes, not months. As financial models, budgets, and forecasts are being modified, adjusted and improved, the need for predictive financial modeling has become more apparent. As companies begin to consider what this means for the future of finance, and how to operate on the most competitive levels, serious conversations must evolve regarding financial modeling processes. This is relevant not just for large companies, but also for middle-market companies and small businesses.

At a high level, predictive financial analysis allows companies to gain quicker insight into metrics between months and quarters in order to make faster, real-time strategic and operational decisions, as well as year-over-year comparisons. Predictive analysis can be a cultural change for most in regard to traditional budgeting, as it’s driven by challenging the status quo and discarding ineffective budgeting procedures.

The CFO of Honda, Martin Sanders, discusses how technology is changing business:

“Businesses who prove to be the most successful are those that can monitor and analyze their budgeting forecasts in real-time to react to current business events. The world is changing and traditional processes cannot meet the needs of the past, present, and future.”

So why do CFOs need to adapt? It has become more apparent today that traditional budgeting processes are providing less value to the workplace. 29 percent of top organizations have recognized inaccurate budgets and financial forecasting as key inhibitors in planning for current and future operational targets and goals. Traditional budgeting models do not provide experts with information quick enough to produce metrics that are requested in this day and age. Poor communication and the lack of real-time data can make performance reporting difficult. While predictive analysis does not tell the future, it does offer a more accurate look on current profits, costs, cash flows, , and how these can be met or improved upon.

Occasionally, when new ideas are implemented or encouraged, they are sometimes met with resistance. Those siding with traditional are most often worried about the potential inaccuracies, or how implementing a whole new model will affect an employee’s day-to-day activities. A common misconception about predictive analytics is that it adds a stronger workload to Financial Planning and Analysis (FP&A) employees. However, once fully adopted, it creates less manual work, and allows for FP&A employees to focus their time on more high-value, high-return activities.

The world is changing too quickly for companies to enjoy the luxury of not investing in the most cutting-edge technology, processes, people and tools. In fact, market volatility is the number one challenge that financial companies face in planning today. With business models and predicted forecasts constantly changing, it’s important for companies to ask themselves who in the business is best suited to influence the company’s future and monitor market volatility. The answer lies within finance, specifically strategic planning. Today, CFOs are 24 percent more likely than their employees to recognize that change needs to be made in budgeting methods in order to ensure the success of their company in the future.

Changing business conditions provide CEOs and business owners with the opportunity to access new information that will ultimately lead to smarter, better and faster decisions for the company. With predictive financial analysis, organizations are able to access accurate snap shots of their company’s performance at any moment in time. If a company commits to this type of state-of-the-art financial analysis, it can become more than a modeling tool. There is the potential to impact the whole company’s culture, as others in the organization will begin to see the effectiveness.

Predictive financial analysis allows companies to think and predict information into the future, without losing sight of what was accomplished in the past and present. Smart technologies allow for dynamic planning to take shape, through connected dashboards, real-time reporting, and visualization tools. CFOs are able to monitor the road ahead for changes in business, without changing key targets or metrics along the way. CEOs and business owners who are dynamic strategic planners are 46 percent more likely to request predictive analytics. Being able to predict future budget scenarios allows for CFOs to share informed decisions and improve confidence amongst their peers.

Overall, the importance of adopting predictive financial modeling is crucial for the finance function. With CFOs leading the charge from the top down, employees throughout the company can embrace change and become digital leaders, too. With predictive modeling, employees can analyze real-time data, predict future budgeting results, and work to alter strategy in the moment when it counts the most. Plans, personnel, and value can change very quickly, and it is always critical to monitor your company’s expenses as frequently as possible. Adopters of predictive financial modeling will add a significant advantage to companies that are looking to stay ahead of the competition.

If you are a small business owner or CEO within the San Francisco Bay Area or Silicon Valley, in need of an experienced part-time CFO to help your company improve financial and operational reporting, cash flow, accounting and billing process management, as well as profit margins, our highly skilled outsourced CFO services provide direct access to high-quality expertise in a cost-effective manner.

CFO Growth Advisors (CGA) specializes in unique and highly effective growth strategies that are tailored to help companies grow more quickly and efficiently while improving sales & profit growth. Contact us to learn more.

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