Utilizing Predictive Algorithms & KPI to Forecast Future
Following basic accounting principles is essential for success in any business. Sure, accountants are trained to use debits and credits to record business activity and create accurate financial statements. But a great CFO knows that in business, success requires looking below the surface level. Much like an iceberg, there’s a lot that goes below the surface or beyond the financial statements. Once a CFO uncovers those activities and understands what drives debits and credits, we can begin to predict future results.
As CFOs, we should measure inputs, like sales orders, to understand what activities are taking place below. We should then look at historical outcomes, such as gross margin on sales orders, to quantify the results. The magic happens when we can determine a correlation between those factors and from there create predictive algorithms. By harnessing measurable inputs, outcomes, and expected results based on our predictive algorithms, we can develop high-level key performance indicators (KPIs) that allow a business to not only predict the future, but also hold its team accountable for how effectively it is reaching its goals and targets. KPIs will also offer predictive and prescriptive indicators, not just rearview-mirror reviews, to better help a business bolster up its areas of weakness over time.
This level of predictability and accountability take away the mystery of the month-end close. Rather, the monthly financial statements confirm what the executive team already knows, allowing them to manage the business, its profitability, its cash flow, and the future in real time—not 30 to 60 days after the fact. And, when the results don’t match the predictions, CFOs know immediately that something has gone awry. We can address the challenge or analyze the algorithms to make sure they fit the current state of the business to get back on course.
Due to rapid advances in dashboard technology, it has never been easier to create and monitor KPIs in real time. These tools are radically influencing how executive teams can retrieve actionable and measurable data that shows how effectively their company is achieving its goals, while also helping them avoid an icy crash above the waterline.
