Corporate giants all over the world are going out of business and one of the reasons behind it is not doing proper research and ignoring the key performance indicators. Key performance indicators or KPI is a tool of performance management. KPIs evaluate the performance of the main activity of the business. In finance, key indicators are the Financial Ratios that are taught at the start of accountancy training. However, financial analytics in today’s world has moved on far beyond the mere calculation of the ratios.
Major retailers in America are closing more stores than ever with an estimated 12,000 stores closure only in 2019. US lingerie giant Victoria’s Secret has closed a dozen stores due to declining sales because it failed to stay relevant among the shoppers. On the other hand, the brands promoting body-positivity such as Savage Fenty, ThirdLove and Aerie are selling a record number of products. Procter & Gamble wrote down the value of its Gillette brand by $8 billion because men now prefer beard. Mark & Spencer is going out of business with the planned closure of its hundreds of stores because it failed to keep with the expectations of its customers. So, what did these businesses fail to notice? Were they not monitoring the changing trends? Or did they not keep an eye on their competitors’ products?
Digital and Analytical Transformation
Many things have changed in recent times. Majority of these changes are drawn by digital advancements and technology. Today, the customer has become more demanding and societal expectations from businesses are certainly more prominent than ever. Therefore, businesses need to reinvent themselves and incorporate changes if they wish to survive in this rapidly changing economy. CFOs, being the centre of all business activities, need to reinvent themselves as well.
Financial analytics is not related to finance anymore. Therefore, businesses expect CFOs to be more versatile and possess the ability to take roles in strategic planning, operations and human resources. They are also expected to not only report on past trends but also provide present and future financial information. There are various software available for data mining, highlighting trends, automatic calculation of financial ratios, etc. Hence, the calculation of financial ratios is not a big deal anymore. The ability to interpret the numbers into words and what a particular trend is showing is what is expected from an expert. Accountants and finance professionals today must have analytical and statistical skills to use the technology to interpret data and build business models that are predictive.
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How Should CFOs Reinvent Themselves
With the advancements in technology, the role of CFO is changing. It is not about reporting great data anymore. Instead, it’s more about better insights. To explain how and why a particular trend is changing and what is the reason for variation from plans and targets. CFOs use advanced financial analysis tools such as financial modelling, simulation, probability analysis, etc.
There are ten things that a CFO should evaluate every month:
Is our company making enough profits in relation to the capital invested? Are we allocating the right amount of funds in projects that have attractive markets? What is the reason behind declining sales? How intelligently and efficiently are we using our resources to generate competitive returns on investments?
2. Return on Investment
Also known as DuPont Analysis, identify what is the most important driver of ROI for the company. This approach of business analysis breaks down ROI or return on investment into three parts: profitability, asset efficiency and financial leverage. Profitability is measured by profit margin, asset efficiency is measured by asset turnover while financial leverage is measured by equity multiplier.
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Do we have enough cash in the bank to meet the expenses and pay bills in time? Will we be able to pay off our short-term debt? Why is the value of our current assets declining? Will be able to recover our debts?
4. Sustainable Growth
What is the current pace of growth of our company? Is the business growing too slow or too fast? How could we make growth more sustainable?
What are our current debt and asset situation? Will be able to repay our debts? Do we have enough assets to cover our debts?
What is our credit rating? Will be able to borrow more money if needed with the acceptable risk? What will be the interest rate that will be given to us if we borrow long-term or short-term loans?
How productive is our staff? Are we managing human capital efficiently? Do we have enough human resources that can carry out the work in changing technology?
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8. Value Creation
Do the product we make or the service we provide is making enough value compared to the cost that it is incurring? Is our product or service popular among the customers or is the trend changing?
How efficient is our utilization of assets? Are we using our resources to the fullest? What can we do to make our workforce more efficient? What our balance sheet is reflecting?
10. Investor’s return
Is our company attractive to investors? What can we do to make the investor’s return better?
In the End
In present times with all the advancements, it has become very simple to run a business. But all of these advancements and modern are only beneficial if manage things on a daily basis. Otherwise, all advancement and modern technology can have adverse effects as well.