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to weathering the financial downturn with advanced analytics
AbouT This whiTe pApeR
AnALyZing business
PeRfoRmAnce
The current economic climate is a crucial test for companies
of every shape and size. Your business model must be resilient
enough to maintain profitability in changing conditions,
and flexible enough to capitalize on those opportunities
that do present themselves. Organizations are often guilty
of entrenching themselves and continuing to operate in
ways that have always worked in the past, hoping they will
continue to do so in the future.
In an economic downturn, the Chief Financial Officer (CFO)
faces a host of difficult questions on a daily basis. How can
we improve cash flows? How can we improve productivity?
Where can we better distribute resources? What can we do
to better predict performance results? How can we better
manage inventories and cut costs?
This white paper will explore common ways that businesses
protect themselves in an economic downturn, the pressures
faced by CFOs during such a time, and why the need for
comprehensive analytics and reporting is heightened to
make sound decisions in pressured situations.
CosT CuTTing STRATegies
As revenues drop, cost cutting is generally the first strategy
businesses employ to maintain profitability. In fact, shares of
Gap (GPS) jumped 27% in November 2008 even as the retailer???s
sales fell 8%, due to successful cost-cutting that improved
profitability1. Cutting costs is often seen as a precautionary
measure, best done earlier rather than later to buy time for
further decline.
The first step to cost cutting should be to perform indepth
analysis of your business to understand which areas
are performing and profitable, which aren???t, and what the
trends are. For example, what is your business performance
by geography and region; by product line; against plan; by
channel, by month, quarter??? and so on. You may perform
???outlier??? analysis, such as reports on the least profitable
products and stores. This may lead to cost cutting based on
parts of the business that are least profitable ??? for instance
retailers often cut unprofitable outlets to cut their losses and
---------------------------------------------------- focus resources on outlets that are performing.
1 BusinessWeek, November 25, 2008
CosT CuTTing
STRATegies
02
03 OpTimiZing CAsh Flows
Selling moRe To
exisTing CusTomeRs
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05 The pressure on CFOs
06 conclusions
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Reducing heAdcounT
TighTening invenToRy
mAnAgemenT
CuTTInG unpRoven
mARkeTing
If you fully understand your business performance and
which areas are being hit hardest by a downturn, where
to reduce headcount often becomes apparent. From the
previous example, cutting retail outlets will obviously lead to
a reduction in headcount. For a service business, analysis may
highlight areas where staff are now under-utilized. Analysis
may also help to identify discrepancies in resourcing within
your business, for example looking at sales per employee by
different geographies to assess productivity.
For companies in the manufacturing and distribution
sectors, inventory often represents their most important asset,
and also where most money is tied up and difficult to liquidate.
It is critical in a downturn to adjust inventory levels to changes
in market demand. If demand drops and inventory stocks are
too high, cash flow will be affected and unnecessary costs
incurred in the areas of insurance and storage. If inventory
turn slows during a downturn, stock may become obsolete
and lose value. Constant analysis and reporting on inventory
becomes critical so that your business remains responsive.
Few businesses these days would slash marketing budgets
in a random manner. After all, one of the challenges during
a downturn is not enough revenue, and it is marketing in
combination with sales efforts that will be relied upon to drive
more revenue. The basic principle in allocating or reallocating
marketing budgets should be proven performance. If you are
tracking your marketing campaign performance, you will be
able to review and analyze what has worked, what hasn???t, and
which campaigns are performing in a changing economic
environment. Many businesses will adjust their marketing
messaging or product offerings during a downturn, and
ongoing measurement and adjustment will be required.
Any financial executive knows that cash is king, and no
more so than in an economic downturn. Creditor and debtor
behavior can shift rapidly, throwing into sharp perspective
just how important a well managed cash flow strategy can
be. Decision-makers need to be acutely aware of sales results
and credit terms, but also be able to accurately and quickly
generate debtor reports and cash flow forecasts.
In a volatile market, financial managers generally face the
double challenge of being pressured to tighten credit terms,
combined with customers increasingly pushing their credit
limits. To remain in control of credit limits and cash flows,
finance managers must be able to recognize symptoms of
changing credit patterns in both vendors and customers.
OpTimiZing CAsh Flows
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This requires ongoing analysis and reporting to delve deep
into past and present behaviors and rapidly identify changes
and issues in order to manage them effectively.
Businesses and consumers alike respond to an economic
downturn by tightening their budgets, lengthening decision
times, and looking to competitors for a better deal. This makes
existing customers more valuable than ever. Considering that
the costs associated with attracting new customers far exceed
the costs of maintaining relationships with existing ones, it
is not surprising that most businesses deem customers as a
precious resource to be protected. Recent estimates suggest
that improving customer retention by 5% can enhance
profitability by anything from 25-85%2. Consequently, your
organization???s ability to retain customers, and increase the
volume of sales from that base, is instrumental to surviving in
increasingly lean and turbulent markets.
Common customer analytics include:
?? Who are your most profitable customers? Do you know
exactly who your most profitable customers are based
on recent sales data? Understanding who they are and
their characteristics may help you to further narrow
where you should target your lead generation strategies.
You may also wish to review their satisfaction rates and
customer service levels to ensure that the most valuable
part of your business is looked after and protected.
?? Which products are your most profitable? If you find
that your most profitable products are being sold in
small numbers, you could offer incentives either to the
customer base or to your sales reps to lift sales.
?? Who are the most likely targets for complementary
products? Analyze your customer base to determine
where you could focus your efforts for promotions or
upselling campaigns.
?? When do customers buy? Review historical buying
patterns. If you are more aware of when customers are
likely to buy, you can ensure that sales and marketing
campaigns target them in the time leading up to this.
?? What is your customer retention rate? Examine your
customer churn data and consider reaching out to
customers that have recently left you. Perhaps they felt
neglected in terms of service and account management
but were otherwise happy with your products. Or
perhaps their new supplier isn???t as good as they
promised.
Selling moRe To
exisTing CusTomeRs
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----------------------------------------------------
2 Reichheld, F. and Sasser, W. (1990, Harvard
Business Review, Sept-Oct, 1990,
pp 105-111.
The pRessuRe on CFOs
In times of economic slowdown, directors and investors
become increasingly demanding for more frequent and
accurate forecasts and reports. Long-standing assumptions
are questioned, and the business is dissected from every way,
searching for problem areas and new opportunities. This puts
immense pressure on CFOs to provide views of data from
multiple sources at more granular levels and more frequent
time intervals. If this entails manual processes and endless
hours in spreadsheets, the finance team will struggle with
extra reporting demands, and is likely to produce reports that
are prone to errors. An investment in the right tools can be far
more valuable than sidelining resources for endless manual
reporting, and is also an investment in the longer term that will
ensure that the business is agile and responsive to any future
change.
Some of the reasons that the CFO must have analytics
capabilities in an economic downturn include:
?? The volume of reporting and forecasting required
increases. Relying on manual tools and processes will
mean delays and inaccuracies in providing information
back to business decision makers.
?? If the CFO is buried in producing reports, less time can
be spent interpreting the data and helping the business
to act on findings. CFOs today need to provide strategic
advice back to the business as the most valuable part of
their job.
?? Formal, structured reports are not enough. Many
established businesses have long-standing reports in
place. However a downturn requires ad-hoc, instant
questioning of the latest data to determine trends,
answer questions and challenge assumptions. This
requires far more speed, agility and flexibility than is
necessary for ???standard??? management reporting.
?? Manual processes must be minimized. To maximize
performance from the finance team, the CFO must ensure
that minimal time is spent actually pulling data and
producing reports, and maximum time on interpretation
of data and communicating it back to the business.
?? Data must be communicated accurately and easily. For
example, providing decision-makers with dashboards,
scorecards and charts help the CFO to convey
performance metrics instantly, rather than using tabular
reports. If formal report packs need to be generated, it
is much more effective to use an online reporting tool
that enables multiple types of data to be pulled together
and for the finance team to collaborate, rather than using
multiple offline, unsecured tools.
RAmping up
foRecAsTing and
RepoRTing
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Conclusions
The past few years have seen an increased investment in the
use of business intelligence technology, and case studies
show that users are seeing a return on those investments. In
a tougher market, purchasing new technology can often be
delayed until times are more certain. Contrary to this, slower
times of economic growth can actually be the best time to
invest in technology that helps to maximize performance
and enhance decision-making, and secure a company???s
future.
Decision-makers who embrace business analytics
applications will find that the initial investments in such
tools are a relatively low cost method of maintaining a
competitive edge. Slow business periods are also often the
best time to launch new initiatives, for example, vendors
will find that implementation times are shortened when
business is slowest. This is due to excess capacity in the
times of business slowdowns, whereby acceptance of new
systems is higher and more thoroughly implemented.
Often organizations are loath to change, preferring the devil
they know such as spreadsheets, even when they realize
the inaccuracies and operational inefficiencies of remaining
stagnant. Smart organizations understand that the real
question is not whether your company can afford an
investment in business analytics, but in such lean markets,
can you afford not to?
Understanding that business analytics can be your
organization???s greatest shield against a market downturn
is a significant advantage to all decision-makers. By
transforming raw data into business intelligence
and undergoing rigorous questioning and ongoing
measurement, your business will be better placed to make
accurate and informed strategic decisions, ensuring your
organization emerges from a downturn leaner, and in a
strong competitive position.
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CFO Cost Cutting Cash flow optimization