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Innovative Controlling With Predictive Margin Management

By Henner Schliebs

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We all know about the “new normal” for today’s chief financial officers (CFOs) from several recent blogs. Recently, I gained some interesting insight into the challenges of a CFO at a forum for financial management in Germany. The focus was about how the CFO can better manage the enablement and the development areas highlighted in the wheel.

Successful CFOs have managed to elevate their positions within their companies to the highest levels, becoming strategic advisors, drivers of initiatives, and business partners to all revenue-enabling organizations. Some of them even become the successor of parting CEOs these days, which demonstrates their full value to the company.

Innovative Controlling With Predictive Margin Management image Henner 300x289To become just such a strategic advisor, finance needs to take a new innovative approach that crosses the border of the “regular” function within finance. With the help of sophisticated analytics solutions, corporate finance departments can bridge the gap between strategic and operational decision-making.

What first comes to my mind when talking about cross-functional exercises is the low hanging fruit — profitable customers and products. Organizations have many people involved in the proper management of margins, including employees from marketing, the supply chain, production/service generation, and human resources.

Typically these functions come together “data wise” in Excel, since the source of information mostly resides in ERP systems, CRM systems, or a profitability and cost management system (if there’s an advanced finance system landscape). It’s hard to get the data management properly deployed.

What if your organization could have all its margin data in one system?

With the proper analytic tools, you would be able to gain a great overview of your various key performance indicators that define the margin. Dashboards give you a high-level overview, but if integrated with the core systems and enabled for drill-through, they can provide for detailed information. The controller and the marketing guy can easily see the profitable customer segments with cost profiles showing areas of improvements.

Sophisticated analytics solutions allow you to:

  • Check the overall profitability in a customer or product segment to identify the neutral and the destructive ones.
  • Perform a deeper drill-down into any given segment as needed. Visualizations like waterfall charts demonstrate the value creation/destruction within that segment and compare profitability over time and plans.
  • Visualize data in a regional view and even group per criteria like customer size or maturity. You can even include external facets of the business like economic indicators or weather. Then you will be better enabled to leverage statistical algorithms for advanced analysis.
  • Use a cluster analysis to get a decent view of customer or product groups and their contributions to the margins. This enables you to find the correlations between various dimensions of your customers/products.
  • Make correlations to external data. For example, you can track how profits are affected by changes in external factors (like the price of a resource that is relevant to your business).
  • Have the system calculate a forecast. Why not compare it to existing plans/forecasts that are coming from your planning system? Easily identify gaps, share the trend with planning executives to correct potentially wrong plans, and increase the quality and closeness to reality of the process.
  • Create a model to optimize contribution to margin. Simply let software do the math. For example, you can create a decision tree that reveals that “…a typically high profit generating customers has a size of 350 employees, revenues between 500m and 1bn, is purchasing a certain market basket and pays on time using a certain commerce platform, and we have close contact to their CFO as well…”
  • Use the results to simulate some “what-if” scenarios, like how a change of distribution channel might result in a positive impact on your margin of 10% for customer segment “SME Nordics”. Or figure out how a change in package size can have a direct impact on your bottom line.

There’s no justification for not making use of modern technology – it’s on its way to becoming a commodity. Some software vendors even provide so called personal editions of their tools so you can try them out.

Help your CFO become more important. It elevates your position too, and serves your company by helping it achieve sustainable success. Make predictive margin management your mantra and transform yourself into your company’s champion.

Illustration credit: Ernst & Young