Predictive Finance

Predictive FinanceHenner Schliebs, April 10, 2023

© 2013 SAP AG or an SAP affiliate company. All rights reserved. 2

Finance Excellence: Guidance on, Guiding for the future

Core functions of effective organizations :

Reporting of historic financial information

AND

Guidance on and guiding expected (future) results

source: Association of Accountants and Financial Professionals in Business (IMA): Conceptual Framework for Managerial Costing


The Finance Conundrum: What is the future ?

Based on the past

what is likely going to happen ?

Which factors are correlated with others or impact the future ?

Plans tell us where we want to go (vision), not where we are heading (direction)

Vision (Plan)

Direction (Reality)

Indicators (Trends)

Past Performance


Predictive FinanceExamine the past. Extrapolate the future

Examine current and historical data to make representations about the future

Representations close enough to be useful; risk and uncertainty are inherent

Encompasses (formal statistical) methods

Exploits patterns, trends, variances, and correlations

Terms similar to “prediction “include but are not limited to “estimation”, “approximation”, “projection”, “forecasting”, and “extrapolation”

http://en.wikipedia.org/wiki/File:Extrapolation_example.svg

SAP Predictive Analysis


What if you could…Address your future finance needs by anticipating them today

Sense & Respond Predict & Act

RawData

CleanedData

Standard Reports

Ad Hoc Reports &

OLAP

Generic Predictive Analytics

Predictive Modeling

Optimization

What happened?

Why did it happen?

What will happen?

What is the best that could happen?

Co

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Ad

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Maturity of Analytics Capabilities

Finance Analytics influenced decision making processDECIPHERING DATA > SENSING & RESPONSE > PREDICTION & ACTION


Predictive FinanceAnalyses and Optimization scenarios for Profitability and Performance

Cost, margin and other financial trends

Time series (Forecasting)

Profitability analysis (A also bought XYZ)

Associations (Identification)

Optimized performance management

Classification (Decision Trees)

Proactive detection of financial risks

Outliers (Anomaly detection)

Late payers - attributes (Receivables)

Clustering (Segmentation)

Company performance (external factors)

Classification (Correlations)

Analyze

Optimize


SAP Predictive Analysis - Key Finance process component

SAP Predictive Analysis allows end-to-end SAP coverage for the record-to-act management process. Results of the analysis process step are used to take action (plan, re-plan, or management action outside SAP system)

Record Report Analyze Act

SAP Predictive Analysis

SAP Net Margin Analysis

SAP Business Planning

SAP ERP

SAP EPM

BOBJ BI platform

SAP Accelerators

SAP ERP foundation

SAP Accelerators

Record-to-act management process


Manage Financial Risk

SAP Predictive Analysis - Finance Value Proposition

Optimize business opportunities

Outperform Financial Objectives

Reach your business goals faster by turning dormant data into new opportunities

Stay agile and gain a competitive edge with efficient forecasting and planning

Solve problems before they happen by exposing hidden risks and hazards

Analyst View


Importance of the CFO and the Finance Organization

Changing role of the CFO

CFO are the most influential personas in the corporation, trend: replace the CEO

(advanced) Analytics is a top topic for CFOs (cfo.com study, Deloitte, BBRS article and many more)

Gartner

BBRS


Cfo.com research (published soon)

42% spend more than half their time on low-value manual activities

Cross-departmental analysis: finance as a service functionAdvanced Analytics – Enterprise

BI - Visualization

TOP: Margin Management


Functions benefiting from Predictive Analysis

UK USA

Loud House research


Powerful as an assessment tool Assess results sooner and with greater certainty

Respond faster to actual outcomes

Can be applied broadly across the company or to a specific customer, especially effective when businesses are dealing with well-established cyclical patterns

Valuable tools for performance management. Automate planning or forecasting and enhance accuracy

Set benchmarks to assess performance

Generate alerts to accelerate action

Ventana ResearchPredictive Analysis - Predictive Analytics Support Human Judgment

http://robertkugel.ventanaresearch.com/2011/06/10/predictive-analytics-support-human-judgment


… receivables aging process to collect overdue amounts from customers. Why not take this a step further? If analysis shows that a specific customer reliably pays within, say, 28 days, why not set an alert if payment is not received by day 32 that would trigger an automated process for contacting the customer?

… accuracy of cash forecasting by providing a finer-grain approach to projecting receipts. Rather than consigning financial analytics to a rear-view-mirror view, companies should be analyzing accounts proactively to identify slow and fast payers to see if there are systemic issues that should be addressed or actions that could be taken to manage receivables

… optimize payables as well. In today’s low-interest-rate environment there is limited value to holding onto excess cash, especially since incentives for early payment can provide a high return. Does your company manage payables? Can it?

… managing profitability strategically. Individual departments and business units typically focus on their own profit or cost objectives. Product organizations try to maximize product profitability, sales organizations may try to maximize revenue, call centers may try to minimize costs. Individually, each of these moves may be rational, but collectively they can work at cross-purposes, and few companies focus on managing the sometimes-conflicting objectives of individual parts of the business

Ventana ResearchPredictive Analysis - Focus on potential problems rather than fighting fires

http://robertkugel.ventanaresearch.com/2011/07/21/finance-analytics-innovation

Customer Success Storyto be completed


Customer Use CasePredictive Analysis – Warranty Prediction: Cash Optimization


Industry / Use Case Challenges• Raw materials have very high price volatility• Tens of thousand of finished products with complex BOMs• The price scenarios depend on the production plants and distribution countries• Huge volume of calculations

Solution DetailsSAP PIO has provided an high performance algorithm that calculates the costs of each finished product• Computes all the production costs (raw materials costs, packaging costs, manufacturing costs, distribution costs) using the sales forecast• Adjusts costs using price scenarios defined for material groups per month and country• Calculates the costs and quantities at the lowest granularity• Users may analyze data at arbitrary levels of granularity using drill-down.

Benefit Details • The customer is able to forecast the production costs and quantities• SKU-based sales planning can be seen in a P&L view• Empower the customer to act preemptively

Customer Use CasePredictive Analysis –production cost modeling using price scenarios and demand forecasts


Industry / Use Case Challenges• Difficulty understanding impact to cash flow of highly seasonal business, made more complex by the delays between bookings and billings• Accurately forecasting revenues and margin to identify underperforming parts of the business• Taking advantage of each supplier’s / buyer’s unique seasonal behavior• Recognizing growth rates and performance differences by region• Understanding demand for parts vs. products vs. bundled solutions, and any cannibalization effects

Solution DetailsThe use case addressed predictive scenarios of:• Seasonality factors for sales levels based on booking time series (trend analysis)• Clustering of sales nodes based on bookings, planning, and assignments (performance analysis)• Clustering of products based on seasonality of bookings

Benefit Details • Better respond to customers and deliver tangible business value• Reduce time to transform information into insights and improvement in the quality of decision-making on those insights• Ultimately drive higher profitability and growth

Customer Use CasePredictive Analysis – cash flow optimization

ConclusionNecessary exercise in the 21st century


Summary

1Guiding an organization into a financially positive future is a core function of Finance

2Plans tell us where we want to go (vision), not where we are heading (direction) or how to best get there (optimizations)

3SAP Predictive Analysis creates extrapolations of the future (as analysis and for optimizations) that enable high value business scenarios with superior business return


Advanced Analytics & Agile Visualization – check it out

SAP Lumira – Personal Edition (free) SAP Predictive Analysis (30 day trial)

http://bit.ly/personallumira http://bit.ly/PA-test

http://bit.ly/personallumira

http://bit.ly/PA-test

© 2013 SAP AG or an SAP affiliate company. All rights reserved.

Henner SchliebsAnalytics Audience Marketing

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Predictive FinanceDEMO


Predictive Finance


… select data set


Grid (view)


Facets (view)

Trend and Forecast


Visualize - Actual and planned profit


Predict - Exponential Smoothing


Predict - Results (Forecast / 2011)


Results - Chart


Visualize - Actual, forecasted and planned profit


Visualize - Planned and forecasted profit (shortfall)


Visualize - Baseline (2007), trend (2008-2010), and forecast (2011)

Correlation


File: external data


Mapping using calculated timestamp


Baseline file now contains additional (external) data


Predict - Filter, Calculate, CSV writer (for demo reporting)


Predict - Predicted Values


Correlation: external factors


Correlation: profit and gas price by month (bad correlation)


Correlation: profit and predicted value (pretty close)


Correlation: elasticity of profit based on changes in oil price

Clustering


Clustering



Results - Clusters (Grid)


Results - Overview (chart)






Results - Visualized (results are cross-country, customer)

Decision Tree


Results- Decision Tree