Maximizing the Positive about Prediction

Maximizing the Positive about Prediction

By Karl Kern, Founder/President, Kern Analytics LLC

FP&A Analytics, FP&A Trends, Predictive AnalyticsPrediction is an important work that FP&A practitioners do.  This work has many challenges. One way to address these challenges is by maximizing the positive.

 

1. Establishing a Framework

The first step in maximizing the positive is establishing a framework.  For FP&A practitioners a framework has been established by a quote from Bill James in his praise of the book The Signal and the Noise by Nate Silver: “Projection, prediction, assumption, trepidation, anticipation, expectation, estimation…we wouldn’t have eighty words like this in the English language if it wasn’t central to our lives.”  This quote establishes a framework because the vast number of words indicates the importance of prediction in people’s lives.  That means we have won half the battle! By winning this part of the battle we know that prediction will receive acceptance in organizations whether they are startups, small businesses, middle market companies, or large corporations.  That means we have a place at the table! The question is whether we can keep our place at the table.

 

2. Understanding the Objectives

In order for us to keep our place at the table, we need to take the second step in maximizing the positive, understanding the objectives within organizations.  I have had many opportunities to work with people who have had a variety of objectives. I have worked with entrepreneurs who want to create businesses through the ideas that they have about products or services.  I have worked with real estate investors who want to purchase properties that can be sold at a price which generates a high return on investment. I have worked with people in the construction industry who want to develop properties at a reasonable cost.  What these people have in common is this: they have goals that can be accomplished by maximizing the positive about prediction.

 

3. Developing Processes

After we understand the objectives within organizations the third step in maximizing the positive is developing processes.  Processes can vary based on the type of business. Startups need a process that guides entrepreneurs to think about they are going to earn revenue, employ people, promote their products or services, support their businesses, purchase and sell inventory, collect cash, and pay bills in order to predict revenues and expenses that determine valuation and predict cash flows that determine financing requirements which are two important parts in the effort that entrepreneurs must make in order to raise money.  Small businesses need a process that guides owners to think about their strengths and weaknesses in revenues, expenses, assets, liabilities, and equity that serve as the basis for predicting the valuation of their businesses should they decide to put their enterprises up for sale. Middle market companies need a process that guides executives to make decisions about capital expenditures like building new stores or adding new warehouses based on predictions from the cash flows from these proposals. Large corporations need a process that guides executives to make decisions about acquisitions or organic growth based on predictions from the returns on these ideas. Since processes assist the effort in making decisions from predictions based on financial numbers FP&A practitioners can influence not only how but also whether important decisions within organizations are made.