Are they on track? – and what does “on track” mean to you?
And are you sure that you on the right track?
Are your financial management activities primarily focused on the past – on observation and historical reporting and analysis?
And what activities and tools do you use relating to the future financial requirements and performance of the company?
Just for fun, I decided to put this question to our source of all knowledge (perhaps data might be a more accurate description.) – the highly topical ChatGPT.
My question was:
Describe and detail common current corporate financial management activities practised by well run companies, the focus of these activities on historical information, and the shortcomings thereof, as well as the tools and the benefits thereof, available for predictive financial management activities.
The following was the result:
Well run companies engage in several financial management activities to ensure their financial stability and growth. These activities include budgeting, forecasting, financial analysis, risk management, and cash flow management.
Budgeting involves estimating the revenue and expenses for the upcoming year based on historical information. This helps companies identify areas for improvement and set realistic financial goals.
Forecasting involves predicting future trends and events that may impact the company’s financial performance. This helps companies prepare for potential changes and make informed decisions.
Financial analysis involves examining financial statements and data to identify trends, patterns, and areas for improvement. This helps companies identify opportunities to increase profitability and reduce costs.
Risk management involves identifying potential risks and developing strategies to mitigate them. This helps companies protect their finances from unexpected events and minimize financial losses.
Cash flow management involves monitoring and managing cash inflows and outflows to ensure the company has enough cash to meet its financial obligations. This helps companies avoid financial distress and maintain their creditworthiness.
The focus of these activities is on historical information, which can be limiting.
Historical data is based on past events and may not accurately reflect future developments. Therefore, companies need to complement historical data with tools and techniques that allow for predictive financial management activities.
One such tool is financial modeling, which uses mathematical formulas and statistical analysis to predict future financial outcomes.
Financial modeling can help companies make informed decisions about investment opportunities, evaluate the impact of changes in the market conditions, and determine the best course of action to achieve their financial goals.
Another tool is scenario analysis, which involves testing different scenarios to understand the potential impact on the company’s financials. This helps companies prepare for potential changes and develop contingency plans.
Predictive analytics is yet another tool that uses data, statistical algorithms, and machine learning to identify patterns and make predictions about future events. This helps companies anticipate future trends, customer behaviour, and market conditions, and adjust their financial strategies accordingly.
The benefits of these tools for predictive financial management activities are many.
They help companies make informed decisions, anticipate challenges and opportunities, and respond quickly to changes in the market.
This ultimately results in improved financial performance and stability for the company.
It seems that even ChatGPT is aware of the significant benefits that can accrue to management from properly designed, properly researched flexible financial models!
If you want to know more about how financial models can be your financial compass, just drop us an email or give us a call.
