OLAP Benefits for CFOs

By Ernest Blansfield

Times have changed for CFOs in light of recent events at Enron, Tyco and Microstrategy. The CFO position in most large companies has been filled based on a person's ability to engineer business deals and to act as the company's Wall Street liaison. The CFO's focus is shifting from the time-consuming role of corporate window-dresser (where the art of managing earnings is mastered or not), to the traditional role of providing an accurate depiction of the company's current situation and where it is headed.

What does this shift mean to the CFO? First of all, CFOs will get their hands dirtier in terms of day-to-day operations in the accounting and finance departments. One key task that will receive more attention is cost management: understanding the company's cost structure. What are we paying for and why? This is especially important in today's economic environment. Second, more emphasis will be placed on increasing the accuracy and the timeliness of budgets and forecasts.

As this shift takes place – and it is well under way – Business Intelligence (BI), and more specifically OLAP applications, will move up on the list of priorities for those holding the CFO position. These applications provide quick access to the pulse of a business. They become the window through which all levels of the finance and accounting departments view their company.

OLAP Budgeting/Forecasting Benefits

1. Timeliness – Most companies utilize a budget/forecast process that operates solely on the transmission of Excel spreadsheets. Lower level analysts, accountants, managers and other staffers produce estimates for their department or area and pass it on to be aggregated with the estimates from other personnel at their level. This aggregated and summarized estimate is reviewed and moderated and is then passed on to be aggregated and summarized once more at a higher level. The process continues until the overall corporate budget/forecast has been constructed. It is a painful, manually intensive process. By the time the process is finished the data is either stale, no longer as meaningful as when produced, and/or the people involved are frustrated and cringe at the thought of the next cycle.
   
   OLAP applications can help improve the speed in which budgets/forecasts are created by:
   
   a. Providing the ability to write/send forecast data directly to the application itself. It therefore facilitates the collection task by eliminating the manual compilation of individual spreadsheets.
   
   b. Eliminating the need to manually summarize forecast data by department, then by division, then by the company as a whole. Data is automatically summarized based on a single or multiple organizational hierarchies.
   
   c. Eliminating the need to manually calculate all necessary ratios or Key Performance Indicators (KPI's) based on the forecast data by utilizing the powerful OLAP calc engine.
   
   Decreasing the time to produce the forecast provides several perks:
   
   a. More time is afforded for individuals to sanity check their estimates and possibly iterate through several versions.
   
   b. The forecasting process can be carried out on a more frequent basis allowing the company to quickly incorporate sudden changes in market or industry variables.
   
   c. Forecast can be created at a more detailed level: the more detailed the forecast the better the understanding of the company's true business drivers. Which products will make us money in the near-term and the long-term? Where and when do we become bloated with cost?
   
   
2. Accuracy – Greater accuracy is actually the result of streamlining the process discussed in the preceding section. By reducing the level of manual effort, more time can be spent analyzing and iterating through forecast data; and the forecast itself can be conducted more frequently at a greater level of detail.
   
   Forecasting accuracy benefits the company by:
   
   a. Reducing the risk of over-producing. When a company-over produces a product, it will eventually have to scrap (write-off) the excess inventory, potentially costing the company millions of dollars.
   
   b. Reducing the risk of under-producing. When a company has not produced as many units as were demanded, the company suffers lost revenue and potentially lost customers as they are forced to go elsewhere and may never return.
   
   c. Reduced dependency on the art of managing earnings to appease Wall Street.
3. Accountability – Again, this is result streamlining the process. The Excel-based system discussed above generally leaves little time for review. The midnight oil is burned just to get something out of the door. Using OLAP technology allows more time for iteration and analytic review, thereby providing individuals the ability to develop in-depth rationale for their estimates. There is also more time for review at the higher levels, which will focus on gaining an understanding of that rationale.
   

OLAP Analytic Benefits

There are many benefits that result from embracing OLAP technology. Here are just a few:

1. Key financial ratios identify the business drivers of an operation: debt to equity, quick ratio, earnings per share, gross profit percent, return on equity, inventory turns, days sales outstanding, and cash per share are a few common financial ratios. These and other key financial ratios can be calculated for each company, division, and product.
   
   
2. Cash flow analysis provides the ability to see which business segments of the organization are generating or burning cash. Is cash in the right places and at the right levels for the best return?
   
   
3. Product sales analysis to illuminate which products, business segments, etc. are driving the company.
   
   
4. Customer and product profitability analysis identifies a company's most profitable customers and products. Knowing your best customers and products is critical to a company's survival and for the identification of new opportunities. Remember that even though a company may sell vast quantities of a certain product, it may be losing money on that product.
   
   
5. Strategic marketing analysis to organize customers from most valuable to least valuable (based on revenue or margin or both) over the current period or year or since inception or capture the number of customers by profitability tier, so the trend in profitability mix can be easily seen over time.

The bottom line is that OLAP is a technology that CFOs and other financial executives can leverage in order to gain a greater understanding – and better control – over their business. And it's a technology that's catching on: according to the OLAP Report, the total OLAP market in 1994 was roughly $500 million. Compare that with a 2000 estimate of $3 billion and you can see how quickly OLAP is catching on.