4 ways predictive analytics in finance can help companies see the future
Every company wants to know the future. Will customers buy more products in December, or will demand drop off? How much will the business have to spend on overtime during the holidays? Will a hot new product sell out in Omaha next month?
With the increasing role and responsibilities of the CFO, financial professionals seek solutions to help provide answers these questions, and drive performance across the enterprise. Today, predictive analytics are changing the game for companies and their executive teams.
The basics of predictive analytics
Predictive analytics in finance is the art and science of using massive amounts of data to find patterns. These insights can reveal what will happen next: what a customer will buy or how long an employee might last. Predictive analytics involve everything from sophisticated statistical modeling to relatively simple data mining, and the practice is transforming virtually every industry, as it provides the ultimate competitive advantage.
Of course, some industries already use predictive analytics. Life insurers, for example, have sliced and diced mortality data for decades to predict when policyholders will die. But the world of predictive analytics goes far beyond insurance.
Here are just four of the many ways predictive analytics can help finance teams move their companies ahead of the competition.
1. Sharpening online revenue projections
Using data on how customers navigate through a website, predictive analytics can help online retailers identify the site paths most likely to lead to a sale or abandoned cart. Knowing a customer is, say, twice as likely to buy if he or she clicks on two product reviews can inform not just the brand's approach to site design, but its entire revenue model.
How? One example might be using the information to tweak real-time pricing for customers on those more-likely-to-buy navigation paths. Amazon is famous for this strategy. Predictive analytics can also increase purchase rates by sending customers to more profitable site entry points when they click on external advertisements.
2. Shrinking extraordinary expenses
Predictive analytics can help lower a variety of costs, particularly unexpected ones, by detecting where underperformance is likely to occur. In the health care industry, for example, hospitals are subject to reduced Medicare payments if their patient readmission rates are high. These fines can be up to 3 percent of total revenue from Medicare for hospitals with the highest readmission rates, according to the U.S. Centers for Medicare and Medicaid Services. By using predictive analytics to identify which patients are most likely to have post-discharge problems, hospitals can give extra care and instructions to at-risk patients and potentially save millions of dollars.
3. Improving supply-chain efficiency
Predictive analytics can take the massive amounts of data from point-of-sale systems and make real-time forecasts of when and where products are likely to sell out or not move at all. This foresight can save retailers significant amounts of money that might otherwise be wasted on emergency inventory purchases to meet unexpected demand or shipping inventory where it's not needed. Ensuring that popular products are always in stock keeps customers happy, too.
4. Rethinking labor costs
There are dozens of ways to apply predictive analytics to labor costs. In the utilities industry, for example, predictive analytics can use data from meters to forecast which customers will have high bills that month. This can be used to boost customer satisfaction by alerting households about high bills before they arrive. If customers are more likely to call the utility provider when their bills are high, predictive analytics can not only help finance teams project revenue more accurately, but they can also predict labor costs at call centers.
The use of predictive analytics is spreading like wildfire. The ability to see even a tiny piece of the future can lead to happier customers, improved efficiency and productivity, and more successful business decisions.
Learn how forward-looking financial analysis can provide the data-based insights you need to help steer your sales, marketing and supply chain functions, and realize more profitable business opportunities.