We can be more confident
We get to meet a lot of Finance people. We have the privilege of teaching Finance Teams within the various Mastercourse Programmes that we present, and of working closely with them as part of our day job as Consultants. Based upon the conversations that we have had along the way, in particular about the demands being placed upon the Finance Function, we believe that a significant problem is starting to emerge.
The amount of data that is available within businesses is growing, and yet Finance Teams seem very hesitant to exploit it.
More data should mean finding more patterns in customer behaviour, trends in demand, insight into risks, threats and possibilities. It should mean knowing more about what’s ahead, and increasing your confidence in what you know. As a result, forecasts should be looking further ahead and be packed with options, scenarios and alternatives.
But, on the whole (and there are exceptions), this is not the case. Nor, we believe, will it be anytime soon.
Here is just one example of what should be possible:
- Financial forecasts that look well beyond the end of the financial year;
- Forecasts starting with projections of history using regression methods;
- The use of ‘confidence intervals’ (e.g. a 95% probability that it will be between A and B);
- Refinements to the forecast using new information – plans in place, trends in demand, economic factors, competitor intelligence, consumer preferences and purchasing behaviour, regulatory impacts .. and so on .. all of which are accompanied by confidence intervals.
Some industries have taken a probabilistic approach to forecasting value for many years – oil companies, for example, when valuing their reserves. But for many businesses their forecasts are still single numbers. They will almost certainly be wrong. We need to know by how much.
But data rich and time poor
Of course this all depends upon data, and most businesses feel that they don’t have enough of the right sort for this to be possible. But that position is changing.
Businesses typically have an increasingly rich seam of historical data to draw upon as well as better tools with which to access it. Businesses are also closer than ever to powerful sources of information that cover all the drivers of demand – from customer preferences through to the economic and political climate.
What is missing is the time, and the skill set, to put these to good use. For example, from a recent survey of staff time in a client organisation, Finance Managers had less than 5% of their time available for ‘value adding analysis and decision support’. That’s a couple of hours on a Friday afternoon. And this result is consistent with all the other surveys that we have conducted.
Also, based upon entirely unscientific and ad hoc surveys of the delegates to our Mastercourses, there seems to be a major shortage of skills. E.g. only about 5% of delegates have so far been able to explain what a confidence interval is and how it might be applied to a forecast. Extrapolate this out across all sectors of industry and we appear to have a problem.
In short, businesses are missing out on the value contained within their data. To see how, you need look no further than the weather forecast.
Imagine being the organiser for a church fete. If the forecast says that it is simply going to rain on the day, what do you do?
Most would probably assume the worst (i.e. heavy rain) and shift the venue indoors. This would guarantee everyone stays dry but may lead to less people coming.
But the Met Office can provide you with a percentage chance e.g. 60% chance of rain for no more than a couple of hours. This might convince you to leave things as they are. A bit of rain dodging might be needed, but not enough to keep people away. And with the fete outside more people might be persuaded to come. In other words, with a little more information attached the forecast can lead to a different and potentially better decision being made.
Put your team to the test
So here’s the question. How confident is your Finance Team at dealing with confidence? We have four simple questions for your Finance Manager.
- Do you have more than 5% of your time dedicated to improving the quality of decision making?
- Do you know what confidence intervals are and how you could build them into a forecast?
- Are you confident about joining data together that comes from different systems?
- Do you know what regression analysis is and how it might be applied to a forecast?
If the answer to two or more is ‘yes’ then things are looking up. If not then your forecasts and valuations will probably remain as single numbers accompanied by pages of notes explaining why they are probably wrong, but giving few clues about how much they are wrong.
Develin Consulting helps organisations to turn the value within their data into better financial forecasts
Using big data methods we have been able to predict which social housing occupants are at greatest risk of abandoning their home without warning. The numbers are very small but their impact is big – court action to secure the property, unpaid rent to chase.
We started by flagging those who had probably already gone – primarily to recover the property more quickly.
We were then asked to find those who haven’t yet departed but whose behaviour suggests they probably will. If they can be caught in time, it may be possible to turn things around.
We are talking about 10 a month, out of a population of tens of thousands. About a third of the population are behind with their rent at any one time, and about a third of this group owe many hundreds if not thousands of pounds. Needles in haystacks don’t come much better than this.
But we have just produced our 1st ‘top 10’ list of candidates. To give an idea about how it works, it might be worth telling a few of the stories from those on the list.
Lives with her teenage son in Derby. Back in November her working hours were reduced to 1 day per week. She was then told that she had been paid too much Housing Benefit. Her benefits would therefore be reduced until the account balanced once more.
Unsurprisingly Jenny’s arrears started to mount. Her mobile number then ceased to work, gas safety contractors failed to get access, and cards through the door asking Jenny to make contact remain unanswered. We think she is still there. But, perhaps out of fear, has she simply gone to ground?
Lives alone in South London. His rent payments have been sporadic and now and again he has fallen into arrears, albeit not by much. When this has happened he has received reminders to pay to which he has always responded well.
But back in December he did something not seen before. Whilst his rent account was still in credit, he phoned to check the balance. In January he paid his rent in full bringing his account further into the black. But he hasn’t paid a penny since. There are signs someone is there, some rubbish has been put out into communal hallways. But is it Michael?
Lives with her partner in Plymouth. She has fled the property due to domestic violence, but her Partner still lives there. He hasn’t been paying the rent, nor has he allowed anyone in to check for gas safety.
Alicia wants to return, but to live there alone. She therefore wants her Partner evicted for non payment of rent. Unfortunately the tenancy is in both their names, so if he is evicted then so is she. And if that happens she goes back down the ladder when it comes to getting another home.
Alicia can’t stay much longer where she is now. Indeed she has already been in touch with the local Homeless Persons Team. How do we help Alicia?
And there are many more to come
Those are the stories behind 3 of the 10, and to find them we had to work data from multiple systems hard. Each indicator mentioned above was there on a system somewhere. But it was only when all were brought together did the important patterns emerge.
There are probably thousands out there who look just like Alicia, Jenny and Michael – people who will remain invisible until it’s too late but whose numbers are likely to grow as Universal Credit bites.
But if they can be found in time there are systems in place to intervene.
Ali, for example, was on one of our earlier lists but he had already been flagged as needing help. This was because he was still a new tenant, and still under the watchful eye of the team that gave him his home.
Ali was entitled to Housing Benefit, but his claim had stalled. He was therefore falling into debt. Thankfully the local support team sorted his claim out, and the local Money Advice Unit found other benefits to which Ali was entitled. Local Volunteers also stepped in to sort out his house and garden.
Not everyone is going to be found in time, nor can everyone be helped in time. But if we make the best use of the data to hand then we can at least better understand the size of the problem. The next step will be to figure out how to respond.
This month we found Alicia, Jenny and Michael as well as the others on the list. I think we are going to find a whole lot more in the months to come.
Unlocking value through analytics
Back in January of this year the journal ‘Third Sector’ posted an article containing an uncomfortable suggestion. It was that Charities in the UK should ask themselves a series of searching questions in order to test their fitness to survive.
The sort of questions that the Author had in mind included ‘are you prepared to be taken over?’ and ‘are you prepared to hold on to just your brightest and best and let others go?’
The point behind the questions was that times are hard within the sector and a great many charities have to face an unpalatable truth. If they don’t switch up a gear and find ways to adapt to tough challenges ahead then they may as well call it a day and let someone else take them over.
A scary future
Funding is the central issue. In the UK rules about how you do it have tightened dramatically. And events such as the closure of Kids Company have raised hard questions about the quality of the management and governance processes operating across the sector.
The reason for mentioning this is a small but significant announcement from The Foundation for Social Improvement. Their quarterly Small Charity Index indicates that 60 per cent of small charities reported an increase in demand for their services in the period from December to February’.
Many of these Charities step in to help people unable to get the support they need from state provided front line services. Demand for many of those services is climbing. It’s inevitable that Charities providing relevant services will also see an increase in demand.
For some this means more funding. Happy days! For the majority however it won’t. They will simply see their costs rise at a time when income streams are more uncertain than ever. For the Boards of Trustees and Management Teams it will feel a bit like steering a ship faced with an outgoing tide and knowing there are rocks close by under the surface.
In our experience, when faced with this situation three things matter above all else – information, strategy and strong governance.
They are closely related. Information points to where the rocks are hidden. Finance Directors need to know that, whatever the level of demand, their charity is not undertaking activities that it can’t afford. The information needed describes how income and costs will move under different patterns of demand and where the limits to affordability lie.
Strategy has to explain how to steer around the rocks. If funding is tight it will mean finding ways to get more value from everything that the Charity does – e.g. by finding simpler ways to deliver services, expanding capacity in ways that are affordable, stopping activities if their value is questionable.
And strong governance provides the necessary drive and joins everything together.
Time for some boundaries to be crossed
If the right Trustees have been appointed to the Board then they should have the experience needed to help Charities navigate around the rocks. But if their remit is to simply turn up for Board meetings and to make decisions based upon a few Board papers then their experience may be wasted.
It’s a painful prospect for all parties but the right outcomes are more likely to happen if Trustees are prepared to roll their sleeves up, wade in, tread on a few toes, and sit alongside managers to find out in detail how things are working.
Managers have enough on their plates delivering the day to day services. They may also lack the experience needed to turn things around. We therefore need the Trustees to get under the bonnet, to find the weaknesses and be hands on in helping to straighten them out. And we need them to help out with some of the day to day management tasks. This is to give managers a bit of time and space to step back from the coal face and to take a hard look at how things are done.
This takes time and commitment from Trustees and if too heavy handed risks alienating managers. But if the alternative is people being afraid to make decisions because they are worried about unseen rocks, or making cavalier decisions because they can’t see any rocks, then it is a price worth paying.
We have seen a team of Trustees, appointed because of their commercial experience, step in and turn things around. It has created the problems mentioned above. But it has also led to a much more dynamic, purposeful, decision oriented and information rich working relationship between Trustees and Managers. This in turn has led to more confident approaches to grant providers and philanthropists as well as better prepared tenders for outsourced services from larger agencies.
The smaller Charities in particular need help. They have typically been set up to resolve an issue and because they focus just upon raising money and serving their clients they can quickly find themselves in a difficult situation if the world suddenly changes around them.
They probably can’t afford external advice but they still need some sort of navigational help to find deeper waters. We think that it should be Trustees who step up to play the pivotal role. Indeed this should be their finest hour.
Develin Consulting specialises in helping Third Sector organisations to build business intelligence with which to make strategic choices.