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financial opportunity assessment

Financial Opportunity Assessment generally consists of interpreting financials and evaluating performance at a global level such as finance. EPM can logically be a domain of finance or revenue reporting yet successful EPM teams can be leveraged for opportunity assessment across other domains.

This post is part one of a primer on epm analysis.

Interpreting Financials

First, EPM systems are a window on reality; They are a perspective on reality, not reality itself. Having a window allows one to study linkages between operations and finance. Assessing financial opportunity is to predict and direct financial consequences for the enterprise by analyzing what is. The methodology is a window for finding opportunity.

Second, EPM systems typically provide the three elements of financial management: cash flow statement, income statement, and balance sheet. EPM systems facilitate analysis by quantifying relationships among production, inventory, sales, receivables, collection, cash, taxes, interest, dividends, investment, assets, depreciation, liabilities and equity–sometimes called cash flow. EPM opportunity assessments sometimes look at this version of cash flow within the production cycle.  The operating or production cycle of company is a process or cycle of generating cash flows via operations and working capital. All the sources and uses of cash are but one aspect of the financial statements.  Typical EPM systems provide the other two key elements of management, a balance sheet and an income statement.

Third, EPM systems provide access to a variety of measures beyond traditional GAAP perspectives of solvency, profit, return on equity and the host of accounting principles. EPM systems in conjunction with domain experts generate key performance indicators useful for the identification of financial opportunity across domains (e.g., Sales, Marketing) or for special interest areas (e.g., R&D).

Evaluating Performance

The rationale for building EPM systems is not that one can (and does) produce with extreme accuracy magnificent software systems that provide windows at any level of granularity into the accounting and finance of the business. The practitioner of EPM often begins with extreme focus on accounting and finance components for evaluating the health of a company (its financial statements), then extends this rationale by leveraging  experience and insight for EPM systems that evaluate other domains within the company.   The practical benefits of building an official system of record for executive management goes well beyond the scorecard and a few key performance ideas, but the return on investment is likely possible even if limited to evaluating performance in one domain (e.g., finance). The exponential value of an EPM system occurs as the EPM domain is applied to evaluating performance across the enterprise.

This post is part one of a primer on epm analysis. In the third installment of this series we will further consider financial planning as an extension of interpreting financials.

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