Summary: The success of many B2C companies depends on robust prediction, e.g. of future demands and requests, including a time-dependent risk measure of that prediction that needs no additional, large training data from the accounting database.
Keywords: financial predictions, development of cash flow calendar, data-driven financial risk mitigation, risk-assessed financial forecast
Description
For illustrative purposes of this use case, let us think about a Chief Financial Officer (CFO). The main task of every CFO is to analyze the cash flow, the liabilities, the financial risks in the market as well as in the company and moreover to ensure that the return on investment is in line with the company targets. To this end the CFO has to recommend effective financial strategies, such that the company can improve its performance. It is well known that companies are exposed to a wide range of risks from unexpected events, and information about these risks can be extracted from the accounting data. But to do this is far from being easy or straightforward:
- Accounting cannot always be done by simple continuous real-time logging of the business's activity. Instead, many financial transactions with customers and business partners are sums of many single transactions. This typically is due to delays in business or bank administration. However, summing up accounting data leads to a serious loss of information about the dynamics, the time-dependent interplay of a company with their market segments, where they place their products or services.
- Also, the same real-world processes that correspond to a complex business process have different partial representations in the accounting data. These different accounting data are highly correlated in time, but show variations in their delays, in their lag times. Hence accounting data cannot be considered as realizations of stochastically independent random variables that are typically used in statistics and machine learning. As a consequence, many traditional prediction methods tend to underestimate the business risks. In case of accounting this is a serious economic threat.
In this situation accountants have the habit to extract from the data different information needed for different business management purposes, e.g. the monthly balances. As a result, information about e.g. an existing dynamic phase in a company's business operations is represented only by a few data points that can be used as training data for any type of forecasting algorithm. This leads to the notorious problem of few data for machine learning, which can be characterized as follows:
- Since every business and its customers are embedded in constantly changing markets, it cannot be expected that any historical time-stamped data have some invariant statistical properties in time. This phenomenon is called “non-stationarity”. However, most prediction methods in AI fail in case of non-stationary data, and there is a huge need to find a better algorithm that can deal with such data.
- Many companies have a complex business dynamics that consists of different components with different types of evolution. The reason for that can be that they offer different services or follow different revenue models at the same time. If the business dynamics is complex, i.e. an unknown combination of e.g. a non-linear, a stochastic and a periodic component, it is more or less impossible to find a simple, explicit model that mimics the combined real business development of that company. Hence prediction methods using a model will typically fail in real-life scenarios and cannot be used for financial risk mitigation.
- Even worse, for non-repetitive and simply evolving dynamic processes like the financial state of a business, massive amounts of independent and identically distributed data about the business activities are simply not available. In this case the traditional training of a machine learning model is not possible.
So there is a strong economic need to solve the problem of learning predictions from the temporal correlations in all sorts of historical time-stamped and non-repetitive data, e.g. accounting data, in an automated and model-free way.
From the bird's-eye view
The main benefit of an algorithmic forecast meeting the requirements from above is, on the one hand, to understand the cost of taking future risks. On the other hand, the benefit is to predict the consequences of future decisions in terms of the thereby generated financial risk. The importance of a better risk analysis in case of few data, e.g. short time series, is obvious: the current almost linearly increasing complexity of the social and economic phenomena is at least an economic challenge and sometimes a threat for all of us. Hence minimizing the risk of extreme economic or financial events and avoiding to accumulate some hidden risks in the markets will lead to a less chaotic and unpredictable behavior of the markets. That will allow a much more stable cash flow for the companies. In particular, the rate of failing startups using risk-assessed predictions based on data will drop to the benefit of all of us.
Algorithmic solution
A time series emerges from every historical time-stamped data, e.g. from technical sensors or economic measurements. The analysis of time series aims to develop mathematical models to gain an understanding of the underlying causes and driving factors of the temporal development of a business. As a subsequent step, predictions about possible non-random future fluctuations and developments of the financial time series can be generated in order to consult strategic decision-making of the management algorithmically. Of course there are some limitations for that when dealing with the unpredictable or the unknown. Other limitations come from the structural assumptions of the used forecast methods themselves.
The algorithmic package that we have developed for our client is self-learning, runs completely automated and computes the prediction and its time-dependent risk measure model-free from very few, multivariate data from non-repetitive, but simply evolving processes that typically occur in business or finance.
- The algorithm can finish the task with only one multivariate time series and needs no special training upfront on a statistically large amount of training data. It avoids overfitting and hence computes the probability of extreme events in the underlying dynamical process correctly, even in case of the existence of statistical correlations in the data.
- Since sensors and other measurements always represent only some limited perspective on a dynamically developing phenomenon, in most cases many different time-stamped data are logged about the same phenomenon. As a consequence, the algorithmic prediction method deals with multivariate time series.
- If necessary, an automated denoising procedure of the data can be applied before computing the prediction in order to reduce the aleatory uncertainty in the data.
The prediction's horizon is limited to small and medium ranges in time. In business this typically does not limit the algorithmic benefit for the users.



