Alongside technology, the work of finance departments within companies is evolving at a spiraling speed. The days have gone when finance departments were primarily responsible for the bookkeeping and transaction processing only. Today, with the help of financial analytics, finance practitioners are well-equipped to act efficiently to make strategic decisions and predict the future in a complex and ever-changing environment so as to retain a competitive advantage.
In recent times, analytics has become an essential component to remain competitive and relevant for businesses and organizations. Financial analysis helps businesses consider and analyze current and past results; and forecast future performance in order to make informed business decisions. It can be inferred to mean as a tool for sound financial planning and forecasting to leverage the business.
What is meant by financial analytics?
The analytics which is used to build ad hoc insight or market intelligence reports that address the basic business/financial questions and assist in forecasting financial scenarios is referred to as financial analytics. It is an important method for evaluating and working on the financial issues of companies, and for improving their overall performance.
In simple words, financial data analytics deals with the process of gathering, tracking, analyzing, storing and forecasting data that provides the knowledge required for a company to recognize and forecast its financial status.
It provides a company with multiple views of their financial data and can, therefore, help improve business processes and offer an in-depth and easily readable overview of an organization’s economic health.
Benefits of financial analytics
The need for and importance of financial data analytics is vast. Let us understand how and in what areas financial analytics can offer help to a business enterprise:
Aided by financial analytics, the financial reporting of businesses would be more accurate and reliable. It enhances the readability of financial statements.
It offers an in-depth insight into the financial condition of the company and increases its cash flow, productivity, profitability, and value for the business.
It helps to filter and analyze large volumes of data quickly and easily.
Financial analytics can measure defined key performance indicators (KPIs) to analyze organizational processes and functions to help optimize and improve operational efficiency.
Whether it’s a B2B or B2C business model, financial analytics gives information on the health of your business and integrates customer data and patterns to assess how and where the business could do better.
It has evolved and transformed the role of finance departments from accounting to management. Finance teams are now working to adhere to the business model by translating data insights into value-adding business decisions.
Today, as businesses need timely information for decision-making purposes, this tool helps achieve the objective of speedy compilation and interpretation of financial data.
It allows for prudent financial planning and forecasting in companies. Financial analytics will help shape up prospective plans for the organization. It can also help in the development of decision-making strategies for the future.
It enables an organization to become a data-driven enterprise that is involved in making investments and operating decisions with greater confidence and mitigated risk.
Another important use of analytics is to compare the actual results of the company with the projections and predictions and see if the actual output varies from its estimate.
Is Financial Data Analytics and Financial Reporting the same?
One can conclude, on the surface, that both processes, i.e., financial analytics and financial reporting, are one and the same. However, these are two distinct concepts.
To produce financial reports such as balance sheets, cash flow statements, and statements of profit & loss, companies use data provided by their accounting system, and perhaps also their budgeting and forecasting software. Such reports are then issued to the company’s management to review or may also be used by them to satisfy external reporting guidelines, such as government, banking institutions, and shareholders’ compliance.
Hence, financial reporting, whether carried out at monthly, quarterly, or yearly intervals, is a process whereby consolidated or non-consolidated data of a business entity is used to draw up statements required for the management or legal review and distribution to shareholders, government entities or lenders and other stakeholders. No organization can escape producing financial statements and other compliance reports.
On the flip side, financial analytics is a mechanism that is neither governed nor mandatory, and that is largely ignored by several smaller organizations, either through choice or ignorance. But like several other procedures related to business and jobs, just because you do not have to do it does not mean you should not.
Financial analytics is used to study historical data with a view to investigating future patterns, evaluating the impact of other policies or events, or determining the performance of a specific method or scenario. The goal is to strengthen the company by gaining information that can be used to make improvements or adjustments.
Indeed, financial analytics and financial reporting are not dissociated to each other but are somewhat correlated. This is so because the end result of financial reporting (i.e., financial statements) becomes the input for analysts to evaluate/explore trends and to make informed judgements or strategic financial decisions therefrom. While reporting provides you with information, the analytics give you insights. Thus, both of them are valuable.
What parameters should Financial Reporting conform to?
Financial reporting is an essential mechanism for organizations to disseminate information about their business activities to various stakeholders. Financial statements are the main via media through which financial reporting becomes possible. The financial statements are supplemented by disclosures that are the key source of information and help the users to better interpret the financial statements when making appropriate decisions.
Following are some of the suggested ‘best practices’ which should be followed for improving the quality of financial reporting so as to enable the preparers of financial statements to benchmark their statements:
Financial reporting must be done in a manner so that the reports give a true and fair view of the affairs of the enterprise. The user of the financial statements is entirely dependent on the same, and, therefore, the reliability factor is supreme.
The financial statement should provide relevant information for the period during which it is submitted. There is no point in disclosing past several years’ historical data which is redundant as of date.
The users of financial statements can only benefit if the statements are released at regular intervals and in common formats. If consistency is not there, then the entire purpose of furnishing financials will be defeated.
Financial reporting is a regulated activity, and compliance with the requirements as well as accounting standards is a must. Tax authorities, market regulators, etc. rely heavily on financial statements in order to understand and assess the company’s compliance.
The financial statements and reports should be comparable within the sector in which the company operates as well as outside.
The details revealed in the financial statements should be complete and accurate, and should not contribute to further cross-questioning in the minds of the consumers. It should be ensured that there are no vague or ambiguous notes, with no additional information or explanation that may lead to misinterpretation of information.
Many times, certain assumptions or other frameworks are used in the preparation of financial statements. Such assumptions and bases need to be disclosed transparently, in order not to mislead users as well as substantiate the firm’s judgements.
Information should only be disclosed if it is material. It is material if it could influence users’ decisions which are based on the financial statements.
The purpose served by financial analytics (Key Types)
Financial data analytics is an important tool that should be used by large and small business owners to monitor their business growth and make timely adjustments to their strategies as needed.
Rational business decisions and minimal financial loss are the ultimate principles of financial analytics. Further, one of the aims of financial analytics is to monitor and quantify tangible assets, which makes them relevant to all organizations. Some of the purposes served by financial analytics include the following:
Analysis of customer/client profitability: These analytics may provide a forecast of each client’s productivity individually or within a segment. Such analytics support accounting and underwriting as they can help to reduce corporate and investor default risks and losses.
Predictive sales: Another tool of financial analytics called predictive sales analytics helps to figure out the ‘sales forecast‘ success rate in order to improve the company’s sales predictions. Sales estimates can be made in a variety of ways, such as evaluating past patterns or evaluating correlations. Such predictive analysis assists a company in sailing through its peaks and troughs.
Value-driven analytics: Value-driven research will provide an insight into “what if” scenarios to help guide future decision making. Value-driven analysis can enable a company to see what will change and the probable impact of a decision before its actual implementation.
Shareholders’ value analytics: The analysis of shareholders’ value assesses the success of a company by looking at the returns it gives to its shareholders.
Product profitability: Which product or service will bring you the maximum income is what the profitability of the product analyses. Product profitability is a tool of financial analytics which paves the way to discover the profitability in respect of an individual product/service. Locating the area of its profit and loss is very important for the business to stay in the competition. Such product profitability analytics will help see which goods perform the best and at which price point they can continue to do so to help maximize profit on each product.
Cash flow assessment: For keeping an eye on a company’s safety, it is very important to have a close watch on the cash movement in the business. Cash flow modeling utilizes real-time or historical metrics, such as the working capital ratio and the cash conversion process.
Financial analytics software
Financial data analytics software helps to speed up the process of report creation and presentation of data through graphs, which is much easier to read and understand.
This software acts as a management tool that not only helps conform to internal targets but can also be useful in delivering the requisite information to regulatory bodies that need accurate reporting. Some of the popular financial/business analytics software programs can be named as Oracle Analytics, SAP ERP Analytics, FreshBooks, QlikView, IBM Cognos Finance, NetSuite, Float, SAS Business Analytics, and MATLAB.
It is of quite a relevance to quote here that the important factor is not the software itself, but the conclusions from data and analysis that one draws. Good software supports but does not ensure or guarantee good decision-making.
Financial analytics is an important tool that both small and large business owners should use to manage and measure the company’s progress. It will assist the business firms in adapting to the trends affecting their operations. Financial analytics is a field that gives different views on the financial data of a company. The overall financial health of an entity can be assessed using three main elements – liquidity, leverage, or debt and profitability. All these dimensions can be analyzed through the use of financial data analytics. In fact, it helps you to answer all your business questions related to your business and also lets you forecast the future of your business.
A CA together with MBA (Fin) and M Com, she relishes taking interest in insightful writing in the domain of taxation and finance. She has gained experience as a full-time author and has also served an accounting role in industry.