This blog post will look at what good financial analysis looks like. seasoned finance people know the value of good analysis, but there is so much which gets in the way of being able to do this well, so here are some steps to take to ensure you get the most out of analysis.
Judgment on how the business is performing is based on a whole heap of parameters. sales, operational and specific KPI's rnd financial data, as well as confidence and other less tangible information. Financial decisions, such as securing loans, acquiring new assets, or issuing stocks and bonds, flow from good analysis, so its not surprising that emphasis on this skill is high, and growing.1. Do your Prep
Financial management and analysis starts with accurate and complete financial data. Many planning models can revolve around just the P&L, but that doesn’t provide a realistic view of performance and an incomplete picture when not integrated with a cash flow and balance sheet
Financial analysis goes beyond looking at numbers, graphs, and charts; it involves using different techniques and tools, depending on the nature of your business. The data needs to be joined up to create a complete picture which tells a story.
2. Start by asking the right questions
Still bean counting? Financial analysis is more than just putting numbers together and compiling them to generate fancy-looking reports.
It also isn’t just about calculating ratios and percentages and filling out variables in formulas at the end of every month, quarter, or year. The numbers are just building blocks. In a nutshell, financial analysis should answer the question, “How did my business do and why?” in more qualitative terms.
Start by asking the right questions. Which of the numbers or ratios are useful to evaluate your business? Every business has different drivers so you may need to build your analysis with data from production, marketing or HR to evaluate performance and future growth meaningfully.
Question the comparisons and bench-marking used and remember the nature of your business compared to others.
Here's a list of questions to address:
- Which metrics are critical in your industry or business model?
- How well did you perform against those metrics?
- What factors impact these metrics in the business?
- How will external and internal changes or trends affect your business?
- What steps does management need to take to address these?
3. remember the objective?
Every business has different needs and objectives. So, make sure your business requirements are clearly defined for the purposes of financial analysis. It’s always worth asking why and what for before just doggedly producing numbers and reports just because…
Workloads and demands from boards, investors and the business as a whole we can forget to ask fundamental questions like ‘What purpose your financial analysis serve’
- What is the problem you trying to resolve?
- Can your analysis achieve the insight needed with the scope and depth of data available?
- Is the model you currently use built for purpose i.e. is it short or long view, top down or bottom up, static or rolling?
- Are different metrics being used across the business and can you compare these accurately and effectively?
4. How do we analyse that?
Now you know the why it’s time to think about how. Now you may use some well trodden paths in terms of types of analysis. Ratio, cash flow, comparative and trend analysis are just a few examples.
Analysis is only as good as the process, data collection and processing which ultimately drives the interpretation and ultimately the decision making.
The path to good analysis is getting your process right. Here are the key steps down the path to good analysis:
- Data collection. Are you gathering the right qualitative and quantitative data relevant to your analysis.
- Data processing. You need to adjust data before analyzing it for the numbers to make sense. Raw data may not be enough to compare like with like and perform cross-section analysis.
- Data analysis and interpretation. You need to be able to relate, compare, or contrast different variables with each other, depending on the situation at hand.
- Conclusions and recommendations. From analysing the data gathered you can address the objectives agreed in the beginning .
- Follow-up. What are your next steps? How does your report help your business in the long term? While your report may answer some questions, it may also stir up more questions, which you may also ask within this step
It is important to keep in mind the original objective. There are companies where close management and analysis of costs is the driver of profitability. However, detailed analysis of costs whilst critical, may not be the only view needed to make informed decisions on business planning. Don’t confine your self to the minutiae, what we see under the microscope can distort the view from the air.
5. Error alert
Relying on incomplete or inaccurate information to make decisions or provide insight is dangerous territory. Manual spreadsheets are prone to concealing errors. The process of entering formulas, controlling access, managing versions and spreadsheet updates are all potential pitfalls to accuracy. Despite the time and effort put into spreadsheets, mistakes are still inevitable. Besides, all the time taken in perfecting a spreadsheet takes away analysis and decision-making time based on the data. If Spreadsheet monsters are ruling your office it might be time to look for another way.
6. Complexity demands Modernisation in FP&A
The modern face of financial planning and analysis offers tools which automate the more labour intensive and error prone activities that Excel demands.
Cloud based anytime anywhere access combined with data integration ensures the information you start with is up-to-date. Formulas written in plain English, global drivers working on company assumptions across all sheets makes light work of calculation. Access restrictions with workflow tracking and dashboards support a joined up approach across the business reducing time effort and error and providing reliable real-time information to the business.
If you are getting to any level of complexity be that multi-currency, company or country then modernising your FP&A solution will is worth a look. It matters less what size the company is and and more what you are trying to do which drives the move to more capability in planning. To stay ahead of the game finance needs to be able to feed the business less with numbers and more with insight. There is always a cost impact of doing nothing whilst others reap the rewards of investing in slicker processes and automation to drive better budgeting and forecasting.
For a deeper look into the impact of better analysis and analytics in your business, download our whitepaper on Analytics for CFO's.