Finance is the lifeblood of every business, so tracking its inflows and outflows is essential, no matter what size your business.
In this article, we’ll be looking at how to analyse your financial position, using different types of analytics. We’ll cover:
What financial analytics is
Why it’s vital to business success
The main types of financial analyses small businesses are using today.
What is financial analytics?
Financial analytics is the process of examining a company’s financial documents and data to assess the business’ performance and projected growth.
The key financial documents involved in this process are your cashflow statement, income statement and balance sheet. While other data may be needed in some cases, your financial analyses will typically revolve around the information presented in these documents.
On that note, your financial analyses can vary in scope based on your team’s current needs. For example, you might take a comprehensive approach or, at other times, work to isolate and compare specific data points from a historical perspective.
In any case, a strategic approach to finance analytics is essential to the success of your business.
Importance of analytics in finance
Even at just a glance, the power of data analytics in finance is pretty clear.
Still, let’s go over the main benefits of adopting strategic financial analytics into your operations.
A comprehensive overview
Financial analytics aims to uncover everything there is to know about your company’s financial situation.
Even when honing in on a specific aspect of your company’s finances, a strategic and systematic approach makes sure you always get the “full story” — and never overlook any crucial data that could impact your decisions moving forward.
A single source of truth
By systematically synthesising and documenting your financial data, you can create a single source of truth for your stakeholders to engage with.
This means decision-makers have access to the most current and accurate data, right when they need it to decide business strategy.
A sneak peek into the future
Financial analytics allows you to see where your company’s been, where you currently stand, and where you’re headed in the future.
Because it all revolves around actual, real-world data, strategic financial analysis allows you to make highly informed decisions — in turn allowing you to take full advantage of every situation you encounter.
Common financial analysis styles
Let’s take a look at the most common forms of financial analysis used by businesses today.
Horizontal analysis
A horizontal analysis compares financial data from two or more consecutive periods. E.g., you might conduct a year-on-year or month-on-month analysis of your revenues. Or, you might compare your financial position against a prior quarter.
In making this comparison, you’ll get more context to your financial situation. This may help you identify specific trends — or even potentially avoid certain pitfalls.
Vertical analysis
Vertical analysis assesses a line item in a financial statement as a percentage against a base figure, which may be total assets, total liabilities or total cash inflows. For example:
With vertical analysis, you can quickly see where your finances are going. This insight can help you decide how to allocate your resources in the future.
Short-term analysis
Short-term financial analysis tends to look at your use of working capital for a defined period, as compared to your long-term average.
Essentially, the goal of short-term analysis is to make sure everything remains steady over time. Sudden increases or drops in working capital usage may be a red flag and require investigation.
Company comparison
Company comparisons pit your company’s financial situation against one or more of your direct competitors. Acquirers tend to undertake this type of financial analysis in their due diligence process to make sure their target is a sound investment.
Industry comparison
Industry comparisons are similar to the above, except they use your industry average as a basis for comparison.
Again, the goal is to identify aspects of your financial situation that don’t necessarily match up with your industry standard. From there, you can make the appropriate adjustments to remain competitive.
Common financial analytics areas
Now that we’ve looked at the analysis styles, let’s look at the five key financial analytics areas.
1. Predictive sales analytics
Predictive sales analytics (PSA) assesses the accuracy of your sales forecasts using your actual performance results.
The goal here is to improve your predictive capabilities and processes. Without PSA, you can easily end up making predictions and decisions based on faulty information and other errors.
2. Cashflow analytics
This offers a snapshot of your cashflow at a specific point in time.
Cashflow analytics then compares this snapshot to your optimal cashflow for this moment, given all known variables regarding your financial situation. You can then pinpoint where things aren’t running as best they can — and, of course, make the appropriate adjustments.
3. Customer profitability analytics
This type of analytics measures the monetary value of your average customer, the average customer within a given segment, or even of an individual customer.
This enables you to create value-based audience segments — and, in turn, deliver a more engaging customer experience to each of them.
You can also define future sales quotas based on these average values, and in hindsight use this information to identify what went right or wrong throughout the sales cycle.
4. Product and service profitability analytics
Here, you’re looking at the profitability of individual products or services — along with a complete breakdown of the costs associated with these offerings. With this info in hand, you can reallocate resources to the products or services that are most profitable to your business.
5. Shareholder value analytics
This analytics report communicates the value of company shares to investors, and gives them a snapshot of the overall health of your business.
While share value gives an immediate quantitative explanation of company value, your analysis of this value within a real-world context will help paint a more complete picture for your shareholders.
Simplify financial analysis with MYOB
Before you make any major business decision, you need to know how it'll affect your finances. But taking too much time to analyse your situation can lead to misplaced resources and missed opportunities.
This is where MYOB comes in. Our accounting software gives you visibility of your financial information and the ability to generate customisable reports for detailed analysis at the click of a button. This helps you quickly and efficiently get a comprehensive view of your company’s current financial position.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.