Finance or financial analytics is a subset of enterprise performance management and business intelligence. It involves the study of a company’s financial data to enable businesses to understand the status and health of their finances, but it doesn’t just end there.
Financial analytics is a more in-depth look at the finances of a business. It allows organizations to gain insights into the financial performance of their business. Because of this, it plays a critical role in providing answers to financial queries, calculating revenue and profit, and more importantly, enabling business forecasting. And although it is focused on financial data, the results it produces impact all aspects of a business.
The results of a financial analysis provide different perspectives on the finances of a business. This enables organizations to create strategic actions and decisions that can help their business grow. It is a reliable source of insight, considering it uses complex data instead of perception and opinion methods. It can help you decide on office matters, from minor decisions such as whether it would be good to get demountable glass office partition walls to more complex ones such as whether it would be feasible to spend substantially to diversify your business assets.
Simply put, financial analysis is an effective tool in helping businesses improve their overall performance and foster growth. If you think you can apply this to your business or believe this can help grow your company, you should learn more about financial analysis.
How Financial Analysis Contributes to the Growth of Your Business
Its ability to provide insight and predict possible future financial scenarios isn’t the only reason financial analysis is essential for any business. There are many other benefits to it.
Financial analysis can help you manage your business assets better. It can also help you predict changes in the industries that your business competes with. To come up with financial predictions, financial analysts used to rely on financial statements, budgets, projects, balance sheets, income statements, cash flow statements, and other financial documentation. However, financial analysts nowadays use big data, data warehouses, and customer analytics software to analyze a company’s finances.
These technological advancements have allowed financial analysis to be transformed from a learning tool to a tool that develops business solutions. Its ability to help business create solutions also enable companies to determine risks in and out of their organization. This allows them to address those risks. Indirectly, financial analysis can become a risk management tool.
Financial analysis can also increase the transparency of business processes, helping shed light on challenges that employees face to accomplish them. When key stakeholders are informed of this, they can intervene to enhance productivity and retention, helping your business avoid the cost of expensive turnovers.
Different Types and Methods of Financial Analysis
There are two methods of financial analysis: corporate and investment. Corporate financial analysis is done internally and can be accomplished by your own finance or accounting team. On the other hand, a third-party financial analyst conducts investment financial analysis to help investors gain knowledge about the financial health of a business.
Aside from these methods, the Corporate Finance Institute mentions 12 other types of financial analysis. You can choose from vertical, horizontal, leverage, growth, and profitability analyses. You can also pick liquidity, efficiency, cash flow, valuation, or variance analyses. Finally, there’s scenario and sensitivity and rates of return analyses.
How Is Financial Analysis Done
Whether it’s done internally or externally, there is a general process to doing financial analysis. Investopedia helps to shed light on this process.
According to the industry leader in financial information, a financial analyst will first gather all the necessary financial statements from your company. Next, they will gather the necessary information from these documents. Then, your financial analyst will compare this information with your company’s financial performance in the past. They can also compare the information with other companies’ data.
After comparing the information, the financial analyst will develop conclusions and estimates about how your company’s finances will perform in the future.
Tools Used to Analyze Data
Typically, financial analysts use Microsoft’s spreadsheet software, Excel, to perform their work—analyze data and make projections.
However, thanks to technology, financial analysts can easily do their jobs because of proprietary financial analytics software programs available in the market today. From well-known software companies, you can choose from Oracle’s Analytics for Finance Professionals, SAP’s Financial Planning and Analysis software (stylized as “FP&A”), SAS’ Business Intelligence and Analytics Software, and IBM’s Cognos Finance.
However, independent software companies also provide financial analytics software at a fraction of the price that popular software developers offer. There are financial analysis firms that also have their in-house financial analytics software.
Try It Out to Know If It’s Good for Your Business
Fortunately, most financial analytics software has trial versions that your business can take advantage of. Remember, financial analytics is a valuable tool that you can use to measure and manage the progress of your business. You can use it to develop measures to expand your business.