Financial analytics in the current business panorama has emerged as a valuable tool for every company be it small medium or large. It helps the company to adapt to the trends that affect its operations. As businesses welcome tech related changes and advancement, moving up the ladder from big data to customer analytics software to data warehouses, the role of traditional financial officers have also changed. Every business houses becoming organized, structured systematic in their particular roles have realized the worth of financial analytics.
MEANING OF FINANCIAL ANALYTICS
Financial analytics developed as an ad-hoc analysis and a subset of business intelligence and enterprise performance management, helps to answer specific business questions predict and plan future financial decision. Financial analytics is a crucial business performance tool. Traditional relying on historical data and merely playing the role of information provider finance departments have move forward in incorporating financial analytics to measure and manage company’s assets and forecast future financial status. It involves analyzing huge amounts of financial and other data to identify patterns, trends and predict customer behavior, company’s profits, plan financial investments and other financial decisions. Finance officers utmost engage in leveraging these data to boost companies values, make informed decisions, improve income statements and business processes. Thoroughly analyzing the ins and outs of financial data and indicators, financial analytics offers important insights into organizations’ financial position, profitability status, cash flow and worth. Financial analysis refers to the process of evaluating businesses, projects, budgets and other finance-related entities to determine the stability, solvency, liquidity or profitability of an organization. In addition to focusing on income statements, balance sheets and cash flow statements, financial analysis is employed for evaluating economic trends, setting financial policy, formulating long-term business plans and pinpointing projects or companies for investment.
TYPES OF FINANCIAL ANALYTICS
Predictive sales analytics include the use of correlation analysis or past trends to forecast corporate sales. It can help you plan and manage your business’ peaks and troughs.
Client profitability analytics helps differentiate between clients who make money for a company and those who don’t. Customer profitability typically falls within 80/20 rule, where 20 percent of the clients account for 80 percent of the profits, and 20 percent of the clients account for 80 percent of customer-related expenses. Analyzing the customer group helps to gain valuable insight and plan accordingly.
Cash-flow analytics employs real-time indicators, including the working capital ratio and cash conversion cycle, and may include tools such as regression analysis to predict cash flow. Understanding and gauging the cash flow in a business is crucial for the smooth operations of an organization.
Product profitability analytics can help you establish the profitability of every product rather than analyzing the business as a whole. To do this, you need to assess each product individually. Product profitability analytics can also help you establish profitability insights across the product range so you can make better decisions and protect your profit and growth over time.
Value-driven analytics: Most organizations are guided by some goals for which they strategize to achieve. These goals are the business’ value drivers. These value drivers are the vital drivers that the organization needs to pull to realize its strategic goals. Value driver analytics assesses these levers to ensure that they can deliver the expected outcome.
Shareholder returns analytics, which is used to tally the value of a company by examining the returns it provides to shareholders, is used concurrently with profit and revenue analytics.
MAIN COMPONENTS OF FINANCIAL ANALYTICS
There are three main financial statements on which the financial analysis is done.
Balance Sheet: Balance sheet is the comprehensive outline of all the financial items and assets of a company. It helps to understand the current financial status of a company. It lists the resources of the company. Financial analytics aid to plan how these resources can be best managed and used in the future to improve the business performance. The two main parts of the balance sheet are Assets and Liabilities. Assets are divided into Current assets and Non-current assets. Liabilities are divided into Current Liabilities and Long term debts.
Income statement: Income statement gives an idea about the future financial possibilities of the company by revealing the company’s performance over a particular period of time. It states the net income of the company. Its main elements are revenues earned, expenses incurred and net profit and loss.
Cash Flow Statement: Cash Flow statement is the record of the company’s performance. It calculates the non-cash items such as depreciation. It includes the actual inflow and outflow of cash in the company. This provides a clear picture of the company’s bills to pay, debts and financial growth over a period of time.
IMPORTANCE OF FINANCIAL ANALYTICS
Today’s businesses needs timely information that helps the business people to take important decisions in business .Every business should have a sound financial planning and forecasting to leverage the business. The emergence of new business model, the changing needs of the traditional financial department and the advancement in technology have all led to the need for financial analytics. Financial analytics helps in shaping up tomorrow’s business goals. You can also improve the decision making strategies of your business. Financial analytics focuses on measuring and managing the tangible assets of an organization such as cash, machinery and others. It gives a deeper insight about the financial status of your business and improves the profitability, cash flow and value of your business.
Financial analytics will help in making smart decisions to increase the business revenue and minimize the waste of the business. Accounting, tax and other areas of finance are having data warehouse which is combined with analytics to effectively run the business and achieve the goals faster. With the role of financial department changing to problem solver, the application of analytics has become crucial to measure and quantify risk and provide key insights on how to improve the organization’s overall profitability. Financial analytics just not analyze structured data, such as market or trading data, but also unstructured data, which can include data sources from news outlets, social media and marketing materials.
Predictive analytics developed as an essential element in the digital transformation of finance. A key part of this is the ability to examine historical and new data to assess what’s relevant to a specific company — be it macroeconomic data, industry trends or petroleum prices — to improve forecasting and decision making.
Financial analytics can help companies determine the risks they face, how to enhance and extend the business processes that make them run more effectively, and whether organizations’ investments are focused on the right areas. Using advanced analytics to leverage big data enable organizations to rethink their strategies for solving problems and supporting business decisions. Analytics can also help companies examine the profitability of products across various sales channels and customers, which market segments will add more profit to the business and what could have an impact on the business in the future.
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