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financial analytics
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By

 Corinne Bernstein

Financial analytics is the creation of ad hoc analysis to answer specific

business questions and forecast possible future financial scenarios. The goal
of financial analytics is to shape the strategy for business through reliable,
factual insight rather than intuition. By offering detailed views of companies'
financial data, financial analytics provides the tools for firms to gain deep
knowledge of key trends and take action to improve their performance. 

As a subset of business intelligence and enterprise performance

management, financial analytics affects all parts of a business and is crucial in
helping companies predict and plan for the future. Financial analytics involves
using massive amounts of financial and other relevant data to identify patterns
to make predictions, such as what a customer might buy or how long an
employee's tenure might be. With a wealth of financial and other relevant data
from various departments throughout their organizations, corporate financial
teams are increasingly leveraging this data to help company leaders make
informed decisions and boost the company's value. By helping businesses
understand their top- and bottom-line performance (along with other
indicators, including financial and macroeconomic data), measure and
manage their assets, and forecast variations within the organizations and
industries in which they compete, financial analytics offers insight into
organizations' financial status and improves the profitability, cash flow and
value of the business. Financial analytics also helps companies improve
income statements and business processes.

Business transformation and advances in technology -- from big data

to customer analytics software to data warehouses -- have contributed to
companies' move to use financial analytics. The changing role of corporate
finance department is also having an impact. Chief financial
officers traditionally relied on historical data and trends to forecast future
performance. However, they are changing their focus as they increasingly tap
into technologies, such as advanced data analytics, machine learning and
automation. As finance departments have begun adopting financial analytics
to home in on what's happening in the business and what that's likely to mean
going forward, their roles have changed from "information provider" to
"problem solver." Having more timely access to information is helping
companies make quicker, better informed business decisions.

Many experts consider predictive analytics 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.

The application of analytics is crucial in financial services and other data-

intensive fields. Financial services businesses, including investment banks,
generate and store more data than just about any other business in any other
sector, mainly because finance is a transaction-heavy industry. While banks
have, for many years, used data to measure and quantify risk, data analysts
are now taking on the role of influential internal consultants, responsible for
communicating to senior executives key insights on how to improve the
organization's overall profitability. Today's financial institutions not only
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.

Importance of financial analytics

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. Advanced analytics and its ability to leverage big data will 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.

Continuous visibility into financial and operational performance will help with
more than just decision-making; it will also increase visibility regarding the
processes that support those decisions. So, rather than getting data on
employee turnover rates and the related costs after the fact, financial analysts
and HR leaders will be able to see what problems employees are having and
intervene to improve performance and prevent costly turnover. Another plus is
the potential for improved electronic linkage of records across the supply
chain so that data will only need to be entered once.

Despite the promise of financial analytics, business experts from the academic
and corporate worlds warn against automating bad processes. They note that
the processes that provide financial insights based on historical data are often
disconnected and leave serious data gaps.  Poor-quality data can hurt
business performance and lead to incomplete or inaccurate customer or
prospect data, ineffective marketing and communications efforts, increased
spending and bad decisions. To improve results, companies should use
predictive analytics properly, improve the quality of their data and manage it
effectively.

Types of financial analysis

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 analysis include the following:

 Horizontal analysis refers to the side-by-side comparison of an

organization's financial performance for consecutive reporting periods. The
aim is to determine major shifts in the data. Later, this information could be
applied to a more detailed analysis of financial results.

 Vertical analysis pertains to the proportional analysis of a financial

statement. Each line item on a financial statement is listed as a percentage
of another item -- for example, every line item on an income statement is
provided as a percentage of gross sales, while every line item on a
balance sheet is given as a percentage of total assets.

 Short-term analysis provides a detailed review of working capital,

involving the calculation of turnover rates for accounts receivable,
inventory and accounts payable. Any differences from the long-term
average turnover rate should be studied further because working capital is
a significant user of cash.

 Multi-company comparison entails tallying and comparing major financial

ratios of two organizations, usually in the same industry sector. The aim is
to determine the companies' relative financial strengths and weaknesses.

 Industry comparison contrasts the results of a specific business and the

average results of an entire industry. The purpose is to determine any
unusual results in comparison to the industry average.
Key types of financial analytics
Examining financial and other relevant information, financial analytics offers
various views of companies' past, present and future performance. The
following are key types of analytics that can help companies of different sizes:

 Predictive sales analytics may include the use of correlation analysis or

past trends to forecast corporate sales.

 Client profitability analytics helps differentiate between clients who make

money for a company and those who don't.

 Product profitability analytics entails assessing each product

individually, rather than establishing profitability overall at a company.

 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.

 Value-driven analytics assesses a business' value drivers, or the key

"levers" the organization needs to pull to achieve its goals.

 Shareholder value 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.
Financial analytics software programs
As the way information is now collected and analyzed presents a significant
shift -- along with new challenges -- software can help reduce the complexity.
Financial analysis software can speed up the creation of reports and present
the data in an executive dashboard, a graphical presentation that is easier to
read and interpret than a series of spreadsheets with pivot tables.

Popular financial analysis software programs include:

 Oracle Financial Analytics -- modular component of Oracle's integrated

family of business intelligence software applications. Enables insight into
the general ledger, provides visibility into performance against budget and
the way staffing costs and employee or supplier performance affects
revenue and customer satisfaction.
 SAP ERP Financial Analytics -- helps organizations define financial
goals, develop business plans and monitor costs and revenue during
execution.

 SAS Business Analytics -- provides an integrated environment for data

mining, text mining, simulation and predictive modeling -- a mathematical
model that predicts future outcomes -- as well as descriptive modeling, a
mathematical model that describes historical events and the relationships
that created them.

 IBM Cognos Finance -- provides out of the box data analysis capabilities
for sales, supply chain procurement and workforce management functions.

 NetSuite -- provides financial dashboards, reporting and analytic functions

that allow personal key performance indicators to be monitored in real
time.

 MATLAB -- allows developers to interface with programs developed in

different languages, which makes it possible to harness the unique
strengths of each language for various purposes.

This was last updated in November 2019

https://ecapitaladvisors.com/blog/what-is-
financial-analytics/

What Is Financial Analytics?

Financial analytics is a concept that provides different views on the business’ financial data.
It helps give in-depth knowledge and take strategic actions against them to improve your
business’ overall performance. Financial analytics is a subset of BI & EPM and has an impact
on every aspect of your business. It plays a crucial role in calculating your business’ profit. It
helps you answer every business question related to your business while letting your forecast
the future of your business.

FREE EBOOK: HAVING A CONVERSATION WITH DATA

So why is financial analytics

important?
 Today’s businesses require timely information for decision-making purposes
 Every company needs prudent financial planning and forecasting
 The diverse needs of the traditional financial department, and advancements in technology,
all point to the need for financial analytics.
 Financial analytics can help shape up the business’ future goals. It can help you improve the
decision-making strategies for your business.
 Financial analytics can help you focus on measuring and managing your business’ tangible
assets such as cash and equipment.
 It provides an in-depth insight into the organization’s financial status and improves the cash
flow, profitability, and business value.
Important financial analytics you
need to know
In today’s data-driven world, analytics is critical for any business that wants to remain
competitive. Financial analytics can help you understand your business’ past and present
performance and make strategic decisions. Here are some of the critical financial analytics
that any company, size notwithstanding, should be implementing.

1. Predictive sales analytics

Sales revenue is critical for every business. As such, accurate sales projection has essential
strategic and technical implications for the organization. A predictive sales analytics involves
coming up with an informed sales forecast. There are many approaches to predicting sales,
such as the use of correlation analysis or use of past trends to forecast your sales. Predictive
sales analytics can help you plan and manage your business’ peaks and troughs.

2. Client profitability analytics

Every business needs to differentiate between clients that make them money and clients that
lose them money. Customer profitability typically falls within the 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. Understanding of which is vital.

By understanding your customers’ profitability, you will be able to analyze every client group
and gains useful insight. However, the greatest challenge to customer profitability analytics
comes in when you fail to analyze the client’s contribution to the organization.

3. Product profitability analytics

For organizations to remain competitive within an industry, organizations need to know
where they are making, and losing money. 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.

4. Cash flow analytics

You need a certain amount of cash to run the organization on a day-to-day basis.  Cash flow
is the lifeblood of your business.  Understanding cash flow is crucial for gauging the health of
the business. Cash flow analytics involves the use of real-time indicators like the Working
Capital Ratio and Cash Conversion Cycle. You can also predict cash flow using tools like
regression analysis. Besides helping with cash flow management and ensuring that you have
enough money for day-to-day operations, cash flow analytics can also help you support a
range of business functions.

5. Value-driven analytics
Most organizations have a sense of where they are going to and what they are hoping to
achieve. These goals can be formal and listed on a strategy map that pinpoints 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.

6. Shareholder value analytics

The profits and losses, and their interpretation by analysts, investors, and the media can
influence your business’ performance on the stock market. Shareholder value analytics
calculates the value of the company by looking at the returns it is providing to shareholders.
In other words, it measures the financial repercussions of a strategy and reports how much
value the strategy in question is delivering to the shareholders. Shareholder value analytics is
used concurrently with profit and revenue analytics. You can use tools like Economic Value
Added (EVA) to measure the shareholder value analytics.

Conclusion
Financial analytics is a valuable tool that every organization, small and large, should use to
manage and measure its progress. Done right, it can help the organization adapt to the trends
that affect its operations.

Contact the experts at eCapital Advisors to find out if a Financial Analytics solution is right
for your organization.

DOWNLOAD INFOGRAPHIC: WHAT IS FINANCIAL ANALYTICS?

January 8, 2019|BI / Visualization, Line of Business Modeling

About the Author: Matt Frederick

Matt is passionate about introducing the power performance management applications to his clients. He
enjoys working with companies to leverage technology to shape the future of their business. Matt has
partnered with the firm’s outstanding client base since 2001 to improve their decision making abilities
and business processes. Matt works with the eCapital Advisors Business Development and Delivery teams
to help prospects and customers identify, position and execute successful performance management
initiatives.