6 Steps to Improve Financial Analysis

In this blog, we will look at 6 steps that can be taken to improve financial analysis.
Date posted
17 August 2022
Reading time
5 minutes

6 Steps to Improve Financial Analysis

Seasoned finance professionals know the value of good quality analysis, but there is so much that can get in the way of being able to do this well. Keep reading to discover the best steps to take to ensure you get the most out of your financial analysis.

Judgment on how well the business is performing can be based on many parameters including sales, operations, specific KPI's, financial data, and other less tangible information. Financial decisions such as securing loans, acquiring new assets, or issuing stocks and bonds, flow from good analysis, so it’s not surprising that emphasis on this skill is high.

  1. Do your prep work

Financial management and analysis require accurate and complete financial data. Many planning models can revolve around just the P&L, but without integration of a cash flow and balance sheet this won’t be enough to provide a realistic view of performance.

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 aligned to create a complete picture that tells a story.

  1. 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 only about calculating ratios, percentages and filling out variables in formulas at the end of every month, quarter, or year. These numbers are just the 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 benchmarking used and remember to consider the nature of your business when compared to others.

Some example questions to address might include:

  • 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?
  1. 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 producing any reports.

With increasing workloads and demands from boards, investors, and the business, we can easily forget to ask the fundamental questions.

Ask yourself:

  • 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?
  1. How do we analyse that?

Now you have established the ‘why’ it’s time to think about the ‘how’. You might use some well-trodden paths in terms of the types of analysis. Ratio, cash flow, comparative and trend analysis are just a few examples.

Analysis is only as good as the data collection and processing, which ultimately drives the interpretation and 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 analysing it for the numbers to make sense. Raw data may not be enough for comparisons and cross-section analysis.
  • Data analysis and interpretation. You need to be able to relate and 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.

  1. Error alert

Relying on incomplete or inaccurate information to make decisions 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. Not to mention the time needed to perfect a spreadsheet takes away from analysis and decision-making time. If spreadsheet monsters are ruling your office, it might be time to look for another way.

  1. 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 access combined with data integration ensures the information you start with is up to date. Formulas written in plain English and global drivers working on company assumptions across all sheets makes light work of calculation. Access restrictions with workflow tracking and dashboards support an aligned approach across the business, reducing time, effort, and human error. This helps provide reliable real-time information to the business.

If you are getting to any level of complexity, be that multi-currency, company, or country data, then modernising your FP&A solution is well worth a look. It matters less what size the company is and more what you are trying to achieve 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.

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