4 Must Have Criteria for Value Driven Financial Analytics
Value Area: Financial Analytics
An Example of a Small Business Dashboard with Data Sourced From Financial Analytics
The Short Comings of Financial Statements
For many small businesses, the extent of their Financial Business Intelligence (BI) is typically financial reporting prepared by accountants. Financial Statements usually have 3 components; a P&L statements, a Balance Sheets and a Cash Flow Statement. Many a business owner is frustrated with financial statements. Some common complaints are:
They only give a view of the rear mirror
They are not useful in knowing what specific actions should be taken next
They are not intuitive. You have to stare at cash flow statements for a while to understand what they are telling you.
They typically compare results to the previous month, or previous YTD. These data points are usually not useful in gaining broad insight
There are reasons for these short comings. Financial statements are prepared primarily with tax compliance in mind. Even the structure of most P&L statements are not useful in gaining insight into running the business. They tell you the final result of profit or loss, but not a methodical way of how you get there from an operations standpoint. This is because the focus is on the potential tax exposure at the end of the reporting period. Balance sheets summarize assets. liabilities and equity. In practice, the Balance Sheet usually provides a portfolio view of how they did, but no actionable intelligence about how to get better. In terms of how to run the business better, the owner is left with more questions than answers. As mentioned above, cash flow statements often result in confusion as opposed to insight.
The reporting of numbers and business insight are not the same thing. Insights have an element of being easily interpret able and have a bias toward action.
Progressive Business leaders are hungry for insight.
Criteria for Value Drive Financial Analytics
Financial Analytics are very different from financial statements. Financial Analytics are about gaining needed insight to run the business better. Success and wealth creation are driven by efficient operation, and gaining the tools and insight to make that happen. What are key features of financial analytics to support better operation? Here are 4 critical suggestions:
End to End Visibility of Business Performance. Visualized analytics should give insights to every part of the business flow. They should tell a story from business development all the way through to cash flow and everything in between.
Cause and Effect Traceability. Financial Analytics should bring value in highlighting variances in performance and isolating their origins through the business system cycle.
Real-Time insights. Value driven analytics should produce insights in an appropriate time frame to drive actions. You’ll want real-time information to highlight when something changes.
Predictive Capability. Financial Analytics should bring value in modeling future outcomes. The goal is to feed the model with the best current information and predict future results against a baseline expectation.
As can be seen from the graph below, when value driven financial analytics were initiated in the baseline year, there was a significant impact on improving earnings performance over the subsequent 3 years
Time Series Analytics of Earning Before Interest, Taxes, Depreciation and Amortization (EBITDA)
A Note on Predictive Modeling
In creating predictive models, a meaningful definition of value should be stressed. Utilizing scenario methodologies is the elementary “go to” approach. But, creating a “best case”, “worst case”, “most likely” snap shot of the future is not of real value. The range between best and worst cases are generally so disparate that they are very not useful in actually managing a business. The “ most likely” scenario by definition has a date stamp which usually never pans out as expected. Some businesses become to drawn to the worst case scenario that many decision are made with worst case in mind, even though there is no evidence that the worst case is being realized. This emotional tendency will limit growth and earnings.
Predictive models need to be real-time as well as all other analytics. This means that a combination of historic, present and updated future expectations needs to be a part of the predictive algorithm. The value of a good predictive model to a business owner or leader can not be overemphasized. Aim small, miss small. Year end should not come as a surprise
The Satisfaction of Being “In the Know”
There are intangible benefits of being “in the know”. Everyone wants to feel like they have an edge. No one likes the uncomfortable feeling of being caught by surprise by what you come to realize was a foreseeable . Nothing can strengthen a “can do “ mindset like the benefit of being in command of the facts and being up to date.
These are the things Financial Analytics offers you and your efforts: the feeling of being “in the know”, the knowledge that you have an edge, and knowing that you are in command of the facts.
Informed Decisions. Better Solutions
Stillwater Group LLC can create analytics to meet the specific needs of your business.
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