Updated October 27, 2023
Definition of Financial Analytics
Financial analytics means checking a company’s financial position, finding new opportunities, or spotting any risks by looking at its financial data, like income, cash flow, expenses, etc.
What is Financial Analytics?
There is an increasing use of analytics in many organizations these days. Today’s businesses need timely information that helps people make important business decisions. Finance plays an important role in increasing the value of your business. Finance is finding its way as an important business function that overlaps with analytics in many areas. Financial executives are finding new ways in finance to increase the value of their organization.
Why is Financial Analytics important?
- Today’s businesses need timely information that helps people make important business decisions.
- Every business should have sound financial planning and financial forecasting to leverage the business.
- The emergence of a new business model, the changing needs of the traditional financial department, and technological advancement have all led to the need for financial analytics.
- Financial analytics helps in shaping 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 into your business’s financial status and improves its profitability, cash flow, and value.
- Financial analytics will help make smart decisions to increase the business revenue and minimize the business’s waste.
- The combination of data warehouse and analytics in accounting, tax, and other areas of finance effectively runs the business and helps achieve goals faster.
There are four main reasons why financial analytics is becoming more important these days.
1. Business Models
There are three new business models which form the basis of financial analytics.
- B2B – Business to Business
- B2C – Business to Consumer
- B2E – Business to Employee
2. The changing role of the Financial Department
Most finance functions are automatic and require fewer resources to manage them. This enables the finance executives to concentrate more on the business goals than just processing and reconciling transactions.
3. Business Processes
Businesses are becoming more complex these days due to the advancement of technology. A lot of questions arise in the minds of business people. Analytics provide the answers to all these questions. Financial analytics lets the managers and executives in an organization have access to more accurate and detailed financial information about the organization. This strengthens the relationship between the employees inside the organization.
Here are a few questions for which financial analytics can give you an answer
- What are the risks to which the business is exposed?
- How we enhance and extend the business processes to make them work more effectively?
- Are the investments made on the right path?
- How is the profit of the product across different sales channels and customers?
- Which market segment is expected to bring more profit to the business?
- What are the factors that could affect the business in the future?
4. Integrated Analytics
These days, companies use integrated financial analytics to face the competition in the financial analytics marketplace. Such integrated financial analytics allows companies to analyze and share information with the sources inside and outside the organization. Organizations should use integrated financial analytics to survive in the new economy.
5. Role of the Data Warehouse
The data warehousing solutions mainly focus on important analytical components like data stores, data marts, and reporting applications. Data warehousing in the future will require rich analytical capabilities. When the data and business processes are integrated across all organizational business functions, smart decisions are easily made.
Uses of Financial Analytics
Financial analytics helps a business to
- Understand the performance of an organization
- Measure and manage the value of tangible and intangible assets of an organization.
- Manage the investments of the company
- Forecast the variations in the market
- Increase the functionalities of information systems
- Improve the business processes and profits
Oracle Financial Analytics Software
One example of financial analytics software is Oracle. Oracle is one of the market’s most popular financial analytics software programs.
Oracle Financial Analytics helps to improve financial performance through proper information about the expenses and revenue of all the departments in the organization. It increases the cash flow through proper maintenance of receivables, payables, and inventory management. Oracle Financial Analytics gives you timely financial reports, which will help you determine your business’s performance. It also helps you to have a future forecast and plan your budget well. Oracle Financial Analytics software will help improve the business’s financial health.
Features
This software has a lot of features that include the following
- Fixed Assets Analytics: Manages and measures the asset’s life cycle
- Budgetary Control Analytics: It helps in preventing overspending through effective monitoring of the budget and spending effectively
- General Ledger Analytics: Manage the financial performance of the company through various factors
- Profitability Analytics: Helps in identifying what type of customers and which channels drive more profit to the company
- Payables Analytics: Manage and monitor the cash of the payables department
- Receivables Analytics: Manage collections and a check on the cash cycles
- Proactive Intelligence: This feature can send a signal about the issue to the managers and executives of the organization, which helps them to take immediate action and solve the issue
- Pre-built data models and metrics: Oracle Financial Analytics has more than 100 metrics and models
- Out-of-the-box integration with ERP systems: It helps easily integrate with ERP systems at less risk, low cost, and less effort.
- Oracle Financial Analytics for Oracle Fusion Applications: It helps you to learn about the company’s past, present, and future performance and will let you make smart decisions.
- Powered by Oracle Business Intelligence Foundation: Produces high-quality reports, has a good dashboard, and is highly scalable.
- Exalytics Ready: It goes beyond the values of traditional data analytics and gives deeper knowledge about the huge volume of data at the speed of thought.
Documents Used in Financial Analysis
Finance is the language of a business. The goals of a business are always defined and measured in financial terms. Financial analytics involves analyzing the data involved in financial statements. In this way, it provides useful information to business owners and lets them make better decisions.
The analysis is conducted on three main financial statements.
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Balance Sheet
A balance sheet gives an outline of the financial items and assets that a company possesses. It helps understand the current financial position of a company. The balance sheet lists the company’s resources, but it does not tell you how these resources are managed and how they can be used to improve business performance in the future.
There are two main parts of the balance sheet – Assets and Liabilities. Assets are divided into current assets and Non-current assets. Liabilities are further divided into Current Liabilities and Long-term debts.
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Income Statement
The income statement reveals the company’s performance over a particular period. The main elements of the income statement include revenues earned, expenses incurred, and net profit or loss. It does not reveal the company’s current financial position but lets you know about future possibilities. Net Income is the result obtained through the Income Statement. The Income Statement will let you know how far the company’s goals have been achieved.
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Cash Flow Statement
The cash flow statement is more similar to the Income Statement. It keeps a record of the company’s performance. The income statement takes only cash items, but the Cash Flow Statement takes non-cash items such as depreciation into account. This shows 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.
Elements of Financial Health
The overall financial health of a company can be assessed using three main elements – liquidity, leverage, and profitability. All these are internal factors that work within the company and are beyond the control of management.
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Liquidity
Liquidity in business means the availability of cash and other assets to pay debts, bills, and other expenses. Every business requires a particular amount of liquidity to meet its expenses and bills. A low level of liquidity in companies means that the business needs extra capital, and the performance is poor.
The company’s liquidity level differs from period to period because of certain factors like sales, economy, and seasons. At the same time, the cash flow inside the company will not be the same throughout the year. But whatever the situation is, the company needs to pay its employees and creditors. This is a change in their liquidity level.
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Leverage
Leverage refers to the amount of finance a company has borrowed from outside to run its operations against its investment. Bankers and investors consider the leverage ratio important when evaluating a company. A company will have a high leverage ratio when its debt is high compared to its equity. A high leverage ratio indicates that the company is exposed to risks. However, it is important to note that higher exposure to risk also has the potential to increase the returns for the business.
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Profitability
Profitability refers to the return that the business earns from the amount invested. Many people are starting their businesses these days to earn profits as the investment made in any other means will give fewer returns when compared to the business. Many factors affect the business’s profitability, like price, market trends, assets, debts, expenses, etc.
Financial Ratios
There are also a few ratios that will help in the overall financial analysis. Financial ratios are easy to calculate and simple to use. These ratios will tell where there needs to be an improvement in the business. One calculates financial ratios by dividing one number by another, and they are typically expressed in percentages. These financial ratios are used to compare any financial statistics in a business and help you to decide where there is a need for betterment. Selecting the ratios for the business depends on certain factors like the type of business, years of business, and others.
- Current Ratio: Exhibits the ability of a company to pay its near-term obligations.
- Quick Ratio: Explains the company’s ability to pay its current liabilities
- Liquidity Ratio: This calculates the liquidity of the company by taking everything into consideration except cash.
- Debt or Equity Ratio: This indicates the ratio of the company’s investor vs supplied capital.
- Return on Equity Ratio: This measures the company’s level of profitability.
Conclusion
Financial analytics is an important tool that small and large business owners should use to manage and measure the progress of their businesses. It will help the business to adapt to the trends affecting its operations. Therefore, Financial analytics will provide more reliable and timely financial reports, which is the main factor for measuring a company’s success from the perspective of bankers, investors, and analysts.
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