Financial Analytics

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.

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

As a subset of business intelligence and enterprise performance

Business transformation and advances in technology -- from big data

Many experts consider predictive analytics an essential element in the digital

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

Importance of financial analytics

Types of financial analysis

Types of financial analysis include the following:

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

 Vertical analysis pertains to the proportional analysis of a financial statement.

 Multi-company comparison entails tallying and comparing major financial ratios

 Product profitability analytics entails assessing each product individually, rather

 Cash-flow analytics employs real-time indicators, including the working capital

 Shareholder value analytics, which is used to tally the value of a company by

Popular financial analysis software programs include:

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

 SAP ERP Financial Analytics -- helps organizations define financial goals,

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

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

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

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