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The 6 Unmistakable Tenets of Financial Analytics

Analytics is really a process of discovery.  It is a set of techniques and tools applied to financial data to reveal data patterns which can yield financial return.  In my experience working with various institutions large and small there are a few reoccurring themes in the analytical process.  The following is a brief list of some of the methodologies we use and share with clients.


1.     Common Sense – The first step in analyzing financial data is making sure that the numbers tie.  The first thing any Executive, business owner, or line manager does with an analysis is asks, “Does this make sense?”  The figures need to be checked against multiple sources to make sure that they are correct.  If the data is wrong then the decisions based on the data will be incorrect as well.  Managers and executives will look at the analysis and compare to other items to deem if it is sensible.  This comparison can take a more formal approach as in the vetting against system generated reports.  However, very often it goes through an informal vetting process.  The manager compares to information already received whether it be other meetings or informal conversations.  In addition, if the numbers don’t tie to something credibility is instantly lost.  Managers are also looking for big swings from one year to the next; large transactions in a small space of time or changes in run rates just to name a few.  It is wise to get familiar with the assessment process of the target audience.   In the world of financial analysis the numbers have to make sense.  


2.     Context – People understand things better when they are put in context.  A close friend would always tell me “if you take a text out of context it becomes a pretext.”  Though this saying may sound like a tongue twister, it has value. In order to create context in the world of financial analytics frame the story properly.  If an analysis on a company’s profit and loss statement is being done, compare it with the operating budget, prior year end spending or prior year spending at the same point in time.  Comparing the current year activity to one or all of the mentioned areas helps to give a better context.  In a nutshell context is about storytelling and highlighting important timely issues.


3.     Presentation – Very often people minimize the importance of presentation.  Imagine your favorite meal, perhaps a nice cut of sirloin steak or fillet mignon.  Now picture that sumptuous selection served on a used metal garbage can lid.   The presentation would likely discourage your appetite.  The same can be said of the most thorough analysis.  If the story is not presented in the best way, the audience is lost.  It’s been said that we only have 7 seconds to capture the attention of busy CEOs.  If the analysis does not quickly tell a story then the document is considered useless or worst full of errors.  In my analytics classes I mention three things to keep in mind regarding presentation. They are as follows:


a.      “Know your audience & environment”.  What is on the mind of audience?  What are the current hot button issues?  This information can impact the presentation.


b.     Second, pick the right chart for your message.  If the data is not presented in the right chart the story gets confused.  For example, if the trend from year to year is the story, a line chart would be best. 


c.      Finally don’t embellish data.  At times people get carried away trying to highlight certain points that reality is compromised.  For example, if the growth from one year to the next is only 1%, don’t adjust the scale on a graph to make it look like 10%.  This is not only misleading and wrong it can hurt the credibility of your analysis going forward.  I’ve seen this happen to others quite a few times.


4.     Comparative Consistency – With any type of analysis make sure your comparison makes sense.  Are you comparing apples with apples?  For example, if a benchmarking analysis is developed for two competing companies we need to make sure the playing field is level.  One question to consider right away is, are we looking at the same period of time?  Different companies operate on different fiscal years.  This may seem like a minor issue, but if we are comparing performance based on a fiscal year this will throw off the comparison.  Company A maybe operating on January to December fiscal year, while company B is operating on a June to July fiscal year. The two companies are reporting information based on different time periods therefore any analysis on fiscal year should be taken cautiously.


5.     Triple Check – It’s been said “to err is human, to forgive is divine”.  Keep in mind our audience is not divine.  I’ve learned that there is little tolerance for errors in analysis.  Critical business decisions are based on the financial analysis of new projects and current performance and projections for the future.  Constantly review an analysis before it is submitted to upper management or a business owner.  Keep a running list of prior errors which may arise again.  Build controls and safe guards so the same errors do not become reoccurring ones.


6.     Speed is King –The best analysis can be created and presented but if it’s not on time it’s useless.  Financial analysis must be timely.  Some financial analytical reports take on the form of canned reports.  These are by nature quick but very static.  Ad-hoc analytical reports are of more value but take time to generate.  These analyses are typically based on the request of senior leadership or red flags identified by peers.  Whatever the source, ad-hoc reports need to be prepared quickly.  The creation of quick ad-hoc reports without sacrificing accuracy is an art as much as it is a science.  Take a look at our blog titled “3 Steps to Creating Dynamic Excel Reports” for a few tips.  In addition, take the time to learn specific functions and tools in Excel like sumif, pivot tables, VBA and Power Pivot.  They will be a tremendous benefit in this process.


In short, financial analytics is used every day in companies that are large and small.  The preceding steps outline a few things that I have found helpful in my consulting and work career.  Keeping these thoughts in mind will yield benefits for your business.


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