Financial analytics is another term for financial analysis, a process companies use to assess their financial data. Accountants or financial analysts typically conduct these activities in a company. The best tips for financial analytics include using financial ratios, creating internal trends, and benchmarking performance against other companies. Other actions may be necessary to accurately assess the company’s performance. Financial analytics may change over time if a company needs to adjust its analysis format.
Accounting or financial ratios are specific formulas that take information from a company’s financial statements for the review process. Financial analytics can test a company’s profitability, financial leverage, asset turnover, or other aspects of the business. Ratios use information from the final statements prepared by the company at month end. Accountants can program the company’s software to run ratios when the month is over — they are relatively simple to calculate and use.
Internal trends take the information from financial ratios and assess current performance against previous performance. Financial ratios in and of themselves are not extremely useful for financial analytics. Analysts need to use a trend comparison to determine if the company is performing better or worse under current economic conditions. The ratio results can be retained for several months in order to preserve the analysis gained by accountants. Companies may release this information to stakeholders if they believe it is important for decision analysis.
Benchmarking is an external form of financial analytics. Taking the information gleaned from ratios and comparing it to the industry standard is often the main benchmarking process. Accountants or financial analysts can make this comparison using financial statements released by other companies. This allows a company to determine if it is performing better or worse than other companies. Financial analytics can also compare internal trends to external trends if necessary to see year-over-year performance.
Financial analytics is often a broad term that can cover a wide variety of activities or processes in a company. While financial ratios are common, other analytical tools or procedures may exist for completing this activity. Accounting or financial analysts can typically make a decision to determine which method works best for the company. Other times, a company may prepare multiple assessments using a variety of analysis tools. Owners, executives, or managers usually review the current processes to determine if more or different analysis is necessary to assess the company’s financials.
