Insights
Business Analytics: Helping Businesses Thrive
The key to business analytics is applying good analysis to good data, and focusing on the most important areas. Business people expect to gain insight from financial data, not just reporting. Good, actionable data is critical to growing profits, cash flow and business value.
Company executives value analytical data that drives profits and cash flow while minimizing operational risk. While information is good, actionable data that provides insight and a roadmap to success is better. A company’s income statement and balance sheet have core information from which significant data can be extracted to better manage the business. Most businesses don’t have the time or knowledge to compile and analyze the data. Inexpensive, commercially available software tools provide small to medium-sized companies with an in-depth analysis and actionable information to maximize profit, cash flow and enterprise value. Fiscal Advantage provides a financial roadmap for companies that want to thrive.
Financial analytics have replaced the spreadsheet for in-depth data analysis. While spreadsheets are extremely useful for many business functions, spreadsheets are not well-suited for all financial applications. Software tools reduce the time and cost while providing informational databases and professional insight. Whether you perform the analysis or use commercially available software to support your analysis, all analysis begins with a detailed business assessment.
Business Assessment
It is true, if you don’t measure performance, it is difficult to improve performance. The business needs to analyze the company’s historic performance to isolate areas for improvement. Begin by understanding the Breakeven Point (BEP) to determine how margins and sales volume impacts profits. While the BEP sheds light on historic performance, benchmarking is used to compare the company to its industry peers as well as to the company’s best performance for specific accounts. The benchmarking concept is to identify performance gaps that exist and monetize the value of improvements. Once the performance gaps have been identified for specific accounts, plans to minimize or eliminate the gap are implemented. Benchmarking on COGS, operating expenses, receivables, inventory, payables and capital spending will present the best opportunities to increase profits, cash flow and business value.
Another measure companys should analyze is sales “quality”. Measurement of sales quality includes determining if sales are growing faster than receivables. If not, sales quality might be trending down. Often overlooked is the incremental sales growth. Calculate how profitable incremental (new) sales are and how much working capital is needed to generate those new sales. While sales growth is important, getting the cost structure under control is vital. Sales growth without adequate cost controls can be a recipe for disaster. Sales analysis is central to any business assessment. Sales is the largest cash driver of them all!
Adding Value
If the company can improve profits, it directly impacts business value. An annual business valuation provides the management team with a tool to discuss the value components of the business with the executive team and shareholders. Improvements in business value can be directly tied to improvements in expense controls, cash management, planned reinvestment in the business and market conditions. It is a valuable exercise to understand the true earnings capacity of the company and its balance sheet strength. Making the proper adjustments to reflect this is critical. It is also important to forecast the future free cash flow of the business for the next three years and understand how the market values businesses like yours. The ultimate purpose of a business is to provide employees an opportunity to flourish and for the company to create value and maximize its free cash flow. The business valuation is the ultimate measurement of business performance and serves as a great tool to determine if the company is creating value.
Forecasting
Now that the targeted areas to improve profits and cash flow with the corresponding savings have been documented, the next step is to forecast the next three years using these new goals. Forecasting can be time-consuming and complicated, but accurate forecasting increases long-term success. It is always best to isolate potential problem areas before they develop and respond with a plan to overcome any obstacles.
When forecasting, it is always best to deliver insightful information, not just reporting or documentation. If forecasting is not understood and used, it is not worth preparing. On one page, our forecasting model displays exactly how cash flows through the operating business, the cash surplus or needs, the bankability of the business with collateral assessment for loans and the debt capacity of the company with the coverage ratios. It highlights the forecasted operations quickly and in a format that can be easily understood. A business must forecast to thrive.
The logical goal of a forecast is to deploy resources wisely and develop a realistic strategy to maximize profits and cash flow with adequate capital to grow the business. Automated forecasting tools start with selected income variables and the working capital needs. Then capital investment and financing cost are considered with an analysis on collateral and the company’s ability to service its debt. Good forecasting tools allow the user to easily change key assumptions to see the impact on profits, cash flow and debt coverage. Stress testing the forecast is an integral part of budgeting.
Summary
Financial analytics extracts data from financial statements and analyzes the data so the executive staff has access to critical data so better business decisions can be made. Software programs use analytics to merge historic data, industry databases and sophisticated calculations to generate actionable data to improve profits, cash flow and business value.
A business assessment provides a detailed review on a company’s performance. Utilizing benchmarking processes, companies identify specific savings in their business which they can utilize in forecasting to attain the desired results. Make sure when comparing a company to its industry peers, that you select the right industry classifications for comparison. If the comparison is not adequate, the comparison is not reliable. Fiscal Advantage allows users to use up to five classifications in order to get the exact industry comparable.