Financial analysis dates back centuries, at least to the codification of double-entry bookkeeping in the 15th century. The analysis of balance sheets and income statements has long served as the basis of credit and lending decisions.
The discipline of management accounting developed in the early 20th century as a way of using accounting data to keep corporate executives and managers informed about what happened or is happening and why.
The evolution of financial analysis
The scope of data finance departments have to work with has expanded considerably over the past two decades. Moreover, the discipline of management accounting has changed considerably to reflect business practices and the significantly broader availability of business data. Much of that change involves automating previously manual processes with the positive results of reducing repetition and error, saving time and improving productivity.
Among these technology advances are ones that provide greater analytic power to the office of finance. Open standards have made data far more accessible. In addition, increased processing power and the continued push to make sophisticated applications easier to use have enabled more managers to harness the power of analytic software.
Predictive analytics borrows a variety of techniques from statistics, game theory and data mining to improve forecasts of future business outcomes, and these capabilities can be used with a richer set of operating and financial data to improve the quality, accuracy and timeliness of information to support business activities. The upshot is that technology has given finance the opportunity to play a more central, strategic role in its organisation than ever before.
The timing of these advances is fortuitous. Given the pace of business today, finance departments cannot stand still. If the organisation is to maintain its competitive standing, they must take advantage of the widening range of data -- especially more operating data -- to provide deeper analysis of company results. The use of analytics also will be important in the emerging recovery since companies will be challenged to maintain or improve their position in more competitive and volatile environments.
Corporations will need to pay increased attention to managing profitability. Analytics should be at the center of this effort. Having a clearer picture of the profitability of products and customers is critical to crafting strategies and establishing objectives; it's also essential for measuring results and providing the incentives necessary to ensure these objectives are met consistently. Today, operating units likely have only a vague idea of the impact their strategies will have on the bottom line, and much of the top-down financial analysis done in this area does not incorporate enough data from those operating units. That situation can change if finance steps up to lead the efforts.
The need for organisations to move forward in terms of financial analysis
Many organisations still rely on traditional budget-related metrics and conventional types of analytics; the most important analyses their finance professionals perform involve income statements, financial planning, cashflow planning and product profitability.
Not many use innovative tools such as predictive analytics and fraud detection, nor do they analyze customer profitability.
To reach the innovative level of maturity, organisations should add tools for performing predictive analytics as well. They also should determine what analytic capabilities are most important for their business, ensure data used for metrics is timely and people who use analytics have what they need and modify the process of using analytics to facilitate productive effort.
The three most significant barriers to making changes are a lack of resources and budget for the change, a business case that is not strong enough and low priority given to the issue. These factors indicate that most in finance do not see a driving motivation to reach the highest level of excellence in this area. But as the economic recovery gathers momentum, we expect more finance organisations to consider enhancing their finance analytics processes and capabilities in order to compete more effectively.