Improving Financial Performance through Analytics

Effectively analyzing financial performance requires a combination of analytical, problem-solving and technical skills. By leveraging financial data, businesses can gain valuable insights into their successes, challenges and overall progress. Implementing the strategies outlined below can help you make informed decisions and drive meaningful improvements in your company’s financial performance.

Types of Financial Statement Analysis

Fluctuation analysis, also known as horizontal analysis, is the most fundamental forms of financial statement analysis. It simply involves a review of changes in the balance sheet, income statement and other metrics over different periods using historical data.

When performing fluctuation analysis, it’s important to assess both dollar and percentage changes, as this provides a clearer picture of financial trends. Reporting should include columns that highlight these fluctuations to improve the efficiency and effectiveness of your analysis. Keep in mind that not all users of financial statements are as familiar with numbers as the person presenting them, so clarity and simplicity are key.

The next step is ensuring you understand the relationship between the different accounts and balances. These relationships can help to explain significant fluctuations. They can also lead you to investigate why a balance did not change from year to year as expected based on changes in related balances. By investigating these areas, businesses can uncover underlying financial patterns and potential risks.

Common size financial statements, or vertical analysis, offer another way to present financial data by expressing financial statement items as percentages rather than dollar amounts. These percentages are based on a key amount in the statement, such as a percentage of sales. The common size ratios provide a starting point. You can quickly analyze unusual changes that have occurred in proportion to the key element.

Ratio analysis is another great tool to help analyze your financial statement performance by providing insight into the operation of a business. Ratios serve as “benchmarks” that enable businesses to evaluate itself. Ratios can be compared with previous periods, a budgeted standard or even industry comparisons. The analysis of critical measures of business performance, such as profit margins, inventory turnover and return on equity, can detect emerging problems and strengths, ensuring businesses stay proactive rather than reactive.

Leveraging Your Financial Software for Enhanced Analysis

Modern accounting and financial reporting systems offer robust capabilities that can streamline financial analysis and enhance decision-making. Businesses should take full advantage of built-in reporting features to minimize data loss and errors while improving efficiency.

One of the most effective ways to analyze financial performance is through financial performance dashboards. These dynamic, real-time reporting tools allow users to create charts, graphs and tables to look at working capital, cash conversion cycle, inventory usage, employee utilization and more.

By tailoring dashboards to align with organizational goals, businesses can ensure that decision-makers have real-time access to the data that matters most. This level of financial agility empowers teams to make timely, data-driven decisions that strengthen overall performance.

Conclusion

Financial statement analysis is a critical function to effectively manage and improve business performance. Companies should regularly evaluate the reports available for financial statement analysis and the procedures being performed. Failing to analyze internal financial data or compare results to budgets and industry benchmarks puts a business at a competitive disadvantage. In contrast, companies that invest in detailed financial analysis and modern reporting tools position themselves for stronger decision-making, improved efficiency and long-term success.

If you would like additional information or need help improving your financial statement analysis, please contact Charla A. Roth, CPA, at (315) 472-9127 or via email at croth@dmcpas.com.

Contributing Author:  Charla A. Roth, CPA, is an audit partner with over 23 years of experience providing auditing, accounting and consulting services. Charla specializes in working with manufacturers and architecture and engineering firms.