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In today’s episode of ‘From the eLearning Trenches,’ we asked one of our learners, a partner in public practice, to consider which forms of financial analysis they provide to business clients. How effective are these reports in assisting business clients to make the right decisions? What could be done to improve the value of these reports?

Learner Reflection

Our key business financial reports are as follows:

  1. Ratios/KPIs

Useful for providing a general insight into the key areas of the business. At this stage our firm generally just use a minimal number of KPIs such as gross profit, sales as a % of costs (wages, rent etc). There are a number of ratios such as debtor/creditor days, inventory turnover, debt to equity ratio that could be included to provide further insight and lead to further discussions with clients around business operations. Coupled with benchmarking, this could identify how they are performing against other similar businesses in the same industry.

  1. Profit and loss/Balance sheet

Primarily focused on the past in most cases and are used to identify tax payable at the end of the year. Therefore, their effectiveness is minimal.

They could be used as a conversation starter to find out more about the business i.e. key drivers, what caused changes from prior years, and quizzing clients on certain aspects of their business. This could lead to further financial analysis reports and conversations.

  1. Cashflow and 3-Way forecasts

Useful for cashflow management and budgeting. Potentially looking at turning these reports into a 3-way forecast or a what if analysis could provide the client with valuable information to assist in decision making or to provide key targets to increase revenue, reduce certain costs etc.

  1. Trend analysis

Use to identify trends in revenue and costs over a number of years to help clients understand where the business is heading. Using these trends as a conversation starter to help the client identify areas of concern or for improvement – can further financial analysis be required?

  1. Sensitivity analysis

Very useful for use in a what if scenario. Our firm used these when the COVID pandemic first became a real factor to help clients understand if their sales dropped by X% what impact would this have on their bottom line. If there was an impact it helped identify such things as whether they needed to reduce staff or pause loan repayments.

As discussed above these could be used within a what if scenario to help customers make such decisions as to whether to add a product or new business segment.

Feedback from our experts

The key to effectively transition from financial reports produced primarily for tax compliance requirements to reports that add value at a business strategic level is to firstly work out what’s important for the client to know.

Generally, a simple approach to financial KPIs is the best place to start. The Power of one, which looks at the impact of 1% changes in key financial measures, can provide a useful indicator of the sensitivity of the business to small changes in revenue and costs. We usually recommend that business owners identify no more than 5 key financial indicators to begin with. Then work on up to 5 non-financial indicators of business performance, perhaps focused on sales and marketing activities.

It’s useful to consider challenges in analysing financial reports from the client’s perspective. These challenges will often have a significant impact on the usefulness of these reports:

Complexity of Financial Data

Financial reports are filled with complex data, including balance sheets, income statements, cash flow statements, and notes to the accounts. For those without a background in finance or accounting, understanding the nuances of this data can be daunting. Different accounting standards (such as GAAP or IFRS) and financial terminology can further complicate the analysis.

Time Constraints

Business owners are often pressed for time and may find it challenging to dedicate adequate time to thoroughly analyse financial reports. This time constraint can lead to a superficial review of financial statements, potentially overlooking critical insights or red flags that could impact the business’s financial health.

Identifying Key Performance Indicators (KPIs)

Determining which metrics are most relevant to the business’s goals and financial health can be challenging. KPIs can vary significantly depending on the industry, the stage of business, and specific business objectives. Selecting and focusing on the wrong KPIs can lead to misinformed strategies and decisions.

Interpreting Data for Strategic Decision Making

Translating financial data into actionable strategies is a complex task that requires not only understanding what the numbers mean but also how they relate to the business’s strategic goals. It involves analysing trends, forecasting future performance, and making decisions that can significantly impact the business’s direction. This requires a deep understanding of both the business and its financial drivers.

These challenges underscore the importance of financial literacy for business owners and, in many cases, the need to seek assistance from financial professionals who can help navigate the complexities of financial reporting

Key takeaway: For an accountant, providing business advice is a lot more than simply producing financial reports for the client. It requires a clear strategic focus and understanding of the issues and challenges affecting business clients on a day-to-day basis.

This assessment task and response is taken from the Business Analytics eLearning course (assessment task 2.1). Click here to explore this course

Also, take a look at the Virtual CFO Advanced eLearning Course

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