For many years, companies relied solely on financial statements when addressing shareholders and the public at large. While financial statements are no doubt important, after all what can be more essential to a business than formal records to mark spending, cash flows and the balance sheet? This information assures legality and profitability, however in today’s competitive financial market it is no longer enough. Today, any business and any wise investors want to stay ahead of the game, and have a solid understanding of long-term strategy, future market trends, and insights into what can improve business in the future. Having this foreknowledge as a direct role on the day to day decisions a company makes, and helps it be prepared for all circumstances. The following rules of financial analytics and how to use them help you see into the future, form a strategy, and foresee all potential risks that may come your way.
1. Make Sure Your Financial Statements Are As Accurate As Possible
For a financial analyst to be able to properly assess your company, income, balance sheet and cash flows will all be scrutinised. While some aspects are more important to the other, the analyst will be looking at specific elements that indicate the health of the company, such as short and long term debts, the strength of the business and the potential for growth. The bulk of analysis comes from these reports, and so excluding information or not providing the fullest possible picture will result in unreliable financial analytics.
2. Measure Yourself in Ratios, Not Dollars
While it may be tempting to look at a healthy bottom line and assume that a company is in great health and perfectly situated to carry on in the future, focusing entirely on current profits is foolhardy. A much more reliable tool often used by analysts is using rations, and as explained by Financial Manager Andrew M. Thompson from Best Australian Writers ‘the ideal ratio is 2:1 in terms of current assets/current liabilities.’ For this reason, the assets, liabilities, and equity of a company all need to be accurate, so you can get a good idea of how they relate to one another. For example if the ratio is much less than 2:1, there’s a chance that a business won’t be able to pay their debts in the future, despite appearing to have healthy numbers for assets and equity. Ratios are also used to analyse return of equity, and company leverage – all of which are important factors when considering future performance.
3. Smart Analytics Pick Up On Previously Unseen Issues
For a long time, issues with transparency could mar the effects of financial analytics, and unlinked or undocumented circumstances that could have a profound effect on a business went unnoticed. That is no longer the case as analytical tools can now track and monitor in-depth details that previously would have been impossible to pick up on, and make sure that appropriate correlations are made. This means that external activities can now be monitored in terms of how they affect the business, and a head office has a much more developed idea of any risks or harmful practices, and can rectify them. As transparency in a business has always proved challenging, and it is near impossible for human management to truly watch over every employee’s every move, having automated analytical tools makes it easier to promote and maintain an transparent environment, reducing risks and ensuring long term progress.
Overall, no business, large or small, can expect to thrive without analytics. Promoting transparency and making sure all business documents are accurate are the two most essential factors in producing analytics that can really help you plan for the future.