Analytics and the Financial Statements

Rely on Your Analytics Software for Insight into Financial Health

As I am writing this, today is the end of another fiscal quarter for many companies, and for one of our manufacturing clients, it is year-end. In addition to typical year-end activities and making incredible efforts to ensure that all customer shipments go out by the end of the year and revenue recognition is properly performed, there are several other behind-the-scenes activities that are performed.

Among them is the continual analysis of past periodic performance for the year just ended and a closer look at the budget and periodic revised forecasts and how it all compares with the soon-to-be-revealed final annual results. This means getting a good handle on financial statements, both the actuals and hopefully a meaningful set of forecasted financial statements.

The Role of Financial Statements

Financial statements have multiple purposes – they are used to ensure compliance with the SEC, banks, and certain shareholders, and as a basis for preparing income tax returns. They are also crucial for internal purposes, including senior management, the board of directors, and owners and shareholders in a privately held company.

When a company prepares periodic financial statements and also has a budget and periodic re-forecasts that automatically create forecasted financial statements, one can compare actual financial statements to forecasted financial statements and immediately see how the actual results vary from the forecasted statements and in which direction.

Transitioning to Intelligent Planning

By now, I hope that many companies have already switched their FP&A (Finance, Accounting, and Analysis) software or use of spreadsheets to a solution focused on Intelligent Planning and that the financial statements produced by the software are synchronized with one another – see my blogs All About Synchronized Financial Statements. These financial statements include the income statement, the balance sheet, and the statement of cash flows.

When there are both actual accounting data and budgeted and re-forecasted data, both in a similar format, one can look at both sets of data and perform analysis in various ways. To do that, the following activities must take place:

1. Close the Accounting Period: An accounting period is closed.
2. Transfer Actual Data: Actual accounting data is transferred to the FP&A software, preferably through an automatic data link from the actual GL to the FP&A software GL.
3. Transfer Budgeted Data: The planned and budgeted data is transferred within the FP&A software to the Analytics module. Multiple versions of the budget can be included in this transfer.
4. Setup Analytics Report Books: Analytics report books are set up within the software using a specific format used to convey results to senior finance and company management.

Leveraging the Analytics Module

What makes an Analytics module within the FP&A software powerful and really useful is the ability to change the timeline format as the fiscal year progresses:

Example of Timeline Adjustments

You’ve just closed the sixth period (month) of your fiscal year and transferred your general ledger account balances and maybe even account transaction details to the FP&A software. In your Analytics module, you set up the timeline to display 6 months of actual data followed by 6 months of forecasted data for the remainder of the fiscal year. If this is an income statement, you will see the first 6 months of the actual income statement and the last 6 months of the budgeted income statements.

For the last 6 months, you can use any of the available versions of the budget to analyze the overall forecasted performance for the entire fiscal year. Of course, you are not limited to 6+6 reports. For example, if you’ve only completed the first 3 months, you can create a 3+9 asymmetrical report. The following month this can be changed to a 4+8 report, and so on. Your Analytics report builder will easily let you do that, and you will also be able to save different versions and formats of these reports while maintaining the live connection to the data source.

Utilizing GL Analysis

Other typical uses of GL analysis are to present the data by business unit, location, department, or any other dimension used in your actual GL to define the hierarchy of your organization. Now you can see how each business unit performed against its defined budget. You can rearrange the various dimensions and analyze data in a similar way to using an Excel pivot table. If data was brought into the analytics module in detail (i.e. transactional data in addition to account balances or activity summary), then you can drill down into any of the accounts represented in the report. If you also have an actual vs. budget comparison, you can identify variances and in which business units these variances originated.

Importance of Year-Round Analytics

A lot has been written on this blog about the importance of performing analytics functions year-round and not just when the annual budget is prepared. Having a modern-day software solution will ensure you get the benefits from real-time data and self-serve capabilities. This is important because it allows any authorized user to create reports and use analytics functions without performing any programming, troubleshooting, or risking having material errors that may not be discovered for a long time.

With this type of self-serve system, users never have to rely on IT to create reports or wait for report requests to be reviewed, approved, and placed in a queue for IT or business analysts to work on. Useful reports can be created in minutes and distributed to those who need to see them.

Conclusion

To sum it all up, with these capabilities and quickly arriving at the correct report format, users and managers can clearly see actual results followed by forecasted data with totals that combine both. Then, if you add variance reporting to each completed actual period plus actual transactions, you will be better equipped to perform a more intelligent analysis of your GL and its financial statements.

It is a day like year-end for one of our companies that reminds me that analytics does not have to be done once a year after it ends, or quarterly, but rather year-round and continually. The benefit will also be year-round and continual.

Alan Hart, MBA, is Principal Consultant at Pacific Shine Group in Portland, Oregon, with responsibility for client business development and hands-on client project implementations. Prior to starting Pacific Shine Group, he worked in various executive accounting and finance positions with technology and growth companies. Notable is his 18 years in the hi-tech manufacturing industry where he served as Controller, Vice President of Finance and CFO of several privately as well as publicly held companies in the Hi-Tech industry, such as Hybrid Arts, Inc. Hamilton Bay Associates and Syncronys Software. In his role in management consulting, Alan has worked in diverse industries and with a variety of clients, including fortune 1000 companies such as Boeing, Delta Airlines, Intel, Wyndham Worldwide and others, as well as many mid-market organizations such as Guitar Center, Ducommun AeroStructures, Cypress Semiconductor, TriQuint Semiconductor and others.

Combining his skills and experience in engineering with deep understanding of technical accounting, he is able to assist small and medium-size manufacturing companies establish GAAP compliant accounting and reporting systems.

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