How to Use Financial Analytics to Improve Business Decision-Making

Nowadays, finance doesn’t merely rely on reacting to reports. Modern practices require that you have a dynamic relationship with the vast amounts of information you bring in each day.

Your job in the financial department is to discover the patterns in that data, find cause-and-effect relationships, and make data-driven business decisions and predictions. 

That doesn’t necessarily mean more work—only that the jobs are changing. Financial teams should expand and include machine learning engineers since they can help you organize and understand large amounts of data.

How financial analytics affect business decision-making

So, you’ve set up a beautiful website, with a lot of useful information for your (potential) customers, and use tools for nurturing your customers’ relationship with your business. 

While you now have a lot of data to work with, you may be unsure of how to handle it. Financial analytics can help. Here’s how.

1. Boost cash flow management

Seeing detailed cash flow in real-time helps you pinpoint problem areas. With these insights, you can predict cash requirements and steer clear of liquidity crises.

Above all, understanding your cash flow allows you to take proactive measures to improve the accuracy and reliability of your cash flow projections. Remember, being able to project the flow of money is one of the cornerstones in successful business decision-making.

2. See risks before they emerge

You already know the money flow patterns for your company, but if there are any anomalies or irregularities in the transactional data, you’ll find that out immediately. Financial analytics tools can detect unusual transactions—which can signal fraud—but also find trends in late payments, and analyze some important financial indicators. That way, you’ll be able to predict risks and take preventive efforts on time.

3. Reallocate budget items where needed

Want to know where you’re overspending or identify inefficiency? You can do that by analyzing spending patterns. That way you can improve existing processes, negotiate better contracts, allocate resources better, and find places where you can save money. 

4. Informed decision-making in strategic planning

Knowing internal financial performance together with market trends surely enables you to make informed decisions. When you are considering investing in a new market, reorganizing your company, or launching a new product, financial analytics will provide the needed information so you can make the best decision.

Just imagine how the best AI tools for business have changed other aspects of your business. The same can be done with financial decision-making. There are multiple AI-powered tools that can assist you with analyzing data and identifying potential investment opportunities. Smart investing and fixing underperforming processes both have a high potential of generating more revenue in the long run.

5. Bigger profit

Finally, by combining all of these individual steps, you’ll be able to maximize profitability. Besides that, with financial analytics, you’ll get information on revenue trends, operational efficiency, and costs, which means you’ll not only be able to identify—and address—underperforming processes, but also what generates the most revenue. 

Helpful financial analysis tools

Whether you have a small business and it’s tax season, or you’re a part of a large corporation, you’ll need and want some kind of automation in your process for analyzing your financial data.

Here are the four most common financial analysis tools. 

1. Common size statements

Companies usually have their financial reports, like balance sheets, income statements, and cash-flow statements available online. By transforming them into a percentage format, you can compare them to your results.

2. Comparative financial statement

Comparing financial results can show you some business trends over time. This kind of analysis can also uncover which element of your financial statement has the most impact over a given period of time. 

3. Ratio analysis

There are many kinds of ratios used in financial analysis. The most common are:

• Rate of return

• Profitability formula

• Liquidity

• Comparing with turnover

• Solvency

If you have any special needs, experts can prepare the ratio based on your requirements. 

You can even set up ratio analysis tools, like interactive calculators, for your customers as well.

4. Benchmarking

If you want to find out where your company stands in comparison to others or industry standards, use benchmarking. Not only that, but with benchmarking you can better understand what actions you need to take to achieve the industry standard or to become even better. 

Challenges that emerge from financial analytics

Even though all of this may sound like sunshine and flowers, analyzing a vast amount of data doesn’t come without difficulties. 

• Shifting the focus of the finance department and employing new people (with different kinds of expertise) is often challenging. Finding qualified people to work with usually means first hiring a few unfitting persons, only to find out exactly what expertise you really need. 

• You need to be certain that the data is accurate. Develop processes to check the data accuracy, update the data regularly, or even leave a chunk of data as the “control group”, so you can compare the results.

• Following national legislation about collecting and storing customer information might not go hand in hand with the software you choose to use. Before you start collecting customers' information, make sure you follow the strict rules that apply here. You don’t want to pay huge fines and have your reputation go down the drain. 

• Software is expensive. Try cloud-based solutions that might be more suitable for your budget. Nowadays you can find most software types on the cloud.

• Ensure that the data is secured and private. Cyber-attacks are more common than you think. If you’re using software such as QuickBooks, consider cloud hosting services that will ensure data security. For example, QuickBooks hosting services will enable you to securely access your data anywhere.

Conclusion

Financial analytics can help you better understand what is going on inside your company, which processes stand out (in a good or bad way), and where you stand compared to others.

With that information, you’ll be able to make data-driven decisions and predictions that can improve efficiency and investment efforts, lower risks, and increase profitability.