Using financial analytics to improve business health

In an increasingly competitive landscape, it is important for businesses to accurately forecast and plan for the future. This comes from more than just looking at financial reports and statements. Businesses need data-based insights that can aid in their day-to-day decision making, which will ultimately affect their future accomplishments. Financial analytics software is a critical component to any organization’s tool set.

What is a financial analytics tool?

Most businesses know they need to leverage their data more often, but what is financial analytics software and how do businesses use it? Financial analytics (also known as finance analytics) is a subset of business intelligence that focuses on helping companies answer business questions that aid in predicting future financial scenarios. Financial analytics allows businesses to gain deeper insights on key trends and improve their performance. Businesses use financial analytics to create a more accurate strategy based on facts rather than intuition. Essentially, financial analytics tools provide the ability to interpret current financial results while also planning for future outcomes.

How do companies use financial analytics?

Because it allows businesses to manage and measure their progress, financial analytics tools are a necessary asset that companies should be investing in. Financial analysis should be an important dimension that is considered in nearly all, if not all, areas of an organization’s operation. Businesses both use financial analytics to enable forecasting for the future while also documenting and understanding current company performance.

Companies can use financial analytics to answer various types of business questions that may arise. Some of these questions can relate to:

• What customers might choose to purchase
• Relationships with customers and how those relationships can affect the company’s working capital
• How executives can use real-time financial information to drive business decisions
• What investments may be best to make based on different financial factors like capital and revenue
• How key value drivers may be affected by different business decisions
• How to make various business processes more efficient
• How future events may affect product prices
• How financial KPI trends such as COGS, OpEx, ARR, renewals, etc. can drive insight and action
• How seasonality affects key metrics

While this list provides an idea of different types of business questions, it does not even begin to scratch the surface on the endless questions that financial analytics can answer.

Financial analytics utilizes different methods to help businesses develop strategy. Due to continuous changes in the business landscape, business leaders team up with professionals in various fields (such as finance and tech) to gather data. This analysis process requires more than just looking at financial reports. Instead, it requires business professionals to gather financial and any other pertinent external data to identify specific patterns. Company leaders then use these patterns to make informed decisions to boost their companies’ value.

How can financial analytics add value to my organization?

Companies can reap significant benefits when they use financial analytics. By looking to the past at financial reports and other data, business leaders can then look to the future. They can do this by studying trends and constructing strategies to help make future projects successful.

Employing financial analytics processes also helps companies to find insights from huge amounts of data. This is done through filtering and analyzing the data. These insights can help streamline processes that businesses intend to carry out.

While still on the topic of insights, businesses can produce new insights that, in the past, were not possible nor practical. They can do this through combining internal and external data that they have collected. Internal data includes any information that a company might pull from its internal databases, customers, reports, and software. External data might include information that businesses find through big data, social media, and demographics.

Financial analytics helps business leaders to visualize their data. Streamlining data is much easier through financial analytics software, which adds clarity when presenting the data. When the data is easier to understand and is presented with visuals, it has a higher impact.

The data that financial analytics tools help to gather allows business leaders to take confidence in their business strategy. When a company is data-driven, its leaders can lessen risk and act with peace of mind.

When creating strategy, financial analytics is crucial. Successful strategy that is formulated based on credible data is a vital asset to a business. When financial analytics tools present this data in a user-friendly manner, it makes the company’s finance function a more valuable asset to the business.

Using financial analytics allows business professionals to work backward to solve issues that their business is facing. While working from the end can potentially reveal new issues, it can also reveal helpful, valuable information that business leaders were originally unaware of.

Financial analytics also helps business professionals weed out data that is less important to them and instead, use data that fits their companies’ unique needs. This allows for businesses to be more structured and manageable.

The data that comes from financial reporting allows companies to focus on smaller business areas that can act as test programs for bigger issues. When businesses use testing in smaller areas, they can tweak and improve strategy to better fit their company’s larger needs.

Financial analytics use cases

Like any other dashboards, there are metrics that are essential in a financial analytics report. Financial analytics dashboards include three very important categories, each with their own metrics.

Business health

The first of the three categories is business health. Companies use business health metrics to evaluate short and long-term financial metrics based on a company’s short and long-term goals.

The metrics included in the business health category are revenue and net-new revenue, net profit margin, and LTV:CAC.

• Revenue and Net-New Revenue: These metrics measure a company’s size and growth.
• Net Profit Margin: This metric helps evaluate a company’s profitability. The net profit margin does this by calculating a company’s ratio of profits to the company’s total revenue.
• LTV:CAC: Shows the ratio of a customer’s lifetime value (LTV) to a customer’s acquisition costs (CAC).This metric shows if a business is in a good position to grow long-term. It also has the potential to have an influence on sales and marketing strategies within a company.

Customer health

Another of the important categories on a financial analytics dashboard is customer health. The metrics in this category measure how a company’s existing relationships with customers are impacting the health of the business. Customer health helps a company’s customer service department understand how well it is performing and where it needs to focus its efforts and resources.

The metrics included in the customer health category are number of active customers, gross and net revenue retention, and time to value.

• Number of Active Customers: Because this metric shows an actual, viable number, it allows various departments to compare actual numbers versus projections.
• Gross and Net Revenue Retention: This metric shows how well a company is keeping its customers. It reveals customer satisfaction to company leaders.
• Time to Value: This metric measures how long it takes for a product’s value to implement for a company’s customers. Time to value allows for a business’ departments to decide whether they need to invest in programs that help customers experience the value in the product.

Employee health

The third essential metric category on a financial analytics dashboard is employee health. Employees are one of the most important assets to a business. Employee behaviors and trends, such as retention rate, are vital to a company, as they affect how the company is functioning.

The metrics included in the customer health category are employee retention, headcount budget vs. actuals, revenue per employee, and employee survey data.

• Employee Retention: Businesses should keep track of how many employees stay with the company over specific amounts of time. This can help reveal employee satisfaction levels.
• Headcount Budget vs. Actuals: This metric shows employee growth vs. forecasts to see if the company is expanding at the pace it is projected to.
• Revenue per Employee: This metric can reveal how productive each employee is by measuring the profit each employee is making for the company.
• Employee Survey Data: By distributing surveys to employees, business leaders can track employee satisfaction levels. When business leaders implement changes based on certain findings from employee survey data, they can boost employee satisfaction. In return, a business’ overall performance can be boosted as well.

Each company is different, and financial analytics allows business leaders to form strategies based on their company’s unique needs. Financial analytics tools reveal past data and provide visibility into difficult to address business questions. In turn these insights can help produce a more informed view of what the company’s future may look like. Sophisticated reporting via a financial analytics tool is vital to business’ short-term health and long-term growth.