What Is Financial Analytics And Why Is It Important?

Introduction 

A financial analytics example is the investigation of business results and financial reports with the aim to understand the performance of the entity. The analysis covers the facets of the profitability, liquidity, and solvency of the business. This, in turn, helps to make decisions with regards to investing, policy, or determining the future state of action. The analysis can take place in corporate finance or for investment finance. Corporate finance deals with NPV, IRR calculation of a prospective project whereas investment finance analysis deals with understanding the competitive benefit in investing amongst a slew of competitive firms for an investor.

What is Financial Analytics?

Financial analytics is a field that gives different views of a company's financial data. It helps to gain in-depth knowledge and take action against it to improve the performance of your business. Financial analytics affects all parts of your business.

Importance of Financial Analytics

Analytics provide the answers to all these questions. Financial analytics lets the managers and executives in an organization have access to more accurate and detailed organizational financial information. This strengthens the relationship of the employee inside the organization.

Types of financial analytics

• Horizontal Analytics. This involves comparing an organization's financial results for several consecutive reporting periods.
• Vertical Analytics. This is a proportional analysis of the various expenses on the income statement, measured as a percentage of net sales.
• Short Term Analytics. This is a detailed review of working capital involving calculating turnover rates for accounts receivable, inventory, and accounts payable.
• Multi-Company Comparison. This involves calculating and comparing the key financial ratios of two organizations, usually within the same industry.
• Industry Comparison. This is similar to the multi-company comparison, except that the comparison is between the results of a specific business and the average results of an entire industry

Key Features Financial Analytics

Horizontal Analytics

Horizontal analytics compares balance sheet items in the balance sheet of the current and the previous year, as well as the balance sheet of the current and previous year's success. It is comparative analytics of the changes between the current and the previous year. The first step in this analytics is to calculate the difference between the current and the previous year in the following way: 

Difference (in absolute amount) = Current year - Previous year                             

There has been an increase in current assets and long-term assets, an increase in current liabilities, a decrease in long-term liabilities, and an increase in share capital. 

 Vertical Analytics

Vertical analytics of the balance sheet and the profit and loss account is significant because certain balance positions are expressed as 100% in this analytics. Then all other positions are expressed as% of that base position. This is about structural analysis of financial statements, that is, looking at the relationship of multiple positions concerning one that is treated as 100%. The most commonly treated as 100% are total assets and liabilities in the balance sheet and Income from sales in the income statement. 

Analytics of Financial Assistance Indicators 

Ratio analytics is one of the most commonly used financial analytics tools. In particular, the use of this method in practice implies knowledge of basic theoretical-methodological settings on which it is built as a complete and complete system for analytical testing of the financial and profitability position of the enterprise. Given that the analyst is at the disposal of numerous ratios, it is a significant issue of their choice, grouping, and determining an adequate order. In addition, the correct analytical interpretation of the quantified ratios of sizes is of the same importance. Today, based on massive use in practice and widespread distribution in literature, it can rightly be argued that this is an important method of financial analytics. In this regard, some authors almost identify financial analytics and rational analytics. However, this should be understood more as an emphasis on the significance of this method and less as an exclusive claim. 

Conclusion 

Financial analytics is a significant business-financial, economic and social phenomenon. The financial reports are a phenomenon of first-class public interest and they are subject to rigorous qualitative requirements. On a micro level, the goal of the business analytics is to achieve the goals of the

Company’s economy, which is reflected in the relations of its results and investments, i.e. through the realization of efficiency, is reduced to the study of economic laws that affect the work and business of the company. The goal of conducting business analytics is to know the possibilities and degree of application of the principle to achieve maximum results with minimum investments.