In the world of finance, numbers are more important than ever—their own special language where every figure carries significance. Each number plays an influential role in the future of the organisation, from investments to decision-making.

The professionals who have the expertise to understand, analyse, and converse in these numbers, known as financial analysis, play a crucial role for businesses. They help companies make informed and effective decisions based on financial data.

According to the Australian Banking Association, poor financial management is one of the leading reasons behind small business failure in the country. Financial analysts are critical for the success of any company, using data to predict outcomes and long-term planning.

Whether you want to study applied finance or you’re looking to hire a financial analyst, this article is for you. It’s an introduction to everything you need to know about financial analytics, from what it is to how it works, so you can decide if it’s a suitable career path for you or employ their services.

What Is Financial Analytics?

As described by Investopedia, financial analytics is the process of “evaluating a business’s financial health and performance by reviewing its financial data. It helps management run the business better and outside investors decide whether the company is worth buying into.”

A financial analyst, employed by an organisation to review all of its financials, performs this process. The data reviewed would come from financial statements, which are formal records summarising a company’s financial performance and position, and other related records.

There are generally three major types of financial statements (sometimes known as financial reports). These include:

• Profit and loss statements
• Balance sheets
• Cash flow statements
  

Financial analytics uses the data from the above-mentioned reports to transform the numbers into actionable intelligence. They can be used by stakeholders within and outside of the organisation to inform decisions, predict future outcomes, and create effective plans.

As described by ScienceDirect, the term ‘Actionable Intelligence’ refers to useful information that can be acted upon quickly, usually within 12 to 72 hours, for a strategic advantage. For businesses, where success is measured by their finances, being able to analyse and turn financial data into actionable intelligence is a strong weapon.

The importance of financial analytics

Financial analytics can provide a holistic overview of how a business is performing, its financial position, and uncover trends and opportunities. This makes it important for various reasons, including:

• Strategic planning: One of the biggest benefits of financial analytics is the ability to use the information for strategic planning. The actionable information from the analysis can give you the foresight to plan for market fluctuation, economic changes, and emergencies. 

• Making informed decisions: Similarly, the insight gained through financial analytics regarding an organisation’s current financial state can help management and outside stakeholders, such as investors, make informed decisions. For example, whether a business is worth investing in.

• Optimising business processes: Financial analytics can also help managers streamline business processes as it outlines problem areas that are inefficiently using resources, and where they can cut down costs.

• Setting realistic goals: Analysing financial statements also allows organisations to set realistic, achievable goals using real data from their current financial state. It also allows them to easily track their progress and make adjustments as needed to ensure success.

• Uncovering trends & opportunities: Similarly to data analysis, financial analytics can help uncover business trends and potential opportunities. For example, profit and loss statements can be used to determine current trends with customers/clients, whether a marketing strategy worked, and the success of products/services.
• Risk assessment and mitigation: Financial analytics can also be beneficial for risk assessments. Knowledge of when it’s safe to take a risk and minimising any potential losses is crucial for the success of a business. Financial analysis can help organisations tackle any current finance-related issues and preemptively prepare for future threats. 

Who Uses Financial Analysis?

Financial analysis is a powerful tool not only for company leaders, but a range of other stakeholders. Below is a list of a few different parties that benefit from the use of financial analysis, whether it’s for their own organisation or looking into another.

• Investors benefit from financial analysis because it gives them insight into a business’s current financial state. This information can be used to determine whether it’s worth investing, identify warning signs, and assess potential risks.

• Lenders often use financial analysis to determine whether an entity is eligible for a business loan and to determine borrowing power. Lenders would need to look at information like cash flow and growth trajectory for the loan process.

• Tax authorities use financial analysis to ensure tax compliance, verify reported income, and assess tax obligations. Similarly, organisations can use financial analysis to ensure they’re tax-ready and complying with regulations.

• Regardless of the industry, competitors can use financial analysis to determine how your organisation is performing and use the information to guide their strategic planning.
  

Financial analysis is also useful in every industry and sector. The process is even beneficial in scenarios like academic research, to study historical trends and economic impact. 

The Different Types of Financial Analysis

Depending on the organisation and their goal, many different types of financial analysis can be undertaken. Below is a list of the most common types and a brief description of how they work.

Vertical Analysis

This type of analysis shows each line item on a financial statement as a percentage relative to a key total on the same statement. This comparison can be used for financial forecasting, benchmarking an organisation’s performance against industry averages, and tracking fluctuations.

Horizontal Analysis

Also known as trend analysis, this tracks how financial items change over time. This can be used to uncover trends, identify sudden spikes in profit or loss, and revenue.

Leverage Analysis

It’s common for businesses to borrow money (leverage) to finance operations and growth. Using leverage is normal in the business world, but it’s an issue if a company overborrows. Leverage analysis can help prevent this by providing a holistic overview of a company’s repayment ability and future growth. 

There are easily a dozen different financial analysis types, which cater to different needs and outcomes. If you’re unsure which one would be best for your company, it’s recommended to speak to a finance professional, so you can ensure the analysis aligns with your company’s goals. 

Becoming a Financial Analyst

If you’re interested in financial analytics as a career path, the profession you’ll be seeking is referred to as a financial analyst. Generally, it requires studying a relevant bachelor’s degree, such as finance, accounting, economics, or commerce.

These degrees typically take three years of full-time study. It’s also recommended to pursue postgraduate study, such as a Master’s, which will help refine your skill set. It can also increase job opportunities, employability, and salary potential.

Although it isn’t required in Australia, becoming a Chartered Accountant (CA) or Certified Practising Accountant (CPA) is highly recommended. Generally, both require a recognised Australian bachelor’s degree or a postgraduate degree for eligibility.