5 Principles of High-Quality Financial Analysis

Matthew Dziak

Analysis is such an integral aspect of finance it is prominent in the acronym FP&A, Financial Planning and Analysis, and rightfully so. Quality analysis is necessary to make informed decisions whose outcomes make it possible to reach a set of goals or objectives in an organization.

We can analyze a given set of information, data, and metrics and apply objective reasoning to make recommendations. The problem is not all analysis is created equal. It is much more of an art form than an exact science. You must dig deeper and peel back the onion a few more layers to reveal the reason for the surge in sales, which, in this case, is due to consumers using widget ABC at the beach during the summer months. 

We’ve identified a hierarchy of principles found in high-quality financial analysis. The first is to apply appropriate context to support a metric, trend or analysis. Second, be inquisitive and skeptical of the data by digging deeper, peeling back the onion and answering why. Third, frame alternatives clearly so decision makers can seamlessly evaluate their options and outcomes of their choices. Fourth, consider vested viewpoints as a decision might already be in the works. Fifth is to be mindful of subjectivity driven by bias or personal reasons that could contradict the insights.  Let’s take a closer look at these five principles of high-quality financial and operational analysis that best-in-class finance functions provide. 

1. Apply Appropriate Context

The availability of data has transcended finance into a business unit that must wrangle operational and financial data, synthesize it into metrics, analyze those metrics and deliver actionable insights to the necessary decision makers. The immense volume of data has increased tenfold over the past nine years and nearly doubled over the last three years.

Statistica Data Volume

We won’t try to decipher how much a zettabyte worth of data is, but for comparison, it is equal to one billion terabytes (TB). With all of that data, structured and unstructured, attempting to sift through the library of company data points and provide nuggets of insights without context can be detrimental to the organization. 

For accounting purposes, it is widely known that cash is king; however, for financial analysis, context is king. With analysis, context is essential, and without context, your analysis can be useless. For example, if you are a manufacturer of widgets and only provided a report to a sales leader indicating widget ABC unit sales increased dramatically in Q2 and into Q3 over the last two years, without conveying possible reasons for the spike, the sales leader would be inclined to hire more sales representatives and production teams might draw down more inventory to prepare for the surging demand, without knowing if it will last or to what extent. 

Without context, your analysis could mislead decision-makers to take action that might be detrimental to the business. This is one of the reasons why humans are still very necessary to the finance function, and providing prescriptive analysis is more critical than predictive outcomes artificial intelligence can generate. 

2. Be Inquisitive and Skeptical

There are many characteristics of great analysts and finance professionals, but the best analysts are the ones who are always looking to poke holes in the narrative. They might not be the first person you invite to a cocktail party, but they are certainly the first person you turn to when evaluating potential outcomes of your strategies. 

Be on lookout for a bit of dissonance, that one thing that doesn’t quite add up. A great example of this is in statistical analysis, where you might question why the data begins from a certain year or the axis starts at a certain point or percentage instead of say zero. Junior FP&A analysts and even AI tools can deliver generic, high-level analysis; however, these are oftentimes uninformed and not detailed enough to act on appropriately.

3. Frame Alternatives Clearly

The framing of choices is sometimes overlooked in analysis but can absolutely impact decisions. Decision-makers need to see clearly not only the choice they are making, but the potential outcomes of those decisions. This is where strategic scenario planning comes into play, though it is not a simple endeavor.

Finance has traditionally turned to Excel to deliver scenario plans, which requires a tedious, manual process that makes it difficult to quickly make a variety of assumptions across an entire business or even department. At a minimum, you should provide three scenario options - a best case, worst case, base case scenario, with permeations between each based on the dependent variables of your assumptions. If this becomes too complicated in Excel, which is very common, FP&A Solutions can be a viable option to streamline the process. 

Strategic planning is a priority for CFOs

4. Consider Vested Viewpoints

When you deliver financial analysis there is a chance it will have little impact on decisions, and not because it lacked substance. No matter how compelling or data-driven your analysis and insights are, realize that many times the decision-maker starts with a pre-made decision before you present any analysis. 

An extreme example of this is an executive thinking they can justify the need for a lavish company jet, when the reality is the necessity and benefit of the jet pale in comparison to the ongoing expenses and impact to cash reserves. 

5. Be Mindful of Subjectivity

Unfortunately, people are programmed with biases shaped by influence and experiences. Even if you are able to convey the reasons to clearly go in one direction, a decision maker may have a reason - unknown or not - to take another path. It can be the most difficult aspect to accept, but sometimes despite all of the analysis – decisions can be completely subjective.

A Financial Analysis Resource and CFO Partner

When you combine these principles with an inquisitive mindset, you can deliver tremendous value for your business partners and executives. It is imperative that financial analysis answer the “how” and “why” of the information or data. Analysis should reveal why the results were different than anticipated or projected. But most of all, analysis should tell us why we care about the metrics and data.

FutureView Systems Technology-Driven Finance Solutions

We can help you think through analytical approaches, decide which it coincides best with the needs of the business and implement technology necessary to facilitate insightful analysis. If your company requires more agile decision-making, driven by detailed and insightful analysis, consider FutureView’s Finance Solutions. Contact us to learn more today. 

Principles of High-Quality Analysis - FP&A | FutureView Systems