Financial Analytics

What is Analytics?

Analytics defined:

Analytics is the process of discovering, interpreting, and communicating significant patterns

in data. Quite simply, analytics helps us see insights and meaningful data that we might not
otherwise detect. Business analytics focuses on using insights derived from data to make
more informed decisions that will help organizations increase sales, reduce costs, and make
other business improvements.

4 KEY TYPES OF DATA ANALYTICS

1. Descriptive Analytics

Descriptive analytics is the simplest type of analytics and the foundation the other types are
built on. It allows you to pull trends from raw data and succinctly describe what happened or
is currently happening.

Descriptive analytics answers the question, “What happened?”

For example, imagine you’re analyzing your company’s data and find there’s a seasonal
surge in sales for one of your products: a video game console. Here, descriptive analytics can
tell you, “This video game console experiences an increase in sales in October, November,
and early December each year.”

Data visualization is a natural fit for communicating descriptive analysis because charts,
graphs, and maps can show trends in data—as well as dips and spikes—in a clear, easily
understandable way.
2. Diagnostic Analytics

Diagnostic analytics addresses the next logical question, “Why did this happen?”

Taking the analysis a step further, this type includes comparing coexisting trends or
movement, uncovering correlations between variables, and determining causal relationships
where possible.

Continuing the aforementioned example, you may dig into video game console users’
demographic data and find that they’re between the ages of eight and 18. The customers,
however, tend to be between the ages of 35 and 55. Analysis of customer survey data reveals
that one primary motivator for customers to purchase the video game console is to gift it to
their children. The spike in sales in the fall and early winter months may be due to the
holidays that include gift-giving.

Diagnostic analytics is useful for getting at the root of an organizational issue.

3. Predictive Analytics

Predictive analytics is used to make predictions about future trends or events and answers the
question, “What might happen in the future?”

By analyzing historical data in tandem with industry trends, you can make informed
predictions about what the future could hold for your company.

For instance, knowing that video game console sales have spiked in October, November, and
early December every year for the past decade provides you with ample data to predict that
the same trend will occur next year. Backed by upward trends in the video game industry as a
whole, this is a reasonable prediction to make.

Making predictions for the future can help your organization formulate strategies based on
likely scenarios.
4. Prescriptive Analytics

Finally, prescriptive analytics answers the question, “What should we do next?”

Prescriptive analytics takes into account all possible factors in a scenario and suggests
actionable takeaways. This type of analytics can be especially useful when making data-
driven decisions.

Rounding out the video game example: What should your team decide to do given the
predicted trend in seasonality due to winter gift-giving? Perhaps you decide to run an A/B
test with two ads: one that caters to product end-users (children) and one targeted to
customers (their parents). The data from that test can inform how to capitalize on the seasonal
spike and its supposed cause even further. Or, maybe you decide to increase marketing efforts
in September with holiday-themed messaging to try to extend the spike into another month.

While manual prescriptive analysis is doable and accessible, machine-learning algorithms are
often employed to help parse through large volumes of data to recommend the optimal next
step. Algorithms use “if” and “else” statements, which work as rules for parsing data. If a
specific combination of requirements is met, an algorithm recommends a specific course of
action. While there’s far more to machine-learning algorithms than just those statements,
they—along with mathematical equations—serve as a core component in algorithm training.

What is financial analytics?

Financial analytics is the creation of ad hoc analysis to answer specific business questions
and forecast possible future financial scenarios. The goal of financial analytics is to shape
business strategy through reliable, factual insight rather than intuition.

By offering detailed views of companies' financial data, financial analytics provides the tools
for firms to gain deep knowledge of key trends and take action to improve their performance.
The benefits of financial analytics

As a subset of business intelligence and enterprise performance management, financial

analytics affects all parts of a business and is crucial in helping companies predict and plan
for the future.

Financial analytics involves using massive amounts of financial and other relevant data to
identify patterns to make predictions, such as what a customer might buy or how long an
employee's tenure might be. With a wealth of financial and other relevant data from various
departments throughout their organizations, corporate financial teams are increasingly using
this data to help company leaders make informed decisions and boost the company's value.

By helping businesses understand their top- and bottom-line performance (along with other
indicators, including financial and macroeconomic data), measure and manage their assets,
and forecast variations within the organizations and industries in which they compete,
financial analytics offers insight into organizations' financial status and improves the
profitability, cash flow and value of the business. Financial analytics also helps companies
improve income statements and business processes.

The importance of financial analytics

Financial analytics can help companies determine the risks they face, how to enhance and
extend the business processes that make them run more effectively, and whether
organizations' investments are focused on the right areas.

Advanced analytics and its ability to leverage big data will enable organizations to rethink
their strategies for solving problems and supporting business decisions. Analytics can also
help companies examine the profitability of products across various sales channels and
customers, which market segments will add more profit to the business and what could have
an impact on the business in the future.

Continuous visibility into financial and operational performance will help with more than just
decision-making; it will also increase visibility regarding the processes that support those
decisions. So, rather than getting data on employee turnover rates and the related costs after
the fact, financial analysts and HR leaders will be able to see what problems employees are
having and intervene to improve performance and prevent costly turnover. Another plus is the
potential for improved electronic linkage of records across the supply chain so that data will
only need to be entered once.

Despite the promise of financial analytics, business experts from the academic and corporate
worlds warn against automating bad processes. They note that the processes that provide
financial insights based on historical data are often disconnected and leave serious data
gaps. Poor-quality data can hurt business performance and lead to incomplete or inaccurate
customer or prospect data, ineffective marketing and communications efforts, increased
spending and bad decisions. To improve results, companies should use predictive analytics
properly, improve the quality of their data and manage it effectively.

Types of financial analysis

Financial analysis refers to the process of evaluating businesses, projects, budgets and other
finance-related entities to determine the stability, solvency, liquidity or profitability of an
organization. In addition to focusing on income statements, balance sheets and cash flow
statements, financial analysis is employed for evaluating economic trends, setting financial
policy, formulating long-term business plans and pinpointing projects or companies for
investment.

Types of financial analysis include the following:

• Horizontal analysis refers to the side-by-side comparison of an organization's

financial performance for consecutive reporting periods. The aim is to determine
major shifts in the data. Later, this information could be applied to a more detailed
analysis of financial results.

• Vertical analysis pertains to the proportional analysis of a financial statement.

Each line item on a financial statement is listed as a percentage of another item --
for example, every line item on an income statement is provided as a percentage
of gross sales, while every line item on a balance sheet is given as a percentage of
total assets.
• Short-term analysis provides a detailed review of working capital, involving the
calculation of turnover rates for accounts receivable, inventory and accounts
payable. Any differences from the long-term average turnover rate should be
studied further because working capital is a significant user of cash.

• Multi-company comparison entails tallying and comparing major financial

ratios of two organizations, usually in the same industry sector. The aim is to
determine the companies' relative financial strengths and weaknesses.

• Industry comparison contrasts the results of a specific business and the average
results of an entire industry. The purpose is to determine any unusual results in
comparison to the industry average.
Financial Statements for analysis

1. Balance Sheet
2. Profit and Loss Account
3. Cashflow Statement

Techniques of Financial Statement Analysis

1. Horizontal Analysis
2. Vertical Analysis
3. Ratio Analysis
4. Trend Analysis
5. Cost Volume Profit Analysis

Financial Key Performance Indicators (KPI)

1. Gross Profit Margin (operating profit / Revenue)

2. Net Profit Margin (Net profit / Revenue)
3. Working Capital Analysis (current asset – current liability)
4. Current Ratio (current asset / current liability)
5. Leverage (Total Asset / Equity Capital)
6. Debt to Equity Ratio (debt / equity capital)
7. Inventory Turnover (revenue / inventory)
8. Asset Turnover (Revenue / Asset)
9. Return on Equity (net profit / equity capital)
- ROE = NP/EC , ROCE = EBIT/(EC+DEBT)
10. Return on Asset (net profit / asset)
11. Trend Analysis - Seasonality
12. Cost Volume Profit (CVP) Analysis
Financial Analytics Case

case 1: Why RBI changed policy rate and its impact

case 2: How Russia Ukraine war impacted on indian economy

case 3: Which 3 stocks can be added to portfolio today and why

case 4: Impact of changes in current assets on company financial performance

case 5: Which sector impacted heavily due to rupee depreciation