What Is Financial Analysis and Reporting?

Financial Analysis and Reporting is a wide practice concerned with the evaluation and communication of a company’s key performance indicators that highlight the firm’s health and overall profitability.

Financial Analysis refers to the internal set of practices that collect, manipulate, and illustrate the company’s performance metrics while Reporting those same metrics can take various forms, depending on the business use cases, the type of audience (examples: business stakeholders, the general public, the company’s board), and the reporting standards the firm needs the adhere to.

In this article, we’ll provide an overview of these two key concepts that make up the cornerstone of one’s understanding of a company’s overall performance in its relevant market.

What Is Financial Analysis and Reporting Used For?

Financial Analysis and Reporting are used across a variety of use cases and key business processes which vary along key different dimensions. 
Key examples of objectives for the practice are:

• Presenting and informing the company’s management on the overall performance of the organization

• Reporting to the general public and the stock market (if the company is publicly traded) about the overall growth trajectory and current finances

• Internal projects that require an understanding of the company’s key assets and financial statements to better understand and evaluate options for revenue growth, cost reduction, and overall improvement of the firm’s key success drivers

How Financial Analysis and Reporting Works (Processes)

Independently of the area of application, there are fundamental components that constitute the core of most Financial Analysis and Reporting workflows.

Here’s an overview of the main ones we associate with common Financial Analysis and Reporting workstreams, which can be summarized across 3 key process steps: data gathering, data analysis, and reporting.

Financial Data Gathering

Financial Data Gathering consists of collecting and sourcing the key data sources that will be needed to ultimately answer the key business questions the specific Financial Analysis and Reporting workflow depends on. Typical data sources for this type of data are:

• Prior financial statements, such as the company’s income statement and/or balance sheet

• Financial data available on internal systems, such as common accounting application software, ERP,  data warehouses, or prior company presentation materials

• External data sources, when the object of the Financial Analysis & Reporting workflow is a target company subject to scrutiny. These are usually provided by data vendors (Bloomberg or Thomson Reuters, for example) or media platforms that focus on providing financial analysis and reporting coverage across markets and industries

These sources are usually combined to obtain a complete, up-to-date, and informative data set of financial data on which the analysis can rely. 

It is important to note that for any financial analysis project or initiative, relying on the latest and most accurate database is often the differentiator between an insightful analysis and a partial one, since most companies move very fast in today’s modern market. Therefore, taking data-driven action by relying on accurate and relevant data is now more paramount than ever.

Financial Data Analysis

Once the data is gathered, we move to the step of the analysis itself, where the objective is the manipulation of the data to answer the key business and financial questions that sparked the analysis in the first place.

Below, we provide four common examples of Financial Analysis and Reporting Use cases that center on this data-crunching step

Pricing data

Companies that want to gain better control of their top-line revenue growth often conduct deep financial analytics workflows that evaluate past data to understand the best product pricing across one or more core products and recommend a single or varied pricing strategy (which can vary according to the target market, customer profile, and competitor behavior)

The core focus of this analysis is usually to understand and simulate customer’s reactions to pricing levels, optimize for the highest profit, and secure the highest number of customers in a given market.

These types of pricing analyses are especially important in high-growth companies, where optimizing for revenue growth through a variety of revenue leavers (of which price is a key member) usually ensures success.

Cost allocation

Other companies that want to gain better control of their costs and find reduction or optimization opportunities usually focus a wide portion of their financial analysis projects on understanding the company’s operational efficiency.

The types and sources of costs are varied and spread across a high number of business functions (sales, marketing, finance, product, and engineering). Understanding how the cost profile of the firm moves and changes across the entirety of these functions is vital to make sure the company can sustain profitability in the long run. 

Thus, financial analysis workflows that focus on costs are especially important in mature companies, where the firm has usually reached a mature stage of its growth and tends then to focus on improving internal efficiencies and finding cost-saving opportunities

Cash flow analytics

Aside from growing revenue and conducting proper cost-saving initiatives, an important subject of many financial analysis studies is the firm’s cash situation and projections, which take into account the company’s cash flow, which is a key indicator of the company’s ability to generate positive cash in the long run, relative to its revenue, expenses and overall investments.

Aside from the cash generated (or burned) by a company’s day-to-day business operations, cash flow is also accrued in the form of investments and/or financing decisions (e.g. taking on debt or raising capital from its shareholders) as well as its capital expenditures for the construction of key infrastructure (data centers, or office buildings).

These dimensions all contribute to the company’s net financial position and subsequent financial health.

Corporate Development Simulations

Companies or individuals also get very busy analyzing the impact of inorganic growth opportunities, which contrasts with the organic growth strategy. The latter simply refers to growing the company solely relying on its core product and business, while the former turns to acquiring or merging with other firms to increase its overall financial performance.

Firms that are distinctly focused on growing via Mergers & Acquisition (M&A) operations spend a lot of time assessing the financial impact of potential M&A opportunities on the company’s business and financial performance. These operations, at a certain size, are usually massive and require hefty amounts of time, money, and resources dedicated to ensuring their success.

As a consequence, entire business functions, teams, and even entire companies fully focused on the analysis across the M&A landscape around a given firm, studying options and probability of certain operations to properly assess financial risk and return scenarios implied ahead of fully committing to a specific strategy

No matter the specific use case of the analysis, ensuring that its findings are accurately reported and effectively communicated to the target audience is as important (if not more important) as the core analysis itself.

Reporting and Communication of financial analysis outputs can take various forms, such as:

• Internal company board meetings, or meetings dedicated to key investors and shareholders

• Quarterly financial reporting calls for publicly traded companies

• Investor meetings for financing rounds of equity capital

• Specific and ad-hoc project meetings whose progress depends on a deep understanding of the financial data involved

Financial Reporting and Communication methods also vary depending on the legal requirements underpinned by a company’s requirements towards market participants, the overall general public, and the law, which also dictates precise standards for reporting financial metrics

Best Practices of Financial Analysis and Reporting

As we’ve seen, Financial Analysis and Reporting is a broad practice that is applied across all sorts of markets, company types, and stakeholders. However, there are relevant best practices one should be mindful of when embarking on a specific project, or task that depends on effectively analyzing and communicating financial data.

Be Industry Specific

Though at a general level financial metrics are generally standard, gathering expertise in the industry-specific key performance indicators that ultimately determine the financial success of a company will help the analyst better interpret general metrics in the firm’s relevant industry context.

Analyzing the cash flow drivers behind a retail chain is very different from the ones that a software company will focus on. Therefore, knowing the industry trends and peculiar dynamics will help enhance the overall value of the analysis and reporting 

Know your audience

Focusing on the final consumer of the Financial Analysis and Reporting always ensures not only that the analysis is accurate, but that the narrative that drives the numbers is well understood and communicated to the target audience.
Effective communication always starts with the ability to tell a story to the audience, and Financial Analysis and Reporting projects are no different in this regard.

Rely on the latest technology

Financial Analysis and Reporting is not a new practice, but with the latest advances in computer technology and AI (Artificial Intelligence), the field is becoming more prone to innovation and new solutions that make data easier to analyze and report on.
The Analyst can and should use the latest software tools that augment and enhance the quality of the Financial Analysis and Reporting initiative at all steps.

Adhere to the most common Financial Analysis & Reporting frameworks

Confidence and trust in the results and output of the analysis are also impacted by proper adherence to standard analysis and reporting frameworks, which can vary according to:

• Country

• Regulations

• Professional Certifications held by the analyst (Chartered Financial Analyst being one of the main ones)