Financial analysis is inevitable for assessing a company’s performance and making recommendations about how it can improve going forward. In addition to financial analysis, companies also rely on consolidation and forecasting for a detailed overview of their business performance.
This article will cover the basics of financial analysis, consolidation, and forecasting to present the vital role they play for every business.
There are several types of financial analysis, and variance analysis is the most common one. This process includes comparing actual results to a budget or forecast. It is a critical component of a company’s internal planning and budgeting processes, particularly for professionals in the accounting and finance departments.
The process typically determines if a variance was favorable or unfavorable and then breaks it down to find what caused such results.
Here is an example of how variance analysis works. Let’s say that a company had a revenue budget of $2.5 million and actual results of $2.6 million. This results in a $0.1 million favorable variance due to higher-than-expected volumes (as opposed to higher prices).
The word consolidation means to join things together. When it comes to finances, this process refers to combining financial data from several departments (or even business entities) mostly for reporting purposes.
Importing data, mapping general ledgers to a single chart of accounts, normalizing the consolidated data, and producing reports known as consolidated financial statements are all part of financial consolidation.
Tools like Jedox enable businesses to ‘fix’ their financial consolidation in days, not weeks.
Financial forecasting refers to the process of predicting how a company will perform in the future. The most common type of financial forecast is an income statement. However, a complete financial model includes all three financial statements: income statement, balance sheet, and cash flow statements.
Click here to read more about financial forecasting and learn how to build a financial forecast from scratch.
Financial Analysis: Best Practices
Due to the importance of all the previously-mentioned processes, they must be carried out with the utmost care and precision.
Here are some best practices and recommendations regarding financial analysis, consolidation, and forecasting:
- Make sure to stay highly organized with data
- Keep all formulas and calculations as simple as possible
- Leave notes and comments in cells
- Always make sure that multiple employees review the work done
- Use data tables and charts/graphs to present data
- Base all your assumptions on data
- Pay extreme attention to detail while keeping the big picture in mind
Depending on the complexity of the process and the company’s preference, finance managers and data analysts can use something like Microsoft Excel spreadsheets to carry out all the calculations. However, some experts advise against using Excel because spreadsheets don’t facilitate collaboration, which can lead to a high probability of errors.
Thankfully, there are better suitable options out there.
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