Business relies on finance.
If your finances are a mess, your company at large is likely to be in a similar state. Conversely, a company with highly organized finances and optimized budgets will also be equipped to perform as well as possible.
That’s why financial performance analysis is so important, and why it’s well worth investing time and effort into getting it just right.
We’re going to explore the top tips you need to start improving your own financial performance analysis. First, however, we’ll be giving you a quick rundown of the reasons why this is such a great idea to begin with.
Why Work on your Financial Performance Analysis?
As mentioned, financial performance analysis helps your business thrive. But why?
Put simply, your company can’t run without money. From the smallest mom-and-pop store to the biggest multinational corporation, financial performance is crucial to every business’ success.
On its own, your financial performance is simply the extent to which your finances are under control, well-managed, and meeting your targets. For example, for an in-person only store, this typically includes counting the till and tallying up card purchases.
Financial performance analysis, then, is all about taking a statistical approach to this. So instead of simply counting the till, you might look at how many card vs cash payments were made, what the value of the average purchase was, how your profits compare to your expenses, and more.
This type of analysis lets you continuously improve your financial performance, which means growing and improving your business. This is why it’s so crucial, and why you should pay close attention to our top tips for boosting your financial performance analysis.
Key Takeaways
- Every business needs at least a solid understanding of finances in order to function.
- With financial performance analysis, you can perfect the way your business handles its money, which means more growth opportunities and a better bottom line.
- Financial performance analysis relies on statistics and data, which makes it a fact-based approach to your company’s spending and saving.
Boosting Financial Performance Analysis: The 10 Best Practices
Next, we’ll dive straight into some of the best tips you need to follow if you’re hoping to really revolutionize your financial performance analysis.
Our best practices are useful to all kinds of businesses, regardless of their size and scope. They’re listed in no particular order.
1) Align with your Business Plan
Your business plan should dictate the way your whole company moves and operates. If you’re focused on acquiring new customers over everything else, all your other processes need to reflect this, including your financial performance analysis.
To make this happen, you’ve got to be sure of what your main overall business goals are. In the above example, you’d want to focus on how your financial performance impacts your conversion rates, such as by considering how effective your deals, special offers, and prices are.
Another major aspect of properly aligning your analysis with your goals is to make sure you always do the following:
2) Choose the Right Metrics
The metrics you use to guide your analysis will directly shape the nature of the results you get.
For example, let’s say your metrics are all focused around your investments. This would let you get a very clear picture of where your money is going and why, but ultimately leave you with little insight into the sources of that money in the first place.
To create a balanced result, you’ll want to use a boosted decision tree that lets you eliminate metrics you’re not interested in and hone in on the ones that matter most to you. Also, be sure you consider each time whether a given metric will help you better understand whether you’re meeting your business goals.
3) Look Beyond the Short-Term
A sudden influx of money can look great in your analysis–until you realize you only got that influx because the winter holiday period is right around the corner (more on this shortly). Likewise, a financial solution that saves you money today by creating problems tomorrow is not sustainable in the long term.
That’s why your financial performance analysis always has to consider long-term ramifications.
For example, let’s say you’re looking to reduce overhead costs, so you introduce layoffs within the company. In the short term, this achieves your goal and saves you money. However, in the long term, it might end up creating more costs, especially if your employees are more likely to quit and you’re missing key roles that previously kept the company running smoothly.
Your financial analysis needs to broaden its scope and account for the future consequences of current situations and decisions. That way, you can be better prepared and more appropriately equipped.
4) Use FP&A Software
Financial Planning and Analysis, or FP&A for short, is all about properly planning and preparing for the future. Using FP&A software that’s specifically built for this purpose will help you perfect your analysis much more easily.
For example, you might use financial modeling software to generate visual representations of your financial data. This lets you get a better sense of the state of things, so you can draw accurate conclusions and realistic insights, which in turn enrich your analysis.
Furthermore, integrating a robust project management tool like ProjectPro into your financial planning and analysis toolkit can streamline project tracking and budget management. This can enable you to monitor project expenses, forecast budgets, and optimize resource allocation effectively.
5) Critically Examine your Supply Chains
Paradoxically, a company’s financial situation often relies on factors outside of the company. This includes supply chains.
To that end, it’s well worth applying supply chain optimization models and seeing whether there are any changes you could make that would improve your own finances. A supply chain link that’s holding you back could create adverse ripples in your company’s overall finances, just as the inverse could be true.
6) Stay on Top of Trends
It’s common knowledge that fashion and popular culture alike are subject to trends–but so is finance. New practices can suddenly surge in popularity, and often recede just as fast, making it harder to keep track of what’s current and what’s already outdated.
However, if you want to get an accurate picture of the state of your company’s finances, you’ll need to keep track of topics like AI trends in finance every time. That’s because you’ll need to know if you’re following these trends in practice, and why.
7) Consider Holidays and Similar Cycles
We mentioned that short-term fluctuations in finances can, and often do, come about due to holidays. Taking these cycles into account is vital to good financial performance analysis.
For example, you might sell a lot more summer-themed products while the northern hemisphere is in summertime, as the majority of the world’s population will be experiencing warmer weather. To assume that this increase will last year-round is short-sighted, just as ignoring its existence would be.
Your financial analysis improves when you’re always accounting for seasonal and cyclical variations in customer preferences.
8) Understand Your Tech Stack
Using the right tools for your analysis has already been covered–which is why we’re going to focus on tools outside of the analysis itself here.
Your financial performance analysis relies on knowing how your company is spending its money. This includes tech spending.
Only by fully understanding what each of your pieces of tech do can you accurately say whether you truly need them.
Moreover, if your business involves selling items on eBay or any other e-commerce platform, it’s essential to comprehend how your tech stack facilitates and enhances these operations. Whether it’s inventory management software, e-commerce platforms, or payment processing systems, each component plays a crucial role in optimizing your financial performance analysis.
9) Use Accurate Predictive Models
When you’re analyzing your finances, you’ll rarely operate in a vacuum. Instead, you’d be comparing your observed financial realities to your predicted ones, as well as to your financial goals. This means you’re relying on accurate predictions.
In other words, a highly accurate financial forecast should make up the backbone of your whole financial analysis approach.
That’s why you’ve got to always use fresh data and up-to-date predictive models. These two alone can make the difference between reliable and unreliable predictions.
Moreover, leveraging collective intelligence through collaborative forecasting methods can enhance the accuracy and reliability of your predictive models. By incorporating diverse perspectives and insights from various departments or stakeholders within your organization, you can attain more robust predictions that account for a broader range of factors influencing your financial performance.
10) Remember to Ask Questions
Above almost all else, you’ve got to remember that mistakes lead to progress, and asking questions is better than pretending to know all the answers. For example, it’s so much better to spend a little bit of time researching the answer to a question like what is data governance?, than to assume you already know and end up breaching data protection laws.
Financial performance analysis can get very complex. In order to do it well, you’ve got to understand where all of your company’s money is coming from, where it’s going, and what sorts of factors influence both of these movements.
That’s a lot of information. There’s no shame in not having all of it memorized, so long as you ask questions and remain open to learning new things.
Final thoughts
Optimizing your company’s financial performance analysis should always be a continuous process.
That’s because the world of finance is always growing and changing. For example, your company might choose to accept cryptocurrency as a payment method, or it might decide to retract that option if crypto crashes or otherwise destabilizes. Your analysis should reflect this.
To that end, it’s absolutely vital to always keep an eye on your analysis procedures and update them as needed. Only through continuous improvement can you secure continuous growth.
And continuous growth in your financial performance means your business at large can enjoy the same.
