Key Benefits of Effective Financial Statement Analysis

Want to optimize your workflows to strengthen your company’s performance in a crowded

marketplace? Cut your debts, strengthen your credit rating, and improve your cash flow?
What about making faster, more strategically valuable business decisions while improving
your compliance?

A financial analysis will not only help you understand your company's financial condition,
helping you determine its creditworthiness, profitability and ability to generate wealth, but
will also provide you with a more in-depth look at how well it operates internally.

Effective financial reporting and accounting, supported by best-in-class data management

and analysis tools, can make it happen.

1. Real-Time Analyses

With current and historical spend and performance data at your fingertips, financial
analysis can help you generate forecasts, reports, and data models to make informed,
strategic decisions quickly—not hastily. With real-time visibility and analysis, you can stay
ahead of the competition and take swift advantage of opportunities for growth and
investment that might otherwise pass you by.

2. Better Debt Management

Managing debts effectively is a priority for any business that wants to enjoy a long life. This
is a critical part of company’s ongoing financial health. Transparency into debt-related data
immensely improves your ability to manage it, and it’s not just corporations looking to tap
into the power of financial reporting and analysis. The United Nations, for example, has
invested heavily in optimizing its data management and enhancing its analytics toolkit in
recent years as a hedge against a growing global debt crisis.

Another example, if a business plans for an expansion loan, by using financial reports and
analysis, you can explore financial data and determine if the business needs to reduce
existing liabilities before applying for another loan. Financial analysis on your current
assets and liabilities will help you gauge your liquidity and manage debts accordingly.

Accurately tracking and analyzing the ratio between your current assets and current
liabilities, as well as the financial processes related to generating revenue and paying your
bills (i.e., accounts receivable and accounts payable), makes it easier to maintain short-
term liquidity, plan long-term debt management, and adjust workflows and processes to
ensure you’re getting the best possible return on every dollar when paying down debts.
3.Trend Identification

Regardless of what area of financial activity you’re looking to track, this kind of reporting
will help you identify trends, both past, and present, which will empower you to tackle any
potential weaknesses while helping you make improvements that will benefit the overall
health of your business.

4. Optimizing Financial Performance and Compliance

The insights you glean from analyzing your financial data have immediate value for
strategic planning and decision-making. But those insights also generate long-term value
by helping you identify opportunities to refine your processes, boosting efficiency,
accuracy, and speed overtime. Even more importantly, complete and accurate financial
data helps ensure complete and accurate financial statements that are fully compliant with
all income tax law and financial reporting standards such as GAAP and IFRS, along with
investor protection laws such as Sarbanes-Oxley and more recent data security standards
such as the general data protection regulation (GDPR).

Meeting your tax obligations is easier, too. Accurate and complete financial accounting and
reports simplify the tax process and also take much of the pain out of the auditing and
valuation processes by providing step-by-step, transparent data trails.

5. Cash Flow Management

An estimated 82% of all small businesses fail due to cash flow problems. But businesses of
all sizes are susceptible to cash flow challenges and unexpected market disruptions. A 2020
study conducted by the International Labor Organization (ILO) found that, for businesses
trying to navigate the COVID-19 novel coronavirus pandemic, cash flow management was
the number one threat to business operations and solvency.

By carefully reviewing your KPIs, you can dive deeper into your revenue streams and
liabilities to identify your current and future cash flow, create strategies to insulate against
unpleasant surprises, and make sure you’ve got the capital on hand to take advantage of
opportunities when they arise.

6. Improved Communication and Collaboration

On-demand, role-appropriate access to complete and clean financial data opens up a lot of
new doors for sharing information, strategic planning, and building strong relationships
with creditors, investors, and potential partners.

Real-time data analysis and sharing improves your company’s agility by putting everyone
on the same page and allowing teams to hit the ground running.
 For investors and creditors, a custom dashboard that documents key financial ratios such
as debt-equity ratio, return on assets, P/E ratio, working capital ratio, current ratio, quick
ratio, etc. makes it clear your company is committed to transparency, accuracy, and
compliance—an attractive combination when you’re attempting to secure new funds,
finance new product development, etc.

7. Reducing Risk Exposure

Mitigating risk is as important to your company’s financial health as process optimization

and data quality, if not more so.

Financial analysis can help you reduce risk in several important ways:

 Identifying and correcting delays, inefficiencies, and errors in your financial processes
before they become crises. Over time, and with the use of artificial intelligence and process
automation, iterative improvements can refine processes to improve performance and
accuracy even further.
 Using predictive analytics to anticipate changes in market conditions, supply chain
disruptions, etc. and develop contingencies accordingly.
 Leverage data-driven insights to make more strategically sound business decisions,
investments, and business process management initiatives organization-wide.
 Mitigating the risk of financial fraud by improving data security and spend management.
Some of the most important KPIs to track when you’re looking to mitigate risk include, but
are not limited to:

 Cash Conversion Cycle Time

 Return on Assets
 Return on Equity
 Operating Expenses Ratio
 Gross Profit Margin
 Net Profit Margin
 Working Capital

8. Improving Supplier Relationship Management

Paying your bills on time (or even early) is a good way to become your vendors’ favorite
customer. But paying early to capture vendor discounts isn’t always the right choice for
your cash flow management; sometimes, it might be smarter to pay as close to the due date
as possible to preserve liquidity, or even request delayed payment if you have a strong
relationship with your supplier.

Those relationships don’t just happen by themselves, however. Building a solid reputation
with suppliers—and being able to take advantage of special incentives such as early
payment discounts—is simpler when you use financial metrics to manage your spend.
Tracking your vendor payment error rate, for example, can help you pay the right amount
at the right time for a healthy cash flow while preserving good will between you and your
suppliers.
And don’t forget, choosing a comprehensive P2P solution will allow you to integrate your
vendors’ systems directly to support electronic invoicing, vendor catalogs, and automated
performance and compliance tracking. The more data you have, the more effectively you
can focus on building strong supplier relationships, add resiliency to your supply chain, and
identify opportunities to partner with key suppliers to develop new products, improve
your sustainable sourcing, or leverage economies of scale—all of which can give a
significant boost to your company’s competitive performance and financial health over
time.
Importance of Financial Analysis and Reporting

1) For taxes

One of the major importance and uses of Financial Statement Analysis and Reporting are
taxes. Government utilizes these reports to ensure that the Company is paying their fair
share of taxes.

The government’s requirements for these documents have created an entire industry of
auditing firms (like the “Big 4” of KPMG, Ernst & Young, Deloitte, and PWC) that exist to
independently review companies’ financial reports. This auditing process is also a legal
requirement.

Moreover, FSA are also a tool used in auditing and investigating cases in the BIR. For
example, I personally use FSA in determining how quickly a company replenish its
inventory for sale or inventory turn-over. (COGS/AVERAGE INVENTORY)

2) For other companies, investors, shareholders, etc.

As an investor, it only makes sense to know which companies are doing well so I can put
my money in a good investment. This is where financial statement reporting and analysis
comes into play. This tool can also be applied to creditors and banks who are assessing
your capability to loan.

With metrics such as the return on assets, return on equity, debt-equity ratio, and more,
this can portray the overview of the company’s financial performance tracked over a period
of time.

3) For internal decision-making

Accurate financial reports are crucial in using as a tool in decision making. This will be used
in management reports in analyzing the performance of a company.

Regardless of which area of financial activity you’re looking to track, this will identify
trends, both past, and present, which can tackle any potential weaknesses while helping the
company make improvements that will benefit the overall health of your business.

In conclusion, accurate financial report leads to accurate financial analysis.

4) For improved internal vision

Financial analysis and reporting are accurate, cohesive, and widely accessible means of
sharing critical financial information throughout your organization.
This can help answer vital questions on all aspects of a company’s financial activities, giving
both internal and external stakeholders an accurate, comprehensive view of the strategic as
well as operational metrics they need to make decisions and take informed action.

5) For building strategies and ensuring profitability

Following the previous point, financial analysis and reporting are critical to building
informed strategies and ensuring the business stays profitable.

(slide) With the help FSA trends and patterns in real-time as well as monitor their income
and expenses to allocate resources smartly.

6) For raising capital and performing audits

Financial analysis and reporting facilitate statutory audits. Statutory audits required by law
for an auditor to express opinion in the financial reports of a company. Moreover, as
discussed, these reporting tools will give concise, accurate and compliant information to
stakeholders.

7) For managing financial ratios

Ratios are essential to a business’s fiscal management initiatives - and there are many to
consider.

Critical financial reporting ratios include the Working Capital Ratio, Quick Ratio, Return on
Equity (ROE). With these ratios, it’s possible to preserve the company’s financial health
while developing plan and strategies that tip the fiscal balance in the company’s favor,
boosting your profitability in the process. Also as discussed earlier, one of the benefits of
FSA is you can review the financial trends of the company.

(optional) Generated with a professional financial KPI tool, the quick ratio is a metric that
tracks the short-term liquidity or near-cash assets that can be turned quickly into cash. The
point of this KPI, which is also known as the acid test ratio, is to include only the assets that
can be easily converted into cash, usually within 90 days or so, such as accounts receivable.

8) For accurate projections & predictive strategies

The predictive power of financial analysis offers dynamic data visualization from trend
spotting and real-time decision making. FSA can also be a tool to provide comprehensive
insights into that financial performance and processes.

A company can work in reverse (both internally and externallyjm, developing accurate
solutions or strategies that offered the best return on investment (ROI) along the way.
Source: https://planergy.com/blog/financial-reporting-and-analysis/

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