Business Analytics Blog

Financial Analysis is not Accounting

Posted by Robert Trupe

Financial Analysis

      The role of the financial manager is tightly aligned with the strategic management of the company. The CEO relies on the financial analysis of the financial manager to align day to day operations and decisions with strategic goals. Although the accountants play an important role in scorekeeping for past performance, it is the financial manager who helps guide the company with future endeavors.
     It is interesting to discuss the difference between profits compared to cash flow and the relation to making business decisions. A business opportunity which may unfold profits in the future may not be in the best interest of the company due to the demand on cash flows which could jeopardize daily operations and other business opportunities which may arise.
     I have run into many business owners who do not realize the dislocation and differentiation between cash flows and profits. A common question by many small business owners is: “How can I make X amount of profits and be short of cash. Cash flow shortages can be detrimental to the health of a company. The concept of managing a business based on cash flows with profits being secondary may be one of the most important lessons to be learned for business success.

Financial Analysis

How Financial Management differs from Accounting:

      Both the accountant and the financial manager deal with cash flows. An accountant produces cash flow statements as a part of business financial reporting which contain the Profit & Loss, Balance Sheet (Financial Statement), and Statement of Cash flows.
     The main difference is that the accountant deals with documenting the past by “counting” historical transactions and organizing the results into accurate reports. This gives the CEO and Finance manager Past and Current picture of the company. Think of the accountant as the scorekeeper of a basketball team. They have an effect on the coach (CEO) and players by keeping score and showing past performance, but they do not necessarily produce a future game plan for future decision making (Strategic Management). The accounting role of accumulating accurate history and current status is very important to the CEO/Financial Manager because past history gives us a pattern which we can use to predict the future.
     The Financial manager differs by filling the roll of using the history, trend analysis, predictive analysis and business analysis tools to predict the future thereby advising the CEO of the potential risk/reward. The financial manager is the fortune teller whose crystal ball is in part the set of analytical tools CleverQ software provides. He or she uses the historical data to monitor financial metrics, predict sales, inventory demands, cash flows, and weigh risk. As a result of the financial manager’s advice, the CEO can adjust the game plan to maintain the course of the strategic goals while making returns to the stockholders and winning the game.
     The financial manager is not only worried about cash flows. He weighs cash flow with risk and profit. If immediate cash flow was the only factor for the financial manager to consider, he or she may advise the CEO to liquidate assets which would be the wrong thing for the company’s future profits. It is the assessment and balances all of the factors which produce the best outcome for the company.

Tags: Financial Analysis, Financial Metrics, Trend Analysis