Rudra Narayan Pandey Nividh Consulting Nividh Business Intelligence 919448119930 http://www.nividh.com/bi/ondemand/fi nance_bi.

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F i n a n c i a l p e r f o rma n c e a n d c o s t ma n a g eme n tO n e d o m a i n o f b u s i n e s s value for analy tics can revolve around per formance management. Monitoring and decision making on financial infor mation is not often thought of as acompetitive str a t e g y, b u t i t c a n b e Key - T h e m o s t i m p o r t a n t f a c t o r i n b e i n g p r e p a r e d f o r s o p h i s t i c a t e da n a l y t i c s i s t h e a v a i l a b i l i t y o f s u f ficient volumes of high-quality data.

The importance of Business Analytics Analytics driven organisations are shaping their own business outcomes and delivering exceptional economic performance as a result For finance executives the benefit is clear: good data brings discipline to business unit planning and performance management and gives finance teams the insight to make fact-based decisions By understanding the strategic implications of the data, finance teams and decision makers gain the ability to change course in volatile

It is a defined process Business Analytics has a defined order: Data has been cleansed Clean data is converted to valid information Underlying logic of the model is correct Appropriate forecasting techniques have been Applied

circumstances and achieve competitive advantage

Challenges BI deployments across apps and departments Fragmented view of information No consistent definition of business metrics

Analysis and reporting on Financial Analytics

Are metrics such as product profitability, customer lifetime value, and marketing campaign ROI calculated consistently? Each analyst with a BI tool may have their own answer Top management requests get first priority, while needs of other Business users go unmet

Report-centric model with backlog of new requests in IT

Few users have timely and actionable information needed to optimize actions and decisions
Particularly middle management and front line users

Analytical review High level overview: an overall sense check on the data, model structure and outputs Hence, need to be clear what the key outputs are Do the results appear reasonable under the base case? Flex inputs to ensure that the outputs change as expected e.g. if Sales Volume is increased by 20%, what happens to Costs Of Goods Sold (and Sales)? Attempt to break the model (this will not always be an error) Chart key items to examine the patterns: Increasing / decreasing trend Blips Time lags or leading indicators Precedents / dependents analysis

Illustrative examples Is the company insolvent? Do Non-Current Assets over depreciate? What happens to the outputs if all inputs are deleted? Tests for hard code in formulae Tests for plugs Tests for #DIV/0! errors Chart key items such as EBITDA, debt waterfalls, ratios Create control accounts Is interest being treated correctly: rolled up vs. capitalised, etc. Ratios: Ensure they relate to key outputs Confirm definitions Enter some extreme numbers and review corresponding outputs

Profitability Gross Margin = Gross Profit / Revenue High level, quick and dirty analysis Provides contribution analysis at product and / or segment level Net Margin = EBIT / Revenue Ratio analysis Not always defined consistently Takes into account overheads Easier to manipulate, but basis for some valuations, e.g. EVA Compound Annual Growth Rates (CAGR) Looks at growth in profit (or other metrics) over multiple periods and provides an average annual growth rate (on a compounding basis) Assists with identifying performance against CPI, etc.

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Liquidity
Current ratio = Current Assets / Current Liabilities Frequently used ratio Short-term creditors prefer high current ratio Shareholders prefer lower current ratio Ratio analysis Quick ratio = (Current Assets Inventory) / Current Liabilities An alternative measure of liquidity that does not include inventory (because it may be hard to liquidate inventory quickly) It is often referred to as the acid test Cash ratio = (Cash + Marketable Securities) / Current Liabilities This is the most conservative liquidity ratio Excludes all current assets except the most liquid: cash and cash equivalents Indicates ability to pay of current liabilities if immediate payment demanded

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Liquidity
Debtor days = Closing Debtors x Days in Period / Credit Sales Very common ratio Frequently miscalculated Creditor days = Closing Creditors x Days in Period / Credit Payments Also, often miscalculated Ratio analysis Inventory turnover = Cost of Inventory Sold / Inventory Identifies slow moving stock if broken down Can be calculated in days also Gearing Gearing ratio = Debt / Equity Proxy for financial leverage

Finance professionals need to learn efficient and effective data forecasting methods in order to make effective decisions Almost all managerial decisions are based on forecasts of future conditions Forecasts are needed throughout an organisation and they should certainly not be produced by an isolated group of forecasters Forecasting is never finished Forecasts are needed continually, and as time moves on, the impact of the forecasts on actual performance is measured, original forecasts are updated, variance analysis assessed and decisions modified, etc.

Managers are required to make decisions under uncertainty about the future In order to make those decisions, it is necessary to forecast key variables The choice of forecast models can have a significant impact on the accuracy of forecasts It is necessary to understand forecasting methods (and their limitations) in order to make reliable and timely business decisions


Break-even Analysis For Month Ended June 30, 2010 Fixed Costs (Operating Expenses) $ 962 Variable Costs (Cost of Goods Sold) 3,680 Break-even in Sales = Fixed Costs + Variable Costs = $4,642 Formula to calculate the break-even point: Break-even = Fixed Costs (Operating Expenses) + Variable Costs (COGS) OR Break-even = Operating Expenses Gross Margin per unit

Fixed Costs: These are expenses that do not fluctuate in relation to the amount of sales. They can be considered operating expenses. Examples of fixed costs are monthly phone bill, insurance payments, rent, etc. Variable Costs: These expenses vary. (If these expenses contribute directly to the production of a businesss service or product, then they can be considered Costs of Goods Sold as well.) Some examples are supplies, wages, etc.
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(Break-even) Sales = Fixed Costs + (Variable Costs / Estimated Revenues) x Sales

The key relation for CVP analysis is the profi t equation. Every organizations fi nancial operations can be stated as a simple relation among total revenues ( TR ), total costs ( TC ), and operating profi t: Operating profi t = Total revenues - Total costs Profi t = TR - TC (For not-for-profi t and government organizations, the profi t may go by different names such as surplus or contribution to fund, but the analysis is the same.) Both total revenues and total costs are likely to be affected by changes in the amount of output. 1 We rewrite the profi t equation to explicitly include volume, allowing us to analyze the relations among volume, costs, and profi t. Total revenue ( TR ) equals average selling price per unit ( P ) times the units of output ( X ):

Total revenue = Price *Units of output produced and sold TR = PX In our profi t equation, total costs ( TC ) may be divided into a fi xed component that does not vary with changes in output levels and a variable component that does vary. The fixed component is made up of total fixed costs ( F ) per period; the variable component is the product of the average variable cost per unit ( V ) multiplied by the quantity of output ( X ). Therefore, the cost function is Total costs = (Variable costs per unit Units of output) + Fixed costs TC = VX + F
Profi t = Contribution margin - Fixed costs (P -V)X-F

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