3 financial analytics every business should monitor
With advances in technology, the modern finance team’s role has changed. Where previously, its primary function was to provide financial reporting, now finance professionals are expected to develop partnerships across the business and deliver vital insights alongside financial information. Monitoring financial analytics is key to creating this insight, and there are certain analytics every business should track.
The value of financial analytics
Financial analytics help businesses review their past performance, evaluate current performance and forecast future success based on their own trends and cycles. With this knowledge, businesses can make more accurate decisions and develop a stronger understanding of their organisational strengths and weaknesses.
Predicting sales through financial analytics
Sales are, of course, vital to a business’ success. Understanding the factors behind past sales performance – whether positive or negative – enables businesses to capitalise on or mitigate those factors in the future. Whether sales are impacted by consumer cycles, seasonal trends or economic changes, using financial analytics to predict sales can help you implement tailored strategies to strengthen your business.
Drawing on a combination of past sales data and correlation analysis (measuring the linear relationship between two continuous variables), you can hone your sales forecasts to be more accurate. With this insight – knowing when demand will rise and fall – you’ll be able to better manage your inventory to optimise your working capital and improve cash flow.
Analysing product profitability
While sales are usually an indication of business success, product profitability denotes financial health. Which is why it’s so important for businesses to analyse which products are the most lucrative. Although a product may receive considerable consumer demand, if the profit it generates isn’t as strong as other products sold, it may not be worth stocking. Employing financial analytics will help you determine this.
Product profitability analytics help you measure the profitability of individual products, rather than examining your product selection as a whole. This can help you assess the success of specific product ranges, and influence how you market and prioritise certain products.
Product profitability analytics can, however, be more complex than other financial analytics, as certain products may share cost bases or production processes. But finding a way to analyse profitability at a product-by-product level can provide a richer understanding of your business.
When looking at product profitability, it’s worth bearing in mind that although some products may not be as profitable as others, they can increase sales of other, more profitable products. For example, a product that requires repeat or replacement parts with a greater mark up may still play a valuable role within a product range.
Customer profitability analytics
Using financial analytics to understand your customers is as important as analysing your products. The more insight you gain on your consumers, the more effectively you can tailor your products and services.
Businesses often focus their efforts on determining the creditworthiness of prospects, but successful financial and risk management means analysing your customer throughout the life cycle. Customer profitability analytics establish the profit a business makes by serving a customer – calculated as revenue earned versus the costs incurred by providing that product or service.
With this information, you can segment your customers and distinguish between those who make you money and those who don’t. Often, it’s a small portion of your customers who are the most profitable, so being able to adapt your service to their needs is important. Indeed, it may be worth extending different credit terms to these customers to strengthen the relationship and increase sales.
Similarly, insight into these customers can influence how you market your product or service to future prospects.
Knowledge is power
Harnessing this crucial combination of financial analytics – predictive sales, product profitability and customer profitability – will give you a critical level of insight to strengthen, protect and grow your business, making calculated risks and informed decisions.