Numbers People in Action: Finance Analysis
August 18, 2009, 3:15 pm
Copyright © 2009 Integrated Profitability TM
A further continuation of the suggestion that came in to “…include a simple but meaningful scenario which you’d have the three Numbers People work through to posting, reporting and interpretation and planning…” The first article set up the simple scenario, the second dealt with Accountants & Bookkeepers, the third with basic Finance reporting. This article focuses on the analysis that Finance does.
The third step for Finance is to provide analysis and interpretation of the numbers. To the extent possible from the general ledger accounts, Finance will dig into changes in the numbers and provide explanations as to what is causing those changes, as well as identifying interconnected events. They use the information they have reported: what the number are and how they have turned out. The analytical stage focuses on explaining the numbers, and their movement, in terms of what is happening with the business creating the numbers.
For example,
● if the expense figure for the snacks has increased, it would be good if sales revenue has also increased. Even better if it has increased at a faster pace.
● if the amount in inventory is increasing, a fall off in sales would help explain what is going on
● if net profit is increasing, a decrease in expense or an increase in revenue would help explain the beneficial outcome
But what if things aren’t moving in expected, or at least hoped for, ways?
For example,
● the expense figure for snacks is higher, but revenues are lower. This squeezes cash flow and reduces net profitability
● the inventory number is decreasing, and revenues are the flat
Finance’s job is to get underneath the hood, behind the numbers and find out why they are behaving the way they are. The first step is to understand what the drivers of a particular change are and then to look specifically at each component of those drivers.
Let’s take the first example above: snack expenses have increased, but revenues are lower. Any one of the following could partially explain what is happening:
● The cost of the snacks have increased; volume of purchases have remained the same
● The number of snacks purchased has increased; the unit/item cost has remained the same
● The number of snacks being sold has decreased; the price has remained the same
● The price of the snacks has fallen; the volume of purchases has remained steady
There is an important issue here. Most general ledgers only hold accounting numbers, and most of those numbers are summarized to specific accounting lines. Which means there isn’t a lot of detail and most of the drivers listed above are not even included in the general ledger. Drivers like the cost of an individual snack, the number (and kind) of snacks purchased and/or sold, the realized price of individual snacks.
In other words, expenses (or revenues, inventories, credit card outstandings) may have gone up, down or remained flat and the general ledger is very clear about what is happening. But it is silent as to underlying transaction volumes and unit/item costs & prices. So, unfortunately, basic finance can only tell you what is happening and how much is happening, but not exactly how nor why it is happening.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 39
Copyright © 2009 Integrated Profitability TM
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