There are many analytical tools and models to identify problems and opportunities within the financial information. Today we will discuss how to decide which tool to use and how to get started.
The first step in using an analytical tool is to decide why you are doing this in the first place.
What are you hoping to achieve?
Who will be using this information?
When will they use this information?
How often will they be using this information?
What are the key pieces of data that will influence various outcomes?
What analytical tool would be best to analyze the information?
After you have answered the questions above, it is time to look at various analytical tools and decide which of them will be useful for your purposes.
There are various analytical tools and models that we can choose from. Here are a few:
Trend analysis - evaluating trends over time.
Scenario analysis - evaluating various scenarios
Sensitivity analysis - predicting the outcome of a decision given specific range of variables
Decision trees - net present value analysis of various future scenarios based on how likely they are to occur.
Root cause analysis - technique to identify key causes of behind issues in order to establish procedures or protocols to prevent it from happening in the future
Benchmarking -
Internal benchmarking is comparing performance between teams.
External benchmarking is comparing performance of the company to other companies.
Financial Business Model - a summary of a company's expenses and earnings and allows for benchmarking across various drivers.
It's important to keep in mind as you develop your analytical tool to keep detailed documentation of all of source information. This is key as individuals will want to know where each number was derived. Also, be sure to "protect" all cells that you do not want others to change.
Use as much historical information as possible when determining various outcomes.
Keep an index of all financial models you have created. You could have a spreadsheet with a column for each of the following:
Purpose of model
Description of model
Most recent version of model
Location/path of model (where it is saved)
File name
by Cynthia Bassett Hartwig, CPA