Why is financial analysis so boring?
a) Accountants are boring.
b) It’s difficult to understand.
c) It’s just rehashing the past.
d) There is too much detail.
e) All of the above.
When the president of the company where I was assistant controller handed me back my financial analysis with the question, “Bill, is this good news or bad news?”, I learned my lesson. To be effective, financial analysis has to be:
b) Free of jargon
c) Future oriented
In this article, let’s talk about the third characteristic – the future orientation.
Recently, the executive director of a client introduced me to a powerful way of reporting against the budget. It uses the same inputs as normal budget variance analysis, but transforms them into something that can make even non-financial directors sit up and take notice.
Traditional budget analysis compares the results to date with the budget to date and explains the differences. The extra step she takes is to apply that information to the whole year’s budget, turning a variance analysis into a forecast of the future.
Note that the forecast is not a crystal ball into the future. Care needs to be taken to explain that it is just an updated budget. It is difficult to predict the future, so an easier question to ask yourself is, “What is the impact of what I know now on the rest of the year?”
The result helps the Board put the comments into perspective. It’s easy to see whether the organization is expected to show a surplus or a loss. It also moves the conversation from explaining the past into discussing what changes the organization needs to make now.
What it looks like
The columns are:
a) Description – The financial line being discussed
b) Actual Year to Date
c) Budget Year to Date
d) Variance – c-b (in dollars or percentages)
e) Full Year Forecast
f) Full Year Budget
g) Variance – f-e (in dollars or percentages)
h) Note # – reference to the written analysis
Forecasting may appear risky, but when you have an organized approach and a clear explanation of the procedure used, it is an excellent discipline for the whole management team. And the more you do it, the better you get at it!
Bill Kennedy is a Toronto based Chartered Accountant with Energized Accounting, focusing on financial and reporting systems in the charitable sector. He blogs at www.EnergizedAccounting.ca/blog/. Find out more at www.EnergizedAccounting.ca; follow Bill @Energized