Insight in finance – the light bulb moment!

Insight is often talked about in Finance, but not always clearly defined. What does it really mean to provide insight and how does this differ from the core role of preparing financial and management reports and accounts?

Let’s Start By Defining The Basics:

Financial reports & accounts: A balance sheet, profit and loss, cash flow and other KPIs which correctly record and value business activities to accepted accounting standards.

Management reports & reports: Additional breakdown of the financial accounts by other dimensions; e.g. product, sales person etc. and other calculated KPIs.

Do these accounts and reports provide insight about a business on their own?

One of the primary purposes of the financial statements is to give analysts and shareholders information to compare companies on a like for like basis.

An expert can read financial statements and gain an understanding of the business e.g. sales, costs, investments, debt, cash etc. However this is limited to a publicly available view of the current state of a business, it would be a stretch to consider it as insight.

What Do We Consider As Insight?

One definition from the Oxford dictionary is, “An accurate and deep understanding.” This is a little abstract. Let’s further say that:

  • Deep means understanding business patterns; having an intuitive view of how business activities translate into financial numbers.
  • It’s not only financial and management balances and KPIs with explanatory comments. It’s something more – advice which leads directly to increased revenue, margin, asset utilisation etc.

What Kind of Analysis do Finance Do

Insight is driven from analysis, so it makes sense to think about the typical types of analysis finance does; common examples include:

  • Review the account postings; apply business knowledge, identity, investigate and resolve errors
  • Review the account postings & balances vs. prior period and plan – to identify and explain unexpected activities
  • Calculate KPIs – review vs. prior period and plan.
  • Develop scenario plans, what if analysis etc.

This analysis brings finance to a clear mechanical description of current business performance, yet it doesn’t on its own cross the boundary into Insight.

A Light Bulb Moment!

Perhaps the best way to think of insight is that it doesn’t come from one report or KPI, but rather it comes from a skilled individual / team using layers of information:

  • An individual or team – with deep knowledge and experience of the business and a critical thinking mind-set
  • Layers of information – validated account balances exist, with overlays of finance generated info – prior period, plan, KPI, trend analysis etc. And further overlay of non-finance data – market analyst, economist etc.
  • A light bulb moment – a leap or a light bulb moment, the individual or team bring together the business context and the layers of information to say, “Ah! We should do this”.

Examples 1: Inconsistent revenue

A company organises market festivals. They have predictable costs, but their revenue varies widely.

  • Deep knowledge – Finance have deep understanding of the business – they know historical performance and what has affected it.
  • Information – Alternative plan versions, monitoring actual performance against it, overlay of economics, weather, news, sales performance etc.
  • Insight – A late spring may affect produce availability and hence cost.

Example 2: Receivables Recovery

A company delivers business services. The demand from clients is highly variable and in addition clients may pay less than agree based on performance:

  • Deep knowledge – Finance understand the services, and the business teams, they have a solid view of factors which affect receivables historically – difficult clients, poorly performing divisions etc.
  • Information – Close monitoring of services provided, outstanding receivables, overlays of performance vs. plan and risk assessments on clients.
  • Insight – The ability to identify high risk receivables and focus attention.

These are basic examples, perhaps not quite Aha – light bulb! Moments, have you come across any great examples of finance insight?

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