Financial Analysis

Financial analysis is the ongoing work of the finance staff after budgets are put to bed.

This activity is hugely dependent on how the planning and reporting system handles importing of actuals data and supports variance analysis — both maintenance intensive activities with spreadsheets.

Alight Planning saves the finance staff time and delivers better analysis during a tight monthly close and re-forecast cycle. Alight is specifically designed to handle critical FP&A activities such as variance analysis and rolling forecasts.

The complexities of importing actuals
Types of variance analysis
Rolling forecast fundamentals

The complexities of importing actuals

Financial analysis and re-forecasting starts with comparing actual financial and operating results with plan. The trick is getting all of the parts imported from multiple database systems and lined up apples to apples.

• Level of detail — Managers frequently plan at a lower or different levels from accounting structures — for example, a sales manager may plan sales by product by channel but the general ledger delivers only sales by product — the real sales detail is in another database. Alight supports importing from multiple disparate databases at any level of detail, not just GL totals.
• Underlying units and rates — Granularity of detail is critical. Managers who plan using a unit/rate/amount architecture want to see that level of granularity with actuals data. Alight supports importing any combination of actual units, rate and amount for all P&L and balance sheet items. Alight also back-calculates missing elements — for example, if you import sales units and dollars, Alight calculates average price. If you import dollars and average price, Alight calculates the units.
• Operational data — Importing actuals should incorporate operating metrics as well as general ledger amounts — especially when financial plans are activity based with assumptions about activity levels and productivity. Alight supports importing operating data at any level with modeling or back calculating of ratios and metrics. For example, if you import billed consulting hours and consulting staff headcount, you can model and calculate consulting staff utilization.

Types of variance analysis

Variance analysis is the rubric for comparing actual results with plan. Here are three types:

• Traditional variance analysis — It works like this: compare actual amounts at the natural class account level to budget or forecast with a column that computes the dollar or percentage variance. Alight does this for all combinations of time periods — month, year to date, full year, etc.
• Not so traditional variance analysis — It should work like this, but usually doesn't: compare actual units, rates and amounts at the line item level to budget or forecast with columns that compute variances for all three data types. Alight does this.
• Causal analysis — Where actuals and plan line items include units and rate as well as dollar amount, you may compute a causal analysis variance. This variance type calculates how much of the total dollar variance is due to higher or lower units (the volume impact) or a higher or lower price/cost (the rate impact). Alight automatically computes volume and rate impacts for all revenue, expense, headcount and balance sheet line items that incorporate units and rates.

Rolling forecast fundamentals

Budgeting defines the basic structures of financial plans. However, most budgets are outdated within a couple of months of publication because market and operational conditions change. Developing a monthly or quarterly rolling forecast is the way teams update business plans and stay tuned with the marketplace.

• The forecast cycle — A major problem with rolling forecasts, especially if the cycle is monthly, is time. Forecasting often consumes the finance team and pre-empts collaboration because the window between the month end close and producing a forecast is too tight.
  
  Forecasting is easier where the planning structure includes modeled elements for costs driven by revenues and activity drivers — that is, many parts of the model can be updated and time saved by changing a few key drivers. Modeling using activity drivers is Alight's basic architecture.
• Integrating actuals for rolling forecast — Variance analysis requires that all elements of the plan, budget or forecast, be "frozen" when comparing to actuals data — that is, the budget or forecast data for comparisons are exactly as originally presented to management.
  
  For rolling forecasts, however, many line items where calculations cross over time periods should, in fact, be based on recent actuals. For example, forecast sales should be driven in early months from actual prospects or orders in the sales pipeline. Quarterly commission payments should be computed from actual commissions booked plus forecast commissions. Alight handles this "look back" condition for rolling forecasts.
• Scenario analysis for rolling forecasts — While budgets may be "frozen" for the year, scenario analysis during the rolling forecast process is important — especially for testing impacts of alternate timing of milestones such as launching a product, changing pricing or moving into a new facility. Alight Incorporates a broad range of tools for scenario analysis including managing time changes.