Monday, February 18, 2013

The Role of the Financial Analyst

Ernesto Hontoria

Here we are, trying to describe the occupation that allows us to earn our livings for some years now. What is the role of The Financial Analyst in a company? Without any question I would say it is to clarify accounts: search for numbers, add and subtract them, put a bunch of them together in a table or chart that will make our boss happy to have something to show to his or her superior, when this makes questions about the financials. It is not a boring and tedious work, as it was once described to me by the merchandising manager in charge of the book department in the company I worked some years ago. She wouldn’t be able to spend the day reviewing numbers – she said. Rather, I would say, it is a noble occupation, that seeks to give happiness and peace of mind to those leading the company. After all, they could not sleep well at nights without understanding why the company accounts are showing those numbers, and what those numbers really mean. How could they sleep well without knowing whether the company is heading or not in the right direction?

The Financial Analyst is a smart person -usually charming and nice looking- sitting for more than eight hours at a computer, making reports, checking numbers, explaining changes, analyzing spending accounts, projecting revenues, preparing presentations, taking coffee and more.  In my experience, those activities could fall into three main groups: reporting, analysis and planning. The reports are the basis to build the business intelligence (BI). Their function is to give those who run the company information on the status of operations and industry. The Financial Analyst is usually responsible for gathering the information that feeds many of the reports designed by the company. He or she gets the data, filters it, sorts it, and puts it together in previously agreed reporting templates. Once the report is ready our hero –or heroine- reviews and conciliates the numbers and, after assuring that everything is right, distributes or publishes it in order to guide future decisions.

Analyzing is more interesting than reporting. Its goal is to seek and find answers to different situations that arise in the company: Why are the sales dropping? Why are the operational costs rising? Why the financial statement of this month shows the rental cost with an opposite sign? The Financial Analyst must seek answers to different questions, browsing in the accounting systems, looking at the transactions behind the numbers, understanding the reasons why the accountants have booked transaction in one way or another, checking whether the numbers accurately reflect the operational status of the company. Analyzing requires contacting the people involved in the activity that is being analyzed, sometimes in both, accounting and operations, in order to understand what is really going on, and to ensure that the financial statements and reports accurately reflect the operational status of the company.

The Financial Analyst not only looks to the past. He or she needs to understand the operational processes in order to be able of projecting the future, of building economic models to estimate incomes and operating costs under certain assumptions and in different scenarios. How much would the company receive as income if the product is sold at certain discount? How much would the raw materials cost in a couple of years? What would be the impact in the cost structure of paying a salary increase? What would be the return for expanding the plant capacity? Projecting the future is part of the planning. To do this, our fellow Financial Analysts should understand how the several operational processes interact with each other, turning raw materials into inventory, inventory into sales, and sales into cash to cover operational costs and provide profit.

To carry out the duties of this job, The Financial Analyst must have the ability to communicate well with others, so as to maintain good working relationships with colleagues, accountants, cost analysts, plant operators, managers, and even with people outside the company. Good communication skills are essential to clarify accounts; to understand what is behind the numbers in a report, what is happening in the business, and to project what will happen in the future.  The numbers that The Financial Analyst manages in the solitude of her or his job are not boring and tedious. Those numbers, which have been obtained from different sources, including communications with operators and accountants, are instead full of meaning and technical details about the company and the industry.

Sometimes it will be better to communicate face to face, or by phone. Others, the analyst will find more convenient to write an e-mail or letter with tables and charts attached, referring questions or comments which would be difficult to explain otherwise. In many cases the analyst will need to use both: submit written information with tables and charts, formats and templates, and also establish personal contact to answer questions and to avoid misunderstandings. A good analyst should be proficient in oral and written communication, should know how to ask the right questions and find the right answers, to understand the technical jargon and be able to synthesize the findings, in order to expose and explain them to decision makers. In her or his position, The Financial Analyst is exposed to many people from different levels in the company, which I dare say makes the ability to communicate well almost as important as the ability to deal with numbers.

The activities of The Financial Analyst ultimately aim to make the best decisions possible. Reports, financial statements, analyses, economic models are instruments to understand the situation of the company and its industry, and to take actions accordingly. Accuracy and correctness of the numbers, analyses, interpretations and reports are important to allow good decisions. The better the analyses and reports reflect the real situation of the company and its industry, the better will be the decisions of those in charge of taking them.

One of the challenges facing businesses today is to be able to integrate information from multiple sources into concise reports and analyses in order to to facilitate decision-making, that is, turning information into appropriate action to survive in a highly competitive world. The integration and management of information, known today as business intelligence, has led to the emergence of computer systems that integrate data from multiple databases, in various ways and in relatively simple manner. The problem for companies today is not the access to information; most of them have abundant information about their customers, their buying habits, the amounts they spend, their ages and their tastes. Nowadays companies also have a sea of ​​statistics of their own production processes, productivity, failures of their machines, the cost of each part, each screw, the time it takes to repair them, etc. The issue is, rather, how to digest the vast amount of data, how to convert it into useful information, how to interpret it correctly, and how to take advantage of it.

The Financial Analyst has a starring role when trying to untangle the web of data, so it is increasingly important to be skilled in managing multiple systems and databases. It is not enough to communicate well, having financial and accounting knowledge; it is also important to know how to extract the right information from the databases, how to handle and cross data from different sources to produce information. The good news is that many systems leading the technology market today, are implementing interfaces similar to Excel, which undoubtedly is the favorite tool of Financial Analysts, and will make their role a little bit easier.

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