Flux Analysis: Road to Observability and Integrity
Finance leaders must be able to explain the period-over-period fluctuations in their business performance to ‘take control’ of situations. Flux Analysis, short for fluctuation analysis, enables leaders to spot variations in trends quickly and act fast.
What is the business challenge?
As businesses scale, it becomes difficult for business leaders to manage and monitor the increasing complexity of financial data – the number of sources of revenue and expenses increases, and so does the volume of transactions.
This increasing complexity and velocity makes it difficult to spot the variations in performance vs. our benchmarks (budgets, forecasts, prior periods, competitors, etc) and take timely, corrective action.
Flux Analysis helps leaders do just that – measure and compare the performance of the business to our benchmark and understand the operational reasons behind the differences. And this can be done not just at a high level, but also at a transaction level!
“92% of the respondent CFOs in Everest’s Global CFO survey agreed that improved performance analysis and data visibility are ‘high-RoI’ areas for the organization.”
What is Flux Analysis?
Flux analysis compares all the revenue and expense transactions over time to draw conclusions about how a company performs and identify transaction anomalies and improvement areas. This can be done weekly, monthly, quarterly, or annually depending on the metric and resulting analysis. This analysis is performed across the following:
- Profit and Loss: For a deeper understanding of the business variations impacting Revenue & Profitability
- Cash Flow: To understand the variations in sources and uses of Cash impacting its Liquidity (both short-term and long-term)
- Balance Sheet: To understand critical variations in the Solvency position of the company
Flux analysis also helps in understanding performance over time and acts as a “trend monitoring” exercise, helping create more reliable forecasts and budgets!
Benefits of Flux Analysis
1. Improved Financial Visibility and predictability: Flux reporting analyses all the revenue and expense sources at a transaction level and helps in a deeper understanding of all the aspects that changed in a given period via-a-vis the prior periods/plans/budgets etc. It also suggests the optimal actions and the outcome of future financial fluctuations (forecasts/plans etc.). It also has the flexibility for a detailed breakdown of financial performance and deviations across income statements, balance sheets, and cash flow statements, breaking down the numbers into specific accounts, categories, transaction types, etc.
For example, by analyzing income statements, businesses can gain real-time insight into identifying the deal that led to a drop in the company’s profitability, the vendor that caused an 11% MoM increase in tool cost, and the campaign with the lowest ARPU, etc.
The Simple Price, Gross Margin and Unit Variance Analysis tool is one way to get you started on a broad income statement flux analysis.
2. Spot early warning signs: By analyzing a company’s financial statements, such as the income statement and balance sheet, finance leaders can share insights into their revenue, expenses, assets, liabilities, and cash flow. This information can be used to identify trends and patterns that may take time to be apparent, such as slow revenue growth or high debt levels.
For example, if a business’s liquidity ratios are declining over time, the company may have difficulty meeting its short-term obligations, such as paying bills on time.
The Cash Velocity Calculator is great tool to help you improve your working capital position and educate your team on how your working capital practices are impacting your liquidity and cash positions.
3. Benchmark Performance: Flux analysis can also benchmark a company’s performance against competitors or industry averages. This can help businesses understand how well they are performing in relation to others in their industry and identify areas where they need to improve. Doing this allows companies to compare their market position (SWOT, Net Promoter Score, etc.) vis-à-vis their competitors.
For example, if a business’s revenue growth is slower than the industry average, this could indicate the company needs to take corrective action, such as increasing its marketing efforts or diversifying its product line
A Key Performance Indicator (KPI) Assessment will help you focus on the right benchmarks.
4. Support Long-term strategy: Flux analysis gives an opportunity to take action in real-time, wherever needed. This helps in the optimal utilization of the resources from an RoI standpoint. By analyzing a company’s financial statements over time, businesses can make more informed decisions about their long-term strategy and identify areas where investment is needed to achieve their objectives. Flux Analysis gives leaders the to regain control over budgets and ensures high investment returns.
Flux Analysis in Action
An e-commerce business has been facing financial challenges due to the high cost of sales and low-profit margins. The CFO was concerned about the company’s financial performance and decided to conduct a flux analysis.
By analyzing the company’s financial statements, the CFO was able to identify the company had a high cost of goods sold from 2 suppliers, high marketing expenses from 1 marketing channel, and high logistics expenses because of increased return rates, which were all contributing to low-profit margins.
The CFO also used the analysis to compare the company’s performance against competitors, which helped him understand how well the company was performing in relation to others in the industry. The analysis revealed that the company’s expenses were higher than its competitors and that the company’s profit margins were lower than its competitors.
With the help of flux analysis, the CEO was able to identify areas where the company needed to improve in order to increase profitability. He decided to focus on reducing expenses by negotiating better deals with suppliers, optimizing logistics, and cutting back on marketing expenses. He also chose to focus on increasing revenue by launching new product lines, expanding into new markets, and focusing on customer retention.
Through flux analysis, the CFO was able to make data-driven decisions that improved the company’s financial performance. By reducing expenses and increasing revenue, the company was able to increase its profit margins and achieve its financial goals.
Flux analysis is a powerful tool in the CFO’s arsenal and should be used in conjunction with other analysis and evaluation methods to get a holistic view of the business performance and identify areas of improvement.
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