Four Business Analysis Frameworks: CFO perspective

The CFO role nowadays goes well beyond just closing the books, creating the budget, and reconciling figures on a balance sheet.

It is also a strategic role that requires proper use of analytics, management skills, and the ability to see the big picture and advise the CEO as well as the board of directors on the company’s future direction including capital investment, merger & acquisition, and strategic planning.

The need for business and financial insights in the finance department will increase as CFO takes on more of a leading role in the company. The finance chief can create clear data pictures for executive teams, solve problems with their critical thinking, and work with other parts of the organization to understand how business & financial information affects their team. This is the reason why business analysis skill is required for every strategic CFO to lead a business to its future success by understanding a firm’s current performance and its future prospects.

CFO’s Business Analysis framework normally involves four key critical areas (1) business strategy (2) accounting analysis (3) financial analysis (4) prospective analysis.

Business Strategy Analysis

CFO must be competent in analyzing the company’s business strategy which involves industry, competitors, economic demand, and supply. The purpose of business strategy analysis is to identify key profit drivers and business risks and to assess the company’s profit potential. Assessment of the firm’s competitive strategy facilitates evaluating whether current profitability is sustainable and enables to make sound assumptions in forecasting the firm’s future performance.

Accounting Analysis

CFO must understand and know how to evaluate the degree to which a firm’s accounting captures the underlying business reality. Sound accounting analysis improves the reliability and conclusion of financial analysis and assesses the degree of distortion in a firm’s accounting numbers.

Financial Analysis

CFO can use financial and business data to evaluate the current and past performance of a company and to assess its sustainability. CFO and the finance team should be systematic and efficient to use financial data to explore and improve any business issues.

Ratio analysis and cash flow analysis are the two most commonly used financial tools. Ratio analysis focuses on evaluating a firm’s profitability performance on P&L and financial leverage policy on the balance sheet while cash flow analysis focuses on a firm’s liquidity and ability to meet any current and future financial obligations.

Prospective Analysis

The last step for business analysis is to forecast a firm’s future to support critical business decisions such as M&A, investment, and asset disposal. The accurate forecast could also support a firm’s communication to shareholders, creditors, and research analysts in terms of future outlook.

The commonly used tools in prospective analysis for CFO are financial statement forecast and valuation. Both of these tools allow the integration of insights from business strategy analysis, accounting analysis, and financial analysis to make predictions about a firm’s future.

The role of a CFO needs to be one of the key business advisors. CEOs rely on their Chief Financial Officer for both financial analysis and general business analysis, to guide direction and decision-making as a whole.

Whereas finance was once a reactive field often focused on past data produced once a month, CFOs are increasingly responsible for becoming proactive strategists who use insights, analysis, and financial projections to chart their company’s future.