You’ve made it to Part 3 of our “Does my business need…” series, where we break through financial gobbledigook to help you figure out your business’s needs. Jargon out, simplicity in.
What does a financial analyst do?
The role of a financial analyst is to help steer the company down the most profitable path. To accomplish this, an analyst craft budgets and forecasts that set the financial targets for the given period of time (yearly, quarterly, monthly). In addition, analysts assist management in making investment decisions by performing analysis based on return on investment (ROI), net present value (NPV), and discounted cash flows (DCF), or other methods.
Financial planning and analysis (FP&A) is a vital component to determining the most profitable ways to grow your business.
When do I need a financial analyst?
You need a financial analyst when you:
- Have to develop a budget forecast for the upcoming year, but don’t have the time to do it yourself
- Are seeking outside investment and need to show potential investors how you will put their money to work
- Are evaluating opening a new location or launching a new product line and you want to evaluate the financial implications of both
- Want guidance on where to invest your business’s funds
- Need to develop a set of Key Performance Indicators to measure your business’s success
- Want to understand how much it’s costing you to acquire new customers (your Customer Acquisition Cost, or CAC) and how much money they will generate over their lifetime (Lifetime Value, or LTV)
- Need comprehensive business data to present to your board of directors
Let’s imagine you are a dentist. You have a private practice that has grown and you are looking to either expand operations by opening a new location, or by acquiring an existing practice. If you don’t have a finance background (many dentists, doctors, physical therapists, and other healthcare professionals don’t!), how are you going to evaluate which of these two options is better? A financial analyst can help you evaluate the different investment opportunities using financial modeling techniques to predict future outcomes based on a set of assumptions.
If you are looking for someone to help you create a budget forecast, develop a scenario analysis, or calculate your CAC:LTV ratio, it’s vitally important that your books are in order first. Many new clients reach out needing a quick turnaround financial model to present to potential venture capital investors or their CAC:LTV ratio for an upcoming board presentation. But, we can’t create an accurate financial model before we’ve dealt with the underlying data that, oftentimes, is a big mess.
So, make sure you take into consideration the extra time and cost it will take to update your books (if you know they’re not current) when thinking about next year’s budget or that investor meeting next week.
Frequently asked questions about financial planning & analysis
What is a financial model and why do I need one?
We get this question a lot, but the main reason you need a basic financial model is to see how your business is doing! Looking at your bank account is not enough. Here are a few of the blog posts we’ve written about budgeting and financial modeling:
What type of education and work experience does a financial analyst have?
Analysts typically have a Bachelor of Science in Business or more specifically in Business Finance and/or a Masters in Business Administration.
They’ve often worked for larger investment banks or in the finance departments of large corporations.
How do I know if my financial analyst is doing a good job?
They’re asking insightful, probing questions. They understand your business. They interpret things in a meaningful way (they don’t just give you numbers, they give you insights). For example, if your sales are decreasing month-over-month, they do more than just tell you that; they give you potential reasons why, as well actionable solutions to test.
They are willing to explain things to you and can discuss complex financial concepts and metrics in a way that makes sense to a non-finance person. The models(s) they’ve built provide you with insightful information about your business and help to frame and answer questions you have.
How do I know if I have a good financial model?
It can be hard to tell if your financial model is good if you have little finance knowledge. But, here are a few things to consider:
- A good financial model is based on actionable metrics or established Key Performance Indicators and dynamic formulas.
- A good model should be intuitive (even if it’s complex) and should enable you to play around with various scenarios (if X happens, the result is Y).
These are the bare minimum.
Here are a few red flags to indicate that your model may not be up to par:
- The inputs are not clearly labeled
- Numbers are hardcoded in Excel, meaning there are formulas with actual numbers typed in. Great financial models should refer to a separate tab for any and all numbers, assumptions so that the model is flexible.
It’s imperative to work with a quality financial analyst to build financial models that provide you with the business insight you require. Quality analysts can be really hard to find, especially if you don’t have a finance background. That’s why Paro does all the vetting for you. We only accept the top 2% of finance professionals who apply to our network to ensure you’re getting the best talent. Hit us up if you want to talk to one of Paro’s finance experts about your needs.