Financial Reporting Analytics – 5 Use Cases For Every Chief Financial Officer Today

September 26, 2022by Team IRIS CARBON0

The finance function has undergone a major transformation in recent times. High-performance solutions based on the cloud have replaced laborious and error-prone manual processes using legacy systems to deliver quality data processing and analysis capabilities. The shift has been helped along by the COVID-19 pandemic, which introduced remote and hybrid work and caused teams to adjust to spending a greater amount of time away from their office workstations. Most business processes have now successfully moved online.

Chief Financial or Accounting Officers and their teams are at the forefront of this shift to a digital way of working. Being released from common, time-intensive tasks due to the digital shift, they are uniquely positioned to enhance organizations’ financial efficiency through insights delivered by software. To that end, it is now a necessity for all finance teams to have in their arsenal a financial reporting analytics solution that is designed to draw high-quality business insights from large pools of financial data. Thanks to structured reporting requirements in place in most jurisdictions around the world, analytics solutions have a wealth of financial data to feed on and throw up any combination of insights businesses can use to their advantage. The key technology making this possible is the eXtensible Business Reporting Language (XBRL).

XBRL has revolutionized the production, dissemination, and analysis of financial information by allowing data to be expressed in a machine-readable format. XBRL is the digital equivalent of accounting concepts. A collection of XBRL elements is known as a taxonomy. Most popular accounting standards such as US GAAP and IFRS have a digital equivalent or XBRL taxonomy. Companies create XBRL reports in compliance with regulatory requirements in jurisdictions such as the United States, European Union, United Kingdom, South Africa, Israel, Japan, and India. Annual and quarterly financial reports created in the XBRL format can be stored, transmitted, analyzed, and compared – which makes them a good source of data for financial analytics tools. Moreover, financial information repositories such as the US Securities and Exchange Commission or SEC’s Electronic Data Gathering, Analysis and Retrieval (EDGAR), Japan’s Electronic Disclosure for Investors’ NETwork (EDINET), and the soon-to-be-created European Single Access Point (ESAP) are also a good source of XBRL data. The chief utility of XBRL to financial reporting analytics solutions is that it offers a ready pool of raw financial data, speeds up the analytics process, and lends transparency to the entire data supply chain.

We now move on to the question of how the financial analytics process, helped by XBRL, can enhance business decision-making processes.

Use Case 1: Improve Financial Planning & Analysis

Financial analytics solutions can help companies forecast their future financial performance and resource allocation through the use of historical financial data and forward-looking statements to spot areas of strength and weakness. Whereas financial statements offer businesses a static picture of their financial health, financial reporting analytics solutions offer dynamic insights anytime they need them. Moreover, these solutions can be integrated with ERP systems or other business information sources via APIs to offer a rich analysis. Using financial analytics, companies can take decisions that help improve revenues and internal cash flows to reduce wastage. They can help with the effective management of assets. Financial reporting analytics solutions that harness the power of XBRL offer further value. Using artificial intelligence, they can pull data from repositories of XBRL data and offer companies a massive store of information to slice and dice. The data can be pulled into spreadsheets or analyzed via dashboards displaying various metrics and financial ratios.

Use Case 2: Conduct Effective Peer Benchmarking

Most business leaders realize the benefits peer benchmarking can bring to their business but stop short of commissioning a full-fledged peer analysis. One of the prime reasons for this could be the limits to accessing peer companies’ data. XBRL solves this problem by improving the accessibility of financial information like never before. Companies can query XBRL data repositories such as EDGAR or EDINET to access the financial statements of all peer companies in their sector to forecast their future financial performance and understand how they deal with resources and allocate cash. Testing their peers’ ratios and metrics can offer companies vital clues into the internal processes they can improve. In that way, financial analytics solutions can be vital business intelligence tools. With the advent of sustainability disclosure regimes, companies can also attempt to understand their peers’ performance with respect to Environmental, Social, and Governance (ESG) issues. Companies can improve their sustainability disclosures based on the information their peers provide in their ESG reports.

Use Case 3: Enhance Communication With Various Stakeholders

Financial analytics using XBRL data can help companies improve their disclosure process and offer stakeholders a more holistic view of their financial performance. With advanced business intelligence at their disposal, companies can gauge their stakeholders’ information needs and answer specific questions. They can also employ creative means to communicate crucial data as most people prefer consuming data in visually appealing formats.

Financial reporting analytics can also improve a company’s financial reporting process. Companies can use financial analytics for high-quality business intelligence and in turn produce financial reports that satisfy all stakeholders’ information needs. Moreover, XBRL helps companies benefit from data that is of high quality and highly transparent. That is because XBRL introduces the element of transparency to the financial disclosure process through the use of machine-readable elements to mark up material information in financial statements.

Use Case 4: Enhance The Business Risk Management Process

Financial reporting analytics can help companies proactively identify potential risks in the system and safeguard against them. They can spot areas where costs are expected to rise and other indicators of poor performance. Risks can be spotted not only at the individual company level but also at the sector level thanks to XBRL data. Moreover, risks are not only financial but also non-financial. Companies need to gauge the sustainability risks they and their peers are susceptible to. Financial analytics solutions can offer companies a more holistic view of the risks they face from various quarters and help them be proactive in dealing with those risks instead of being reactive.

Use Case 5: Enhance The Regulatory Compliance Process

Regulatory compliance requirements are getting more rigorous by the day. Regulators are introducing stringent norms for corporate information to improve their oversight of the companies under their purview, promote transparency, and safeguard various stakeholders’ interests. Financial reporting analytics driven by XBRL data can improve companies’ regulatory compliance through insights that help them furnish comprehensive reports that leave no questions unanswered. Since companies also tap these insights to improve their performance on various metrics, they can expect to satisfy regulatory requirements that pertain to their financial strength. This is especially relevant to the banking sector, where financial analytics can help entities match up to central banks’ requirements in terms of their monetary reserves and safeguards against financial crime.

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