FINANCE

"The hardest thing in the world to understand is income tax."
Albert Einstein
Thanks to the decades of change, opportunity and disasters, financial data in most forms is relevant, reliable and regulated. Today, we are inundated with data from around the world. But markets and institutions today and the set of regulations on the books is based on a long history of factors. And this process is dynamic . To understand where the institutional markets are today and when and why they might change requires a reasonable understanding of history. The Federal Reserve was established only in 1914 as a central bank, well over a century after the first central bank was established. Why? In US, the SEC and vast regulations of financial markets and accounting happened in the 1930s, a big switch from the free markets of earlier history. Why? The internet is essentially unregulated. What does this mean? What are the implications for the future? Understanding the present and planning for the future, requires an approach which collates data with logic and analysis.

Financial analytics is a discipline that helps to take multiple and granular views of a company’s financial data and use it to gain insight and take action. Although financial analytics has a wide reach and touches all parts of your company, it is especially useful in the context of profitability—a very important component of business success and performance management. Today’s business challenges demand timely financial information that enables executives, managers, and front-line employees to make better decisions, take action, and correct problems before they affect the company’s financial performance. Achieving better business performance requires more than just improving process efficiency or enhancing financial reporting. Rather, it requires improving effectiveness by leveraging advanced analytics that integrate data from across the organization and provide insight to the people who can impact business performance. To fully understand the factors driving the business requires timely financial information combined with data from across the company value chain. Frequently, the answers do not reside solely in the company’s financial reporting systems. To get the most complete picture requires integrating information from the company’s human resources, supply chain, customer relationship management, and financial management systems—and turning it into integrated and actionable insight.

Applications of analytics in finance:

Financial Analysis: Analyze financial trends in key growth segments; Financial benchmarking against industry averages; Identify areas for internal improvement; Support corporate finance and treasury departments; Identify sources of funding Financial Trend Identification: Identify opportunities in growth segments; Analyze current trends and financial implications; Cost structure and working capital improvement; Financial ratio analysis

Merger & Acquisition Support: Business Plan validation; Analysis of all top-line assumptions; Proprietary investment ideas; Specific company identification; Due diligence support; Valuation and historical transaction analysis; Shareholders’ value creation; Post-merger performance metrics Financial Analyst Access and Briefings: Direct access to financial analysts monitoring the markets fosters interactive relationships; Continually updated research presented on a regular basis ensures the relevance and value; Maximize analyst contact and touch; Frequent public and private analyst briefings; Global analysts provide "on the ground" support

Trend Identification: Identification of growth areas; Sector themes and investment ideas; Identification of the best ways to play emerging trends; Investment strategy based on trend analysis

Specific Investment Ideas: Specific company identification; Proprietary investment ideas; Coverage of both public and private companies; Customized investment ideas for all stages of the investment cycle: venture start-up to late-stage buy-out; Equity analysis for institutional investors and hedge funds

Financial Framework for Analysis: Industry comparables and valuation; Financial ratio analysis; Portfolio company benchmarking; Portfolio company monitoring; Exit or realization strategies.

Industry example: A New York based hedge fund, while planning a new fund in India, wanted to identify stocks in the IPO segment in India that are intrinsically good but are trading cheaply, and identify underwriters whose deals perform badly on the market. A financial model for the identification of under-valued IPOs was developed using historical data on key stock fundamental ratios collected on a daily basis. To assess the model accuracy, the model was back tested for bull and bear phases. This model helped the hedge fund to acquire profitable stocks based on returns, risk, liquidity and movement within the market. (Source: Advanced Analytics Powering Indian Business by Harsha Kapoor, Practice Head - Analytics Solutions of Tata Strategic Management Group)