What the Numbers Really Mean: A Comparison of Financial Analysis Software

Transcription

1 Published in the Journal of Accountancy, November 2007 What the Numbers Really Mean: A Comparison of Financial Analysis Software by James Estes, Maya Ivanova and Richard S. Savich, CPA Many times CPAs find explaining to their clients what the numbers on the financial statement really mean quite difficult. Wouldn t an easier way to communicate with them be nicer? Thanks to financial analysis software programs you can take your CPA practice to the next level. By choosing one that best serves your practice, you can build a more effective communication bridge between you and your clients. With these software programs you can add value to your services with your existing clients and attract new clients as well. The new programs begin where the general ledger and traditional financial reports leave off, providing in-depth statements, reporting, goal setting, forecasts, what if scenarios, and comparisons of the company s performance to benchmarks or others in their industry. This area of on going development is quite new to the accounting industry, however over time it will prove significant. Over the years accountants have offered financial analysis services, but by building spreadsheets that often have to be modified in order to

2 meet the individual client s needs. With the new programs that is not necessary; all you have to do is export your client s financial statement data into the program and within minutes you ll have a financial analysis consisting of ratios, graphs, narratives, and other informative comparisons. This could be your tool to generate additional revenue during the slower months after tax season and set your practice apart from your CPA colleagues. With the new programs you can help your clients get a better understanding of their financial statements, and help them outline the steps for improving their financial situation and setting future goals. As Brian Hamilton, CEO of Sageworks, Inc. suggests: Sit down with your clients once a year for a Financial Check Up and review their financial statements. By using these software programs you can explain the meaning of the financial statements in plain and easy to understand language. The reports also provide visual aids in a form of graphs and charts. The worst thing to do is turn these sessions into one way communication where clients are lectured and may not understand the issues being discussed. Numbers from a Balance Sheet or Income Statement don t mean anything to the average and highly intelligent business client. This practice is not very common among accountants, but that s where the profession is heading. By adopting any of the software programs or combining them with your own knowledge of the client, you

3 can expand your business. By creating a report for your clients, you will be viewed as a strategic partner. This will gain your clients trust, and consequently your clients will keep coming back to you with more challenges and questions. Small businesses and professional accountants who provide these services to their clients are increasingly switching from manual spreadsheet forecasting and analysis to specialty financial statement analysis software, as well as budgeting and forecasting applications. These various areas, although related, are distinctly separate, and the assorted software that provides services in these areas approach the three functions in varying ways. While many of the programs claim to perform one or two of the tasks, they may not perform all (such as in-depth analysis and forecasting, but not budgeting). The actual capabilities of the various programs depend on the needs of a professional and his or her clients. The software in this arena also varies widely in their cost range, from less than $100 to several thousand dollars, and they require varying degrees of accounting knowledge in order to use. Some are intended only for use by seasoned public or in-house accountants, while others are much more general in nature and are geared toward small business principals for their personal use. While virtually every accounting program on the market has the ability to generate income statements, balance sheets, cash flow statements, most software programs designed for small and midsize businesses lack

4 deeper analysis tools, whether they are off-the-shelf programs or those sold by consultants. But several programs are available that begin where the general ledger and traditional financial reports end, providing in-depth statements, reporting, analysis of key indicators, goal setting, forecasts, what if scenarios, and comparisons of the company s performance to benchmarks or others in their industry. Accountants have offered several of these services for years; often through the use of spreadsheets they build themselves, which must be constantly adapted to meet the needs of individual clients. Financial statement analysis programs, however, will automate these tasks and provide added value to both the client and the accountant. It will deepen the relationship between the accountant and the client. It may also generate additional fees for the practice. Use of such tools will help clients gain a better understanding of their present and potential financial condition. All the software transforms business raw data into meaningful information that the professional accountant can provide to his or her client or use to develop goals, prepare for changes in the industry or use for obtaining loans or other funds. As small businesses perform more and more of their own compliance related financial work, accountants will be forced to move to providing more value-added services. To the average financial professional, this is a boon.

5 Fortunately, there are now excellent technology applications which will help accountants in this transition. This area is quite new to the accounting industry, yet it will prove significant over time. New technology tools provide accountants with an ability to produce custom and specific reports that meet the specific requirements of clients. We looked at seven different financial analysis software packages. They represent the vast majority of separate packages available for CPAs. By the vendors estimates, they cover over 90% of the market for independent financial analysis. The chart (Exhibit 1) lists the packages across the top and the criteria that most CPAs might consider before adopting down the first column. These criteria were developed in concert with the authors, the vendors, and input from the Management Consulting Services Committee of the California Society of CPAs. You can see that not all criteria are met by all vendors, nor are the costs the same between vendors. Product Evaluation Here are some highlights from each vendor. They are not presented in any particular order of recommendation or market penetration. The order is random. We are not making any recommendations. Each CPA should review the material and make his/her own decision. For a more complete

6 understanding, please refer to Exhibit 1 or contact the vendor to learn more or view a demo. ProfitCents by Sageworks ProfitCents is a software program that enables progressive CPAs to quickly and easily provide a written explanation of what the financial statements mean to the business owner in plain language using industry comparisons, ratio analysis, and trend analysis. ProfitCents has become one of the more popular financial statement analysis and benchmarking tools for financial professionals; due partly to its web-based nature that requires no software or updates, and the comparisons and analyses that the system provides. The system develops client-ready reports that use plain language and visual charts and graphs to help clients understand the financial condition of their business. ProfitCents is designed for use by accountants to provide as a service to their clients. ProfitCents is also available in Spanish with the same comprehensive analysis and plain-language reports, designed for clients whose preference is that language. In addition to the analysis, ProfitCents provides recommendations for action and assists in setting goals, as well as the ability to test variables through scenario planning. Its marketing literature claims the following: 1. Converts financial statements into a plain language and graphic report your client can understand. 2. Utilizes current industry comparisons, ratio and trend analysis.

7 3. Standardizes your analytical procedures. 4. Forecasts and projects through what-if analysis. 5. Integrates with QuickBooks, CCH, Caseware, Creative Solutions, and Best Software Applications. The questions answered by its industry specific reports include: 1. Liquidity- What is the business s ability to meet obligations as they come due? 2. Profits and Profit Margin- Are profitability trends in the business favorable? 3. Sales- Are sales growing and satisfactory? 4. Borrowing- Is the business borrowing profitably? 5. Assets- Is the business using gross fixed assets effectively? 6. Employees- Is the business hiring effectively? The reports are in plain, easy to understand language. The report draws upon over 10,000 pages of written text to provide the most appropriate and relevant commentary. It uses dynamic text vs. canned text. Dynamic text is more complicated. It covers every financial situation that could possibly occur. Simple graphs are provided. The benchmark analysis considers 1,600 industries vs. 600 industries that RMA has. PlanGuru by New Horizon Technologies PlanGuru provides accountants with the ability to automatically generate client-ready integrated balance sheets, income statements and cash flow statements, and includes tools for analyzing data, making projections, forecasting and budgeting. It also supports multi-scenario

8 projections. The system can calculate up to 21 financial ratios as well as breakeven point. The program uses spreadsheet style interface and wizards that guide users through data entry, and allows importing data from Excel, QuickBooks, Peachtree and plain text files, and exporting of reports to Excel. The report allows color or black-and-white charts and graphs. There are three editions of PlanGuru: 1. Professional Edition. 2. Forecaster Edition. 3. Consultant Edition. Available also is an add-on component called the Business Analyzer, which offers benchmarking capabilities. It is designed to help accountants build their business advisory services by offering multiple-scenario projections from smaller clients or executive summaries for larger enterprises. ProfitSystem fx Profit Driver by CCH Tax and Accounting Profit Driver begins where traditional financial statements end. The software provides financial diagnostics and analytics that help to pinpoint trends and potential problems that a business can face, from AR and cash flow, to inventory issues and staff productivity. Through its strategic planning tools, the system transforms a business raw data into

9 meaningful information that the professional accountant can provide to his or her client. Profit Driver includes what-if scenario planning that immediately shows the effect of particular variables such as decreasing receivables aging, changes in inventory, growth challenges and other potentials. The data is provided in spreadsheet form, which can then be generated as graphical charts for client presentation. Profit Driver s dynamic budget versus actual reporting tool helps make projections while in the process of budgeting, instantly showing the difference that changes in budget can make. The system also produces financials for up to 40 consecutive periods, providing greater insight into the client s business condition. New benchmarking features also enable users to compare the performance of client s business against industry standards. The what if scenario helps to show the client what effect changing business procedures will have on the health of the business, and what changes are necessary to reach goals. There is a feature scorecard which provides an overview of a company s health and aids the professional accountant in evaluating the business financial position. The program s diagnostic reports are written in plain language, allowing clients to better understand them.

10 The benchmarking tool allows CPAs to evaluate how your client's business compares to industry standards. Traffic lighting on the strategy screen allows you to easily identify both areas of the business where your client excels and where there is room for improvement compared to competitors. The goal seeking function crunches the benchmarking data and provides guidance for success in all areas where a business needs improvement. Interactive goal seeking allows you to define specific financial objectives and clearly identify the steps needed to achieve your goals - instantly allowing you evaluate, forecast and implement strategic business decisions to achieve your desired results. Get instant answers to crucial questions like: 1. How do we improve our working capital cycle? 2. What are the best strategies to employ to reduce our debt? 3. What are the key drivers of our cash flow? Profit Driver offers a unique way of transforming financial statements onto one screen with instant calculation of critical results and business drivers. The unique one-page 'scorecard' clearly reveals the health of the company and helps you perform evaluation of the company's financial position and make better-informed business decisions. Written in plain language and easy to understand, reports instantly provide a complete financial 'health check' which accurately identifies key

11 business drivers, results and performance measures in a 14-page diagnostic report. You can easily determine the effects of a change in a business' financials by performing "what ifs" on any driver. Enter a change on the Strategy screen, and click Net Change to see the difference. Multiple Undo, Redo and "return to base model" options allow you to quickly evaluate and pursue different strategies. Profit Driver will allow you to: 1. Efficiently add value to engagements by including comprehensive financial analysis using consistent and standardized methodologies 2. Clearly communicate with clients and strengthen valuable relationships 3. Underscore your analysis with essential targeted reporting 4. Build recurring revenues by incorporating ongoing analysis with your clients The click of a button lets you perform projections as you create budgets. Review the drivers for the budget, use them as the basis, and from there, you can: model 1. Spread the projection to create monthly or quarterly budgets 2. Enter actual results throughout the year to track performance 3. Annualize the statement at year-end and append to the prior-year The program allows you to use up to 40 periods to analyze financial statements and create graphics and highlight key trends. You can create, save and manage unique client Chart of Accounts - suitable for every industry group.

12 ilumen ilumen, Inc. is a financial information network that provides private company financial monitoring and benchmarking services. ilumen s technology automates the collection, analysis and benchmarking of private company financial data. Customers include leading accounting firms, financial institutions and corporations. According to Bob Woosley, CEO and co-founder of ilumen, most private companies lack the ability to benchmark their performance trends to other companies in their industries or given peer group. Accurate, reliable and current data simply has not been available for the private sector-until now. ilumen's financial information network is powered by imonitor, a proprietary (patent pending) data warehousing engine that standardizes the mapping and analysis of electronic accounting data. By using ilumen s proprietary financial information network, you can now offer your customers the ability to see how their business is performing against a truly comparable industry peer group. Private Company Benchmarking is secure and completely anonymous. Aggregated industry trends and data security are maintained in ilumen s secure financial information network.

13 ilumen s database tracks a defined set of analytics and metrics that represent an aggregate average of representative companies within a given peer group. Peer groups are organized based on an industry code (SIC or NAICS) and can be further filtered based on other attributes (such as geographic location or company size). Aggregate reports are delivered that contain summary financial metrics for each industry trended over time. All submissions are pooled and aggregated to produce averages for each industry peer group with all financial metrics presented as aggregate averages. And unlike annual survey-based data, ilumen s database is updated every month with current information as companies close their books and upload their data. Reports are immediately updated to show the direction of business performance relative to the direction of the industry and can be customized based on the following metrics. Over 80 financial ratios and metrics for comparison Over 10 parameters to select your custom peer group Monthly trends vs. growth rate trends Trend types (annual, quarterly, monthly, trailing 12- month) Four aggregate calculations (average, median, upper quartile, lower quartile) Alerts can be set against specific targets or against prior periods using current period data or rolling 12 month data. These settings can be set for your entire portfolio or for individual companies. Variance can be set from one to 100, depending on specific need. All of ilumen s private company financial monitoring and benchmarking services are powered by imonitor, a proprietary, patent-

14 pending technology platform. The power of imonitor comes from the ability to completely automate and standardize the gathering, mapping, analyzing and reporting of financial information from monthly financial data submissions. The imonitor network is accessed through a secure imonitor-powered data portal within a customer branded website. Submitters upload a trial balance report directly from their accounting software into the imonitor network every month. The information is then standardized and mapped, analysis is conducted and reports are created. Once analyzed, customdesigned alerts, based on early warning indicators or related analytical-based thresholds are sent directly to the desktop of the client s CPA, banker or corporate trade partner. The Portfolio Dashboard is the starting point for managing your client portfolio. From here you can access all the major areas of the application. The upload status of each of your companies is displayed. The client list is an adoption management tool that simplifies introducing the data upload system to clients and tracking their use. The screen lists the clients, status of those clients, number of periods the company has uploaded and the office and party responsible for the client. ilumen s Private Company Benchmarking service is enabled by the imonitor network of private company financial submissions. The repository is populated with periodic electronic submissions of accounting data from

15 the customers of participating banks, CPAs and large corporations and is refreshed each time financial information is submitted.

16 BizBench by Gerke & Associates BizBench software uses client summary financial data to produce customized reports that pinpoint client company strengths and weaknesses. A BizBench report, and your consulting expertise, can help your clients understand and improve their competitive standing in their industries. BizBench is quick and easy to use. In less than five minutes, you will have a BizBench report in hand that will position you to provide consulting services for clients throughout the year. BizBench can obtain broad financial ratio analysis for any company in over 700 industries, using the latest version of the highly respected Risk Management Association database. Quickly generate customized hard- copy reports, including charts and tables, suitable for company management in only minutes. Automatically generate a significant list of discussion ideas for management to consider for ratios that need improvement. Easily create and save what if scenarios. Do case to case analysis. Perform goal seeking on ratios to determine levels of performance improvement neededinvaluable for strategic planning. BizBench contains the database from RMA (Risk Management Associates, formerly known as Robert Morris Associates), a solid source of financial ratio benchmarks since BizBench was developed under a licensing agreement with RMA. RMA provides a high level of assurance

17 that your client benchmarking reports will be based on valid comparison data. RMA data is: 1. Collected from financial statements contributed by leading banks 2. Contains performance data for companies in over 680 industries. 3. Evaluated carefully before including it in the Annual Statement Studies database The first step in financial benchmarking is to determine where a company stands compared to its industry. Most benchmarking tools compare client ratio values to a median or average value from the comparison database. BizBench is the only benchmarking software that automatically calculates industry percentile rankings for these ratios and presents the percentiles in its report. Percentiles are very important in benchmarking performance. Using percentiles is a quick, easy and convenient way to place either a financial or operating performance measure in the context of the universe of comparison organizations. Back Calculation is a powerful and unique What if modeling feature that is exclusive to BizBench. Back Calculation uses percentile rankings for clients benchmarking comparisons as a basis for setting new performance improvement targets. Back Calculation is particularly valuable as an applied planning tool in Profit Improvement consulting. For example, your client may want to improve its competitive standing to the 75 th percentile for Return on Assets. Back Calculation will calculate the new profit target

18 required to achieve that goal or, alternatively, the appropriate asset base to support the existing level of profitability. CFO by ACCPAC ACCPAC Comprehensive Financial Optimizer provides a framework for quantitative analysis that can be used to make target business decisions. Designed for small to midsized enterprises, ACCPAC CFO delivers enterprise-strength financial diagnostics. With ACCPAC CFO, you can study different strategic business opportunities and model the results of every decision. ACCPAC CFO provides a framework for in-depth quantitative analysis that can be used to make targeted business decisions. It is a valuable tool for demonstrating the effect small improvements can have on overall business success. With a single click of the mouse, you can instantly review the results of changes to your financial variables. CFO performs what-if analysis that measures the impact of every decision. A goal-seeking tool helps identify ways to reach target business objectives. The program software helps you model strategies that can be implemented in order to improve cash flow or increase bottom-line profits. With a Roll Forward feature you can prepare a budget or forecast report in just minutes. In addition, you can key in business drivers and then roll your changes forward to produce next year s financials. ACCPAC CFO provides users with a very easy-to-use, yet comprehensive financial scorecard, which provides an overview of key

19 financial information and indicators relating to a business. Reports are generated in common language and utilize multi-color images including charts and graphs. Financial Analysis CS Financial Analysis CS is part of the CS Professional Suite. The software program enables you to review and analyze the financial position of a client within the business itself, a group of similar business peers, or the industry standards. To make the use of the software fast and simple, a variety of special features allow you to evaluate data at varying levels of detail. You can compare client s data from multiple years or periods. Another feature allows you to compare multiple locations of a single business to determine which are most profitable. Through the subscription option, RMA Annual Statement Studies data integrates with Financial Analysis CS to provide aggregated financial indicators of peers or industry standards to show clients how their business measures up. With Report Designer you can quickly and easily produce reports to assist clients in better understanding their business. The reports consist of graphs, charts and more than 35 ratios. Conclusion

20 Each of these packages gives CPAs various options to help expand their services to their clients. You need to decide which one is best for you and your firm, as well as your clients. James Estes and Richard S. Savich are on faculty in the Department of Accounting and Finance in the College of Business and Public Administration, California State University, San Bernardino. Maya Ivanova is a research assistant in the College. Product Comparison Chart for Selected Features Which Product is Right for Your Firm? BizBench by Gerke & Associates ProSystem fx Profit Driver by CCH ProfitCents by Sageworks PlanGuru by New Horizon Technologies Single user pricing $ $ $ $ Five-user pricing $ 1, $ 2, $ 2, $ Purchase or subscription? subscription subscription subscription subscription s User Groups No No No No Web Based No No Yes No CD Yes Yes No Yes Import from client software Excel Yes Yes Yes Yes Microsoft Dynamics GP No No No No Peachtree No No Yes Yes Quick Books No No Yes Yes Sage MAS 90 No No No No SAP Business One No No No No

21 XBRL No No Yes No Exports to: PDF Files Yes Yes Yes Yes Word Yes Yes Yes Yes Excel No No No Yes "What if" Analysis Yes Yes Yes Yes Goalseeking Yes Yes Yes Yes Industry Benchmarks Data Yes Yes Yes Yes Source of Industry Benchmarks RMA Yes Yes Yes Yes Proprietary No No Yes No Industry Percentile Ranking Yes No No No Frequency of updates annually annually daily semi annually Financial ratios Yes Yes Yes Yes Multiple Periods Available Yes Yes Yes Yes Narrative Text Report Yes Yes Yes Yes Dynamic Text No No Yes No Preformatted Yes Yes Yes-can be changed Yes Number of divisions or subsidiaries allowed Unlimited Unlimited Unlimited 20 Availability of other languages No No Yes/Spanish/UK Engl No Projections, Forecasts and Budgeting No Yes Yes Yes Nonfinancial information No No Yes Yes Cash Flow Analysis No Yes Yes Yes Breakeven Analysis No No Yes Yes Z -Score calculation No No Yes No Customer Support Classes No Yes Yes No Problem Resolution Yes Yes Yes Yes Individual financial statements for financial planning No No Yes No Digital Dashboard No Yes No No Not for profit organization compatability No No Yes Yes Free Trial Yes Yes No No

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