Financial Analyst It s about you Do numbers talk to you and tell you a story? Do you enjoy researching, synthesizing and modeling financial data and finding trends? If you thrive under pressure and enjoy the challenge of tight deadlines, then becoming a Financial Analyst might be for you. What is financial analysis? Financial Analysis involves collecting and analyzing financial information to help organizations make business decisions. Financial analysis is a method for gaining an understanding of an organization, or function within an organization, by measuring its performance, viability and profitability. Typically, when analyzing the performance of an organization, Financial Analysts use the company s financial statements (i.e. income statement, balance sheet and cash flow statements). One of the most common approaches is to use financial ratios (e.g. profitability ratios, debt ratios) to compare against those of another company or against the company s own historical performance. Understanding and interpreting the story that ratios tell is the core of financial analysis. For example, return on assets (ROA) is a common ratio used to determine how efficiently a company uses its assets as a measure of profitability. Return on equity (ROE) is used to measure profitability by revealing how much profit a company generates with the money that shareholders have invested. Taken together, the ROA and ROE provide a clear picture of the organization s performance and management s effectiveness. What is the role of the Financial Analyst? Financial Analysts research and model macroeconomic and microeconomic conditions and company fundamentals to make business, sector and industry recommendations and decisions. Financial Analysts collect and analyze financial information such as budgets, operations performance data, economic forecasts, trading volumes and cash flow to provide advice for their company or their company s clients. 1
Areas of focus Financial Analysts are employed across industries, including the financial services sector (e.g. in banks, brokerage houses, insurance companies and mutual fund companies). They sit within corporate finance departments, in particular lines of business or work for a specific product or service team. Despite the variety of employment settings, the core functions of a Financial Analyst remain the same. While the core of the Financial Analyst role may be the same, there are different types of financial analysts, depending on their area of focus: For example: Corporate Finance: There are often several areas of specialization for analysts in the corporate finance department. Financial Reporting Analyst: These Analysts are involved in analyzing their firm s financial statements (e.g. income statement, balance sheet, statement of retained earnings, cash flow statement) or various components of the statements. They look at trends and/or variances in the financial data (actual versus budget) and generate possible explanations. Management Reporting/Performance Analyst: These Analysts play a role in analyzing the performance of specific parts of a firm. They may analyze financial data by product line, department, or geography. For example, a property and casualty insurance company may have analysts to review the performance of both the firm s car insurance and home insurance lines of business. The products may be analyzed against performance measures such as revenue/premiums, claims payout and industry profitability ratios. Treasury Analyst: These analysts focus on analyzing the cash flow of the firm. They may reconcile bank deposits and withdrawals against bank statements, expenditures against cash balances, produce interest schedules, or track inter-company loans and the related interest payments to ensure that the organization and its departments have adequate cash flow. Taxation Analyst: These analysts play a role in helping the organization meet their income tax reporting and compliance obligations. They may be responsible for portions of the Canadian quarterly tax provision process, assist in the preparation of federal and provincial income tax returns or collect data from other areas of the organization to build the tax fact base. There are also other types of analysts, typically outside of the Corporate Finance area. These include: Credit Analyst: Credit Analysts work for organizations that lend money such as banks and credit unions and assess the credit worthiness of loan applicants. They gather and analyze financial information about the 2
client s assets, liabilities, earnings, debt repayment history and purchase patterns to make recommendations as to whether or not the client qualifies for credit, that is, a loan. For additional information on this role, please refer to the Credit Adjudicator profile under the Risk Management cluster. Investment Analyst: Banks, mutual funds, pension funds, hedge funds insurance companies and others employ Financial Analysts to research and evaluate the performance of the firm s investment portfolios (comprised of stocks, bonds, money market securities, derivatives etc.) and provide guidance on the firm s investment strategies. In addition, securities firms typically employ research analysts to provide investment recommendations for the firm s clients - which companies and/or securities to buy or sell. For additional information on this role, please refer to the Research Analyst profile under the Financial Advisory and Investment Management cluster. Performance Analyst: The field of business analytics helps organizations manipulate large volumes of operational data while identifying trends and patterns that are most critical for decision making. The data provides a clear picture of the business operations, allowing management to make future-focused decisions to compete effectively in the marketplace. For additional information on this role, please refer to the Business Intelligence Analyst profile under the Business Analysis Non-IT cluster. The information in this job profile relates primarily to the Financial and Management Reporting Analyst roles. 3
Main Duties Main duties and related activities of a Financial Analyst: Compiling and Researching A Financial Analyst is responsible for aggregating and analyzing a broad array - and large volume - of data. He or she is also closely associated with in-house financial information systems, policies and procedures. The type of information reviewed, of course, depends on the Analyst s area of focus. Key activities: Obtain current and historical information from the firm s financial statements and in-house financial systems and collect explanations on the data and the variances in the data (Financial Reporting Analysts). Assist business line managers with variance analysis information (e.g. actual vs budget) related to specific products, departments or geographies (Management Reporting Analyst) Act as an expert user of in-house financial systems, participating in technical enhancements as required Reconcile across systems and resolving transactional issues as required (e.g. bank reconciliations) Data Modeling and Analysis A Financial Analyst converts large amounts of data into useable information, which is analyzed in a variety of ways. Key activities: Participate in budgeting and forecasting/planning activities Build financial models upon which to perform sensitivity analyses such as what if? scenarios (e.g. a Management Reporting Analyst may investigate the degree to which an increase in an investment service fee will result in an increase in revenue) Act as an on-call resource to respond to corporate audit staff and other ad hoc requests for information and analysis. For instance, an executive who notices an executive who notices a decrease in cash and equivalents on the financial statement may request a report from a Financial Reporting Analyst, who will review the source data in more detail. Or, a Sales Performance Analyst in an insurance company may support Sales 4
Directors by compiling key reports on regional (e.g. provincial) or sales channel (e.g. broker, online) performance on a monthly basis. Plan short-, mid- and long-term cash flows and assess financial performance Reporting and Data Interpretation The value-added component of a Financial Analyst s role is the provision of insights that result from interpreting the data compiled. Key activities: Prepare and/or close (monthly/quarterly/annual) reports that interpret financial results to help identify, recommend and support potential courses of action Provide accurate weekly/monthly forecasts noting significant trends and their implications Participate in regular financial statement review and variance analyses (Financial Reporting Analysts) Perform periodic reviews with management on key operational or financial ratios that are of concern Assist in internal and external audit activities Work Context, Knowledge, Skill Requirements and Applicable Experiences Work Context In general, the core skills and duties of Financial Analysts are similar in any organizational setting, but the work context can vary depending on the financial services sub-sector they work for and the part of the organization in which they work (see Areas of Focus). Financial Analysts perform much of their work independently, but may also need to reach out to co-workers as sources of information. 5
Knowledge Financial Analysts require specific knowledge of: Economics, accounting principles, financial markets and banking Analytical procedures and techniques including calculating net present value (NPV), payback periods, valuation, and rates of return Understanding of regulatory rules and regulations governing the financial services industry (e.g. Basel II) Electronic spreadsheets (e.g. MS Excel) Understanding of internal organizational controls (e.g. proper reporting processes, segregation of financial duties) Technical skills Financial Analysts require specific technical competencies: Strong analytical orientation for analysis of financial market trends, including technical charts for planning (evaluation of market conditions) and strategy Ability to interpret complex data to demonstrate patterns and trends, make recommendations and draw conclusions Quantitative skills to be able to analyze outputs from various models, financial data from organizations and marketplace statistical data Ability to build proprietary financial models Ability to prepare clear, correct, concise and logically structured written reports and presentations Understanding of technical accounting literature 6
Soft skills Financial Analysts require specific personal effectiveness competencies: Strong personal ethics Ability to assimilate/summarize large amounts of information from multiple sources Results-driven, proactive work ethic to deliver results within tight deadlines while remaining calm under pressure Strong verbal communication skills to explain findings to internal and external stakeholders Applicable Experience There are a number of related experiences that are transferrable to the Financial Analyst role. Experience in accounting and financial management systems is particularly valuable. Education, Certifications, Designations, and/or Licenses Entry Level Position Entry level positions typically require: þ Undergraduate degree In the fields of: Business Economics Mathematics Finance Accounting 7
Senior Level Positions More senior positions typically require: þ Graduate university degree In the fields of: Master of Business Administration (MBA) Master of Science, Finance (MSF) Certifications and designations Certifications and designations may include: Chartered Financial Analyst (CFA) Certified International Investment Analyst (CIIA) Certified Management Accountant (CMA) Chartered Accountant (CA) Certified General Accountant (CGA) Other Training: Canadian Securities Course (CSC) Professional Associations Professional Associations may include: CFA Institute Certified General Accountants Chartered Accountants of Canada Association of Chartered International Investment Analysts (ACIIA) Canadian Institute of Chartered Accountants (CICA) Certified Management Accountants (CMA) 8
Representative Job Titles Corporate Financial Analyst Accounting Analyst Management Reporting Analyst Financial Reporting Analyst Performance Analyst Treasury Analyst Taxation Analyst Credit Analyst Investment Analyst Performance Analyst Career Pathways Moving in to the role To gain entry into financial analysis, you will need a strong quantitative orientation and have completed courses in finance, accounting, economics and statistics. To move into a Financial Analyst role in the financial services sector from another industry background, experience in an accounting role will provide exposure to the analysis tools and techniques that are required for financial analysis. A Junior Financial Analyst is an ideal entry-level position to launch a career in financial analysis. Progression beyond the role A Junior Analyst may work his or her way up to an Analyst position in a period of three to five years when they have demonstrated a solid capacity to build complex financial models and when they have developed an in-depth understanding of the organization s finances. For Senior Analysts who want to stay within corporate finance, there is the potential to become a Cash Manager, Strategic Planner, and eventually the Director of Finance, Controller, Chief Financial Officer (CFO) or Treasurer. If you are interested in moving outside of corporate finance, some Analysts go on to become Investment Advisors, Financial Consultants or Investment Bankers. 9
External Factors Impacting the Role The regulatory environment for financial services has changed dramatically in recent years. This is the result of several factors, including competitive developments, new products, advances in technology and impacts of the corporate bankruptcies and scandals in the past decade as well as the recent global financial crisis. As a result of these events, many banks, insurance and other financial organizations have experienced one of the most difficult periods in recent history. Some large organizations no longer exist in their previous form, the industry as a whole now operates in a much more publicly scrutinized environment than ever before and operations are becoming increasingly complex. This has created an even greater need for reliable, informative analysis about a company s overall position and potential future performance. The role of Financial Analyst exists in many different parts of an organization and across the financial services industry. Consequently, there are many opportunities for career progression into different business lines, sectors or even industries. Employment Trends and Outlook Employment Trends Demand for Financial Analysts is predicted to be stable and significant for the next 10 years, given the attrition in this role due to retirements of older workers ( Baby Boomers ) and the natural career progression of Analysts (2009, Canadian Occupational Projection System). 10
Compensation Compensation for Financial Analysts varies depending on the type of firm they work for, their seniority and personal performance. Financial Analysts are typically salary-based with good opportunities for performance-based bonuses (significant bonuses in the case of Financial Analysts in investment organizations). 11