Leveraging Financial Statement Analysis

in Building Strategic Business-to-Business Relationships

Author: Rachel Hester, MBA

The need for a micro-targeted approach marketing methodology among B2B companies is a growing trend in the industry specifically with the advent of social media and the almost

antiquated mode of traditional advertising, such as tv, radio or newspapers. Big tech companies such as Facebook, Google, LinkedIn and Twitter are using consumer data to analyze user trends based on sites visited, clicked on, etc. Wikibon projects that the big data market will top

$84 billion by 2026.1 This translates into at least a 17% growth compounded year over year for the next 11 years. More importantly, it shows the significance of utilizing business intelligence in gaining a competitive advantage for businesses in today’s market.

How can financial statement analysis assist businesses in the business intelligence arena?

Many years ago, I experienced first-hand how banks utilized financial statement analysis as a tool to make risk based lending decisions. As an analyst back then, my job was to summarize audited financial statements going back a minimum of three years, do a financial statement analysis, and together with industry trend research, evaluate a business’ viability in terms of profitability, liquidity and financial condition. It’s incredible what stories can be collected just

by doing an analysis of financial statements. To illustrate this method in terms of sports, let’s take baseball for example. Typically, baseball players have batting averages and one can tell from the outset which player has a better chance based on their averages. Financial ratios are structured in that same way. They are a result of numbers crunched based on financial statement reporting.

Using this same methodology of analyzing financial statements and annual reports, 10-K

and 10-Q filings could form part of a company’s business intelligence apparatus. To be clear, using other business intelligence tools such as an analysis of social media comments, web clickstreams, and others, should not be discounted and should also form part of the whole business intelligence structure. Financial statement analysis can form part of the operational analysis side of this system.

Financial statement analysis/ratios examples that prove valuable in business intelligence

Some examples that may be helpful for B2B intelligence:

1. Gross Profit Margin

Benchmarking GPM versus industry standards could provide glimpses into how a company’s product profitability is more efficient or not. If a company’s product cost is more expensive than industry standards, questions on supply chains come into play which could provide an opportunity for vendors in the same industry to target this company if they could lower product cost.

2. Accounts Receivable Days

This is an easy ratio to analyze if one is in the business of collections or providing accounts receivable discounting services. Depending on a company’s days receivable level, opportunities for providers to target specific companies based on what they can offer abound.

3. Annual Reports, 10-K’s and 10-Q’s

These are broader reports that provide substantial information into a company’s operations and could be an important source of facts to explain the differences in financial ratios from financial statements. Depending on the industry that a provider is in, strategic plans such as new construction, new business units, expanding markets and such are some of the items that provide opportunities to target and can be found in annual reports.

The bottom line is that finding the right mix of analytics and data usage is what drives the success of any organization’s business intelligence system. Financial statement analysis may potentially provide an added approach to deriving more value from big data. With big data becoming the future of all analytics, management should definitely take strategic action to develop deeper insights that can offer greater benefits to an organization.


1 (Forbes) intelligence-forecasts-and-market-estimates-2015/#28d2400344f3

Accounting For Nonprofits:

Top 5 Things To Consider

Author: Rachel Hester, MBA


Several years ago while doing the final project for our MBA program I was once asked an ironic question. Our company sponsor asked, “Why purse an MBA if you are going to concentrate on nonprofit management?” If you think about it, he did have a point. Typically an MBA graduate’s goal is to get into a large for-profit company, apply what they have learned in school and make big bucks climbing up the corporate ladder. Nonprofits normally have reputations for being poorly funded, disorganized and low paying. With several years of experience up my sleeve working in nonprofits, I can say that this mainstream belief is true for small to medium sized nonprofits. It is also an area that is rarely looked into and has a lot of opportunity for involvement, education, and subsequent

self-satisfaction at medium sized nonprofits. Medium sized nonprofits are weak in the accounting and finance department in part due to the lack of specialized professionals in this area. One of the important considerations in building the finance and accounting system/department of a nonprofit is its over-arching ability to track and manage the financial impacts of decision making through the results of outcome metrics. It is equally important to be able to easily visualize this on a regular basis through dashboard metrics not just during reporting periods. These are the top five considerations when building your finance and accounting systems for your nonprofit.

I. Fund Accounting

As with any business, tracking and managing the receipt of money, it uses and what is left over is essential to its success. In nonprofits, tracking these, plus being able to determine and allocate the appropriate funds to certain programs is a critical part of running its business. This is where fund accounting comes in. The Financial Accounting Standards Board outlines these reporting requirements in Statement 117: Financial Statement of Not-for-Profit Organizations. Compliance with this FASB statement assures the nonprofit of at least one less thing to worry about during audits, donor and creditor scrutiny.

II. Revenue Recognition

Donations, grants, contributions, pledges, contracts and in-kind donations are some of the examples that represent a nonprofits revenue stream. Each of these categories is classified as either Unrestricted, Temporarily Restricted or Permanently Restricted. Unrestricted means money that is received that has no restrictions as to how it will be spent. Temporarily Restricted are those monies received that is restricted for a specific purpose, meaning it can only be spent for the purpose that the person giving it specifies. Multiple year pledges and grants for a specific purpose are typically booked under this category. Permanently Restricted funds are those funds that cannot be spent for any reason at all and are usually endowment funds. Typically, revenue is recognized in the year that it is received. Again, this is an important consideration as a nonprofit because it helps the tracking, budgeting and monitoring aspect in running the organization.

III. Taxes

Most nonprofits that are organized as a tax-exempt entity would need to apply for this exemption with the Internal Revenue Service (IRS). Once the IRS designates the entity as a 501(c), they can then ramp up their fundraising activities. This is an important consideration because this is a great benefit for potential donors to know that their contributions are tax exempt, thus possibly increasing the odds that they can contribute more to the organization that they care about. Some nonprofits (depending on the state that they are incorporated) can leverage this official designation by being able to sell items (for additional fundraising) without having to collect sales taxes. The IRS does require all designated 501(c)’s to file an annual Form 990.

IV. Internal Controls

Internal controls is a very broad topic that involves different areas in the operation of an organization such as financial controls, IT, HR, management communications and regulatory compliance. Internal controls are processes and systems that protects and makes sure that an organization’s assets are safe and secure, that financial reporting is accurate, that compliance with laws and regulations are adhered to, and that general operations of the business are effective and efficient. This involves processes for handling receipt and expenditures of money, preparing accurate and timely financial reporting, conducting annual audits of financial statements, proper grant/contracts reporting, employee relations and implementing policies and procedures that addresses financial processes, HR and conflicts of interest.

V. Budgeting

Budgeting is a process that assists a nonprofit in planning for the future and addresses the issue of sustainability of its programs and operations as well as helping to improve an organizations overall performance. One of the common mistakes that I’ve seen in the budgeting process for small nonprofits is first detailing the amount of expenses that they think the organization will incur or spend for the budget period. They use this as the baseline for building their budget and figuring out the amount of money they need to raise to meet this need. While this may make sense to most, nonprofits really need to take a more proactive approach to budgeting and first project the amount of revenue they think they can potentially receive/raise for the budget period and use this instead as the baseline to project what they can spend. The theory behind this thought is defined as a revenue-driven budget, which can also be translated to mean, “spending within your means.” Finally, the last item that I want to address with budgeting is that typically, the numbers that are used in the process should complement the strategic plans that the nonprofit has in place. For example, if the five-year strategic plan is in its fifth year and calls for expanding the facility, or the ability to build a facility that houses its major programs, then the budget would reflect that capital expenditure and the cash flows associated with financing for the project.

About the Author: Rachel Hester is a finance and accounting consultant. She specializes in assisting clients on financial operations management, planning and budgeting, and managing internal and external audits. Rachel has held a number of finance and accounting roles for companies in the nonprofit, education, oil and gas and health industries. She received her MBA from Mount St. Mary’s University in Los Angeles, CA.


Financial Accounting Standards Board. (1993, June). Statement 116: Accounting for Contributions Received and made. Financial Accounting Standards Board. (1993, June). Statement 117: Financial Statements for Not-for-Profit Organizations.