Advanced Business Analysis: Tools and Techniques

Objectives
In this session, you will learn to:
Identify the meaning and use of financial statements
Examine various data analysis tools in Microsoft Excel
Examine various techniques to present financial data using Excel

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Advanced Business Analysis: Tools and Techniques

Introduction to Financial Statements

Financial statements:
Are a collection of reports about an
organization's financial results and condition
Include:
Balance sheet
Profit and loss
Cash flow
Do not include informal records of:
Expenses
Collections and payments
Are often referred to as “final accounts”
Are used by the government, shareholders,
suppliers, customers, and other statutory
authorities

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Advanced Business Analysis: Tools and Techniques

Introduction to Financial Statements (Contd.)

Financial statements are used:
By the organization’s management to make
business and economic decisions such as those
related to:
Capital budgeting
Financial planning
Capital structure
For statutory reporting to various regulators
By investors to make investment decisions
By the organization’s other stakeholders such as
employees and creditors

Financial statements can be prepared using tools

and techniques provided by Excel.

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Advanced Business Analysis: Tools and Techniques

Excel Tools for Data Analysis and Presentation

Common Excel tools for data analysis and
presentation are:
Creating a 5-number summary for financial analysis
Analyzing financial data via repetition
Charting financial frequency trending with a
histogram
Calculating depreciation of assets
Calculating the effective interest rate

Each of these tools is explained next.

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Advanced Business Analysis: Tools and Techniques

Excel Tools for Data Analysis and Presentation (Contd.)

A 5-number summary:
Is a form of data representation that
breaks down a large set of data to five
numbers
The five numbers are:
Maximum number
Minimum number
Average
Upper quartile
Lower quartile
Provides a concise summary of the
distribution of the observations

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Advanced Business Analysis: Tools and Techniques

Excel Tools for Data Analysis and Presentation (Contd.)

Let us view an animation on Creating a 5-Number Summary.

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Advanced Business Analysis: Tools and Techniques

Just a Minute
Which of the following statistical measures is NOT obtained by a 5-number
summary analysis?
a. Average
b. Median
c. Mode
d. Quartiles

Solution

c. Mode

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Advanced Business Analysis: Tools and Techniques

Excel Tools for Data Analysis and Presentation (Contd.)

Analyzing financial data via
repetition:
Involves creating a visual chart
called a “repetition scale”
showing the number of
occurrences of an incident
Helps in visualizing repetition,
without referring to another
graph
Helps in faster decision making

The figure shows a repetition

scale in an Excel sheet.

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Advanced Business Analysis: Tools and Techniques

Excel Tools for Data Analysis and Presentation (Contd.)

Let us view an animation on Analyzing Financial Data via Repetition.

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Advanced Business Analysis: Tools and Techniques

Excel Tools for Data Analysis and Presentation (Contd.)

Charting financial frequency
trending with a histogram:
Involves creating a frequency chart
made of bars of different heights
Represents the frequency of values
in the classes shown as bars
Is used as a tool for frequency
distribution plotting

The graphic depicts a histogram

showing the salary distribution of an
organization’s employees.

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Advanced Business Analysis: Tools and Techniques

Excel Tools for Data Analysis and Presentation (Contd.)

Let us view an animation on Creating a Histogram for Financial

Frequency Trending.

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Advanced Business Analysis: Tools and Techniques

Excel Tools for Data Analysis and Presentation (Contd.)

Depreciation of assets:
Refers to the decrease in the value of assets
from use or effluxion of time through technology Appreciation
and market changes
Also refers to the allocation of the cost of the
assets to each accounting period during the
useful life of the asset
Depreciation
Can be calculated using various methods, such
as:
Straight Line method
Reducing balance method
Fixed percentage method

Only the Straight Line method of depreciation

can be calculated using Excel.

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Advanced Business Analysis: Tools and Techniques

Excel Tools for Data Analysis and Presentation (Contd.)

The Straight Line method of calculating depreciation of an asset:
Estimates the salvage value of the asset at the end of the period during which it will
be used to generate revenues (i.e., its useful life)
Is calculated using the formula:
Annual depreciation expense = Cost of fixed asset – Salvage value
Useful life of asset (years)
Is calculated in Excel using the formula SLN, as shown in the figure

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Advanced Business Analysis: Tools and Techniques

Excel Tools for Data Analysis and Presentation (Contd.)

Effective interest rate:
Is the actual interest rate taking into consideration the compounding factor
Is important in order to plan the cash flows of a business
Can be calculated in Excel using the formula EFFECT

The figure shows the calculation of the effective interest rate using the EFFECT
formula.

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Advanced Business Analysis: Tools and Techniques

Just a Minute
What is the NPERY factor for calculating the effective rate of interest of a
bi-annual compounding government bond?
a. 2
b. 4
c. 6
d. 12

Solution

a. 2 (the number of times the compounding is done in

a year)

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Advanced Business Analysis: Tools and Techniques

Excel Techniques for Data Analysis and Presentation

Common Excel techniques for data analysis and presentation are:
Importing data lists from the Web
Debtors ageing analysis
Creditors ageing analysis

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Advanced Business Analysis: Tools and Techniques

Excel Techniques for Data Analysis and Presentation (Contd.)

Importing data lists from the Web is done for
data that requires frequent updating.

Data on the Web:

Can be imported into Excel
Can also be refreshed/updated automatically
Is error-prone, costly, and time-consuming if
copied and updated manually

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Advanced Business Analysis: Tools and Techniques

Excel Techniques for Data Analysis and Presentation (Contd.)

Let us view an animation on Importing Data Lists from the Web.

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Advanced Business Analysis: Tools and Techniques

Excel Techniques for Data Analysis and Presentation (Contd.)

Debtors ageing analysis:
Involves analysis of the company’s
debts
Shows the number of days the
debtors’ payments are outstanding.
Helps a finance manager to:
Follow up on long-pending
dues
Make provisions for bad debt
and doubtful debt

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Advanced Business Analysis: Tools and Techniques

Excel Techniques for Data Analysis and Presentation (Contd.)

Debtors ageing analysis of XYAB Inc. is shown in the following figure.

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Advanced Business Analysis: Tools and Techniques

Excel Techniques for Data Analysis and Presentation (Contd.)

Creditors ageing analysis:
Involves categorizing the amount payable by Creditors
the company as per the due dates
Helps to avoid legal and regulatory
proceedings
Involves arranging the creditors’ data Suppliers Company Employees
according to their due dates

A creditors ageing analysis table can be

created using the same process as that for
creating a debtors ageing analysis table. Lenders

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Advanced Business Analysis: Tools and Techniques

Demo: Creating a Creditors Ageing Table

Problem Statement:
The CEO of A1B1 wants a report from the Finance Manager, Mr. Thomas Cazillo,
regarding the company’s outstanding creditors. The CEO wishes to pay off all the
dues of the company and wants to know the age-wise creditors’ data. The age
buckets specified are less than 30 days, 31 to 60 days, and more than 61 days.
The company’s creditors data is as shown in the figure.

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Advanced Business Analysis: Tools and Techniques

Demo: Creating a Creditors Ageing Table (Contd.)

Solution:

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Advanced Business Analysis: Tools and Techniques

Summary
In this session, you learned that:
Financial statements are used by the financial managers to analyze and present
financial data in a user-friendly manner.
Various Excel tools help the finance manager to analyze and present the financial
data to various end users in an effective manner.
Important Excel tools and techniques for data analysis and interpretation are:
Creating a 5-number summary for financial analysis
Analyzing financial data via repetition
Charting financial frequency trending with a histogram
Calculating depreciation of assets
Calculating the effective interest rate
Importing data lists from the Web
Debtors ageing analysis
Creditors ageing analysis

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Advanced Business Analysis: Tools and Techniques

Summary (Contd.)
A 5-number summary helps to shrink an enormous data set down to simple
numbers.
A histogram is used as a tool for frequency distribution plotting.
It is possible to import important data from the Web directly to Excel tables.
Analyzing financial data via repetition helps to create a visual chart on the number of
occurrences of an incident.
Debtors ageing analysis and creditors ageing analysis categorize a company’s
receivables and payment into various time buckets, which helps the management to
take various important decisions.
Common methods used to calculate depreciation are:
Straight Line method
Reducing balance method
Fixed percentage method
Excel can calculate depreciation by using the Straight Line method.
You can calculate the effective interest rate by using the EFFECT formula.

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Advanced Business Analysis: Tools and Techniques

What’s Next
Before the next session, please ensure to:
Read the following chapter from Book 1:
Chapter 2, “Concepts of Value and Return”
Cover the following topic in the e-learning session:
Financial Management: An Overview
Complete the assigned task for the project.
Attempt the Lab@Home exercises by clicking on the respective Lab@Home session
on the technology space on Cloudscape.

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