What is Flux Analysis and Why Should Business Owners Care?
All successful business owners care about and monitor the financial health of their company. Professional accountants are asked to manage cash flow, maintain tax compliance, and even track financial fraud and theft. However, one of the most time consuming tasks is flux analysis, short for fluctuation analysis. It is important that your flux analysis is accurate and should be guided by or completed by financial professionals. While you may be tempted to put off a flux analysis and perform one a year, flux analysis should be completed every accounting period.
What is Flux Analysis?
If you have never heard of flux analysis, you may be more familiar with the term horizontal analysis. Flux Analysis evaluates the variation in your account balance from period to period. A good flux analysis will explain:
What changes occurred from one accounting period to the next.
Why each change occurred.
The quantitative (numbered) measure of change. Preferably this would be presented both in dollar amounts and percentages.
Whether your accounting periods are monthly, bi-monthly, or quarterly, a flux analysis allows you to check your company’s financial pulse. You should produce two per period, one for your balance sheet and one for your income statement.
Why Should Business Owners Care?
As you know, your financial officer or accountant is one of the most important members of your team. Flux analysis can help you maintain confidence in your company’s finances. When done well, it will warn you of any financial troubles your company may be facing. It allows you to catch accounting errors, and will magnify any financial fraud and theft in your business.
Flux analysis is an important tool to communicate your finances to your employees and investors. Auditors and stakeholders will require explanations for any changes in your account, whether positive or negative, during each review period. With flux analysis you can easily explain why you pursued a risk or grabbed an opportunity, and you are more likely to pass your audit.
Do you still have questions about flux analysis? Need help getting started or just want professional advice? Contact Money Mastery LLC, we can’t wait to hear from you!