Often, the change in one account is related to the change in another. Consider Relationships Between Accounts.However, if you identify privacy issues or if competitors could take advantage of the detail in your flux analysis, then you may need to decrease the level of detail before releasing it to outsiders. Decision makers can use this detailed data to develop specific courses of action. For example, your revenue flux analysis could be disaggregated by customer, product line, or region to identify more specific reasons for fluctuations. The more specific the explanation, the more useful it can be. The following best practices will help your company identify the underlying causes of line item changes: Each situation will merit a different level of aggregation however, you should consider how important a particular line item is to investors and how much benefit they would receive from a more disaggregated explanation. While your internal flux analysis should include highly detailed information, your financial reporting (which is discussed later in this article) will contain aggregated data that is specific enough for investors’ needs. Understanding the causes of these changes helps BJ’s to manage its business more effectively and provides more useful information to potential investors. Instead of giving a general explanation, BJ’s identifies and explains the specific causes of the change. Private label penetration increased to 19% in fiscal year 2017 from 18% in fiscal year 2016. The merchandise margin rate increased due to successful assortment optimization and better sales penetration of private label items. in which the company identifies two specific issues that led to an increase in merchandise margin rate: Consider the following example from the Form S-1 of BJ’s Wholesale Club Holdings, Inc. Identify Underlying Causes of the ChangeĪny number of factors could cause large fluctuations between periods therefore, a key element of a flux analysis is to identify the underlying causes of the change. Your company will need to keep detailed records to have the necessary information to perform the flux analysis. Key Elements of an Effective Flux AnalysisĪn effective flux analysis will identify the underlying causes of the change and explain the entirety of the change. Additionally, while this article focuses on comparisons of financial data from one period to the next, it can also apply to budget comparisons or comparisons between projections and actual results. While this article will mainly focus on the financial statement reporting aspect of flux analyses, the principles discussed will also help your company manage your business more effectively and prepare for financial statement audits. Material changes in financial statement line items are a point of focus for investors therefore, this portion of your quarterly report can have a significant impact on investor perception and your share price. The flux analysis is reported in the Results of Operations section of the Management Discussion and Analysis (MD&A). The SEC requires public companies to report material fluctuations of certain financial statement line items. Therefore, you will need to provide detailed explanations of fluctuations to receive a clean audit report. This analysis is designed to help auditors gain an understanding of accounts, identify risks, and corroborate the financial statements as a whole. During yearly financial statement audits and quarterly reviews, your auditors will require explanations for material changes in financial statement accounts. An awareness of fluctuations in financial statement line items and a knowledge of the causes of those changes can enable you to make better financial and operating decisions by identifying risks, opportunities, and areas for improvement. An effective flux analysis can help you understand and manage your business more effectively. Being able to explain fluctuations in financial statement line items is critical in three main activities: An effective flux analysis identifies fluctuations and explains their cause. The changes are generally expressed both as a dollar amount and as a percentage. What is a Flux Analysis?Ī flux analysis (sometimes called horizontal analysis) is an evaluation of fluctuations in account balances from period to period. ![]() An effective flux analysis can help your company understand those changes and communicate them effectively. As a result, they will be particularly interested in changes that occur in your financial performance from period to period. IPO investors want to invest in companies that can sustain high performance. Your ability to intimately understand your financial statements will be critical in your efforts to sell your company to investors and increase your valuation. As your company prepares for an IPO, your financial statements will be under intense scrutiny from investors.
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