how to measure your business success? business performance analysis fundamentals
In, this course we will be looking at the P&L from a bird's eye view and cover, the key concepts, that need to be mastered before diving into the more detailed, understanding of. Top line and bottom line, performances. To. Get the most out of this course you, need to have at least a, basic understanding of. What a P&L, is and how, it fits into the financial, statements, of a company, if. You're not familiar with a P&L, or if, you feel you could use a refresher on, the subject, then, I would recommend, that you take a look at the course reading. Financial, reports, also, this. Course will lightly touch on some accounting, concepts, but, you don't need to have any knowledge of accounting. To follow this course, you. Should know though that this is not an accounting, course and as, such I strongly. Advise, you to consult, with a certified, accountant, if you have an accounting, question, also. Note that in this course we, will be entirely focused, on, getting useful, insights. From our analysis, even, if it means deviating. From traditional. Finance, to, get closer to the business reality. As. You can see in the title of this course there, is a single document, that is key to the analysis, of the business performance of a company and that, is the, P&L or profit. And loss statement, also, called the income statement, in. This document, you can find the revenue the company, is generating and, the, expenses, it has to make in, order to operate the business this. Single document, of course is not the only source of information telling, you how the company, is doing but, it will tell you how, good the company is at serving, its customers as well. As how good it is at retaining any profit, from it in. The P&L there are specifically, three elements, that can be analyzed. Revenue. Gross. Margin, and operating. Expenses. If. You're not familiar with, those notions a great, place to start is by following, the financial, literacy reading, financial, reports, course in. That course you will learn everything you, need to know about income, statements, and more. To. Make a long story short the. Revenue element, of the P&L will tell us how well the company is doing at growing, how. Each action, taken from a sales perspective is, delivering. And where, to look if the performance is not to the level we expected, the. Gross margin, is what is left to the company, once, all the product related, costs, have been paid this. Is where we see if a product is profitable. Or not, last. Are the operating, expenses. Which, cover everything, that is to be paid to make the company function, and is, not related to production such. As office, space salaries. And so on by. Analyzing, those elements the underlying, factors, that constitute them. As well. As financial, concepts, relating to the P&L we, will learn the foundation. That is necessary, to dive into a company's, performance and, extract. From it to concrete actions, that need to be taken. As we. Will see there, are different ways to analyze a PMF and the, first one is by taking each component. Individually, each. Of the elements, comprising, a P&L represent. A world in itself with specific, dynamics, underlying. Elements, and will need to be analyzed, in a specific way for. Example when. You analyze the revenue of a company, it is not enough to just look at the figures and see if they are trending, up or down of, course. Training, up is usually preferable but. It doesn't tell you much about the performance. You. Don't really know why it is going up and therefore if, it is sustainable, or not is. It, due to an external factor over which you have no control and, could, therefore drop, soon after and. If so how, much will it drop by these. Are typical, questions, you, need to have answers, to if, you want to not only react, to events but, actually, be ahead of the curve as. We will see there, are internal factors as, well as external, factors that affect, the performance of, each component, of a P&L and therefore. Of the company, some. Of those elements are common, to, most companies, some. Are industry, specific, and some, are specific, to your company in particular it. Is by analyzing those. Elements, that we will be able to forge an opinion, about the company, performance, and identify.
Elements That explain, both good and bad performance. In. Combination. With those analysis. We. Will also see, that there are great insights, to be drawn from analyzing. P&L, components. Together a company. Is one, big complex. Organism. And therefore. Everything is connected together each. Component. Is connected. To many others even, sometimes, to all of them. Components. Can even be dependent, on each other and therefore, the increase, of one component, could, have a negative effect on another. One we. Will therefore learn, in this course some, of the most important, metric combinations. That you need to know about, again. Here there. Are an infinite, number of ways to combine elements. To analyze, a business. But. We will focus on the key ones those. That have proven to be insightful, to many companies, we. Will also look at general, methodologies. To analyze, a business, so, that you can determine which. Combinations. Are specific, to your industry and, even to your specific business. Beware. Of analysis. Paralysis. Once. You get the hang of analyzing, your business and you have identified, the right metrics those, that tell you what is going on in your company, you can fall into the trap of over, analyzing. Once. You have identified that something is happening that you found the source of an issue for example you. Can be tempted to carry on with the analysis, and dive deeper, into the issue and if, you make another great finding, why, not dive further on into the numbers I can. Already tell you that there is an art in finding, a good time to stop analyzing I can. Even tell you that if you dive further and further into the numbers you, will always get, to a point where the numbers will contradict, what you identified, a minute earlier, the. Reason for that is that there is a bias, never analysis. Which is that you look into the factors, that you know are affecting, your business but, never into the factors that you don't know about let. Me explain this a bit further by, using an example let's. Imagine you, just hired a new sales representative. She's. Been on board for three months now and sales, are starting to pick up it, could make sense to conclude that this is due to that new sales rep so you. Could decide to analyze, further and look, into her portfolio of, customers, and see if those are the ones that are taking off and let's say they do so. You dive further into your, analysis, and come. To the conclusion that, something is really happening there. Then. You, could decide to interview. The new sales rep and understand. The customer, specific situations, to, validate again that, this is the effect of the new hire let's. Say now that you realize that the deals you have one were, actually planned, for over a year now and not. Since you hired the new person, what, would you conclude from that has. That new sales rep been instrumental, in, securing a deal that was going on but. Which you would, not have won without her, or is. She getting credit, for something that would have happened anyway. Examples. Such, as this one happen, all the time there's. A point in each analysis, best which things, get more and more confusing. This. Is due to the fact that along, with the factors, that you know of there. Are factors, that you do not know of which affect your business just as much in. Our example, here is.
It Really that important, to understand, if sales are increasing things. That newly hired sales rep does, it allow us to, make any important, business decision. Or would. It be more valuable to, spend our time making, sure that sales rep increases, the number of deals she identifies. Business. Analysis, is an enabler, it's. A means to do something else, in particular. It. Is a means to make business decisions to. Resolve issues or, do, more of what, you do best developing. Your business and with. That in mind an, analysis. Should, always be, initiated. Before there is an action, to be taken. Analyzing. In itself is a waste of time if it does not result in a decision, in. Our example, here the, problem, could be that we're not making enough revenue, this, is why we hired a new sales rep in the first place and, we've. Seen the growth we, are seeing comes, from her portfolio. Then. Instead of diving further, into, it we, should have focused our efforts on the rest of the portfolio maybe. To make sure we're not losing customers, or, to, devise a plan to do more business with our current customers, or, to acquire new, ones, the. Conclusion, here is to, focus your efforts in making, decisions and to use analysis. As a tool. To get there, analysis. Should, not be an activity unto, itself that, sucks up your time with no conclusive outcome, if that, is the case you are probably not on the right track and should, just stop there. Never, business, as in everything else some, things are controllable, and some others are not in. The world of business, performance, analysis, this. Is quite an important, concept the. Point here is to focus, your efforts on what you can control, for. Example let's, say that a big part of your business is in delivering, products, then. You, must have a significant. Budget allocated, to gas. Let's. Say that gas prices go, up and due. To that you're. Now making less, money as you. Have no control over the price of gas you. Cannot push it back down it would, therefore not. Make sense for you to spend time thinking about, it, the. Problem though is still there you still need to make more money to. Compensate for the loss related to the gas prices but. While we have identified. The source of the problem, the resolution, will have to come from a different place a place. That you can control that. Could mean finding, more business, to, make more money or cutting. Down on other expenses, to compensate. Focusing. On what you can control is, a very important, concept as it, focuses your efforts, on the important, things in the, same way it, does not make sense to spend endless hours. Analyzing. What you cannot control merely, knowing that, a non controllable factor.
Is Impacting. You is enough. Your. Analysis, needs to be focused on the actions that you can take and therefore. On what you can control. An important. Element to take into consideration when, analyzing. Your business is the presence of exceptional. Factors, let's. Define what that means when. I say exceptional. It is a matter of time, and magnitude. It. Is an event that is impacting, the company financially, and that, is both big and does not happen often for example. Signing. A large contract, that will generate significantly. More revenue than your usual contract. And that, does not happen very often would. Qualify as an exceptional, contract it, has both the time factor, as it, does not happen very often and is, significantly, bigger than your usual contract. If. It happens every day it is not exceptional and. If it's the same size as your other contract it's not exceptional, either, when. It comes to business analysis, my, advice is to always exclude. Exceptional, factors of course. Exceptional, factors, are part of business and count, towards, your overall performance, but. When you analyze a company, exceptional. Factors, can be misleading. Let's. Imagine for example a, company that has a declining, performance this, year compared. To the past but. Has signed a large contract, that is of setting, this declining, performance of course. That's, great in this, year that will be very helpful in paying salaries. Rent, and all the other expenses, of the company, but. From a business analysis, standpoint this, large contract, could mislead you in believing that everything is fine the company is growing healthily, and that, there is no underlying issue, in. Essence, if, you know for sure that every year you will be able to sign another contract as, large as this one then. All the better, maybe. You're, not in a dire situation but. In that case you cannot say that that contract, is exceptional, anymore since, it's recurrent. You. Could have a dire business, situation, that is hidden by an exceptional, contract, that makes the numbers look good the. Issue here, is that if, you don't exclude that exceptional, element, you, might not realize you, have an issue until, you don't have the benefits, anymore of that large country, and when, it is too late to act upon it by. Excluding exceptional, elements, you, can determine, if you have a performance, issue even. If it's not a problem for your company, right at this moment you. Then have more time to react and do something, so that once you don't have the benefits, of the exceptional, opportunity, anymore you, will already have taken, the required actions, to ensure your business is, well on track to good performance, by. The way this is also true the other way around when. You have had a large exceptional. Expanse that is making your numbers look bad let's. Say for example that you are selling food and that the large portion of your inventory, turned, bad and that. You had to spend large amounts of, money to, reproduce, that inventory. This. Extra cost is exceptional. And could, have eaten up most if not all of your profits, if. You analyze your business including, that element, you could conclude that your company, is not profitable but. By excluding, it you could realize, that it is a one-time event and that your business is still as profitable, as it was therefore. You, would just need to make sure that, it does not happen again but. Would not necessarily have to change the way you work and generate profits. I've already partly, made this point earlier but, it is so important, that I think it is worth spending a bit more time on the concept, of analyzing. For decision making there. Are many benefits to, analyzing. The performance of a business but, like every other activity, it has to add value to the company when. You run a business or a, department, within a business or, your. Own scope within a department for, that matter you. Will probably be overflowing, with questions, you're, asking, yourself which if answered, could help you improve the performance, of the company the. Temptation, then is to try to answer them all and spend, a significant, chunk of your time analyzing, your business while. All those questions, surely seem interesting, in charge, with added value most. Of them will not lead to concrete actions, to improve the business why. Simply, because not all of them have had their source a problem to be resolved every.
Company Every day has, a set of problems to resolve those. Will always have priority, over everything, else, other. People, within the company will acknowledge the, importance of solving those problems and, will, support and prioritize, any action, or analysis. That helps in finding a solution, so. Next time you sit down to analyze, your business ask. Yourself, if it is helping, to resolve a problem and will lead to concrete actions. Most. Questions that start with why. Is this or why, is that usually. Don't, lead to actions, because they seek understanding, of, a situation. Questions. That start with how. Can i how, can we for. Example are, focused, on the need to do something and are therefore likely to lead to concrete actions, any. Analysis. That helps in answering, those questions will. Surely add a lot of value. A last. Point before we get into the nitty-gritty of business, analysis, everything. We will learn here will help you towards, tracking, and analyzing, the financial performance, of, a company you will, be able to use that knowledge to do two things the. First thing will be to understand how financial, elements, can be leveraged, to gain an understanding of. The performance of a company and lead, to action, oriented analysis. The. Second thing is that it will help you identify the, metrics, that, you will need to track on a daily, weekly monthly quarterly, or, even yearly, basis, in. Order to stay on top of your business those. Metrics, can be put together on, a dashboard that, you will review regularly. There's. A big difference between dashboard, preparation, and business, analysis, a dashboard. Is a tool, used, to have visibility over, what is happening, within your company you. Review it on a regular basis, and if, you have the right metrics, on it you can scan all the key areas that need to be controlled and know, where the company, is standing, at any moment in time it. Is like sitting in a control tower that tells you everything that, is happening around you it. Is key to have at least basic, dashboards. In place to drive your company, an, analysis. On the other hand is the link, between the dashboard, and the actions, you need to take it. Is the understanding that is extracted from the dashboard the. Further data analysis. You will be doing that will lead to a conclusion, to an action that you are another person within. The company, will, be carrying out in order to improve the business performance, of the company we, will be focusing more on that in later courses within, this series. You. I hope. You have enjoyed financial. Analysis, introduction. To business performance. Analysis, in this. Course we've seen that. The P&L is going to be our main source of information. When. To analyze, and when, to stop analyzing, how. Combining, financial, elements. Is key, to the understanding of the performance, how. To make the distinction, between, controllable. And non, controllable elements. How. To treat, exceptional. Factors, what. The differences, are between, analysis. And dashboard. You.