Art Kaun: Business Analysis

Business Analysis

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Every business has data available, which if turned into useful information can benefit the business owner to improve the business.
Due to more pressing priorities, or disinclination toward analysis, this data often is ignored.
Many owners perceive the health of their business based on experience or gut feel, and if they sense a problem, don't have good information to determine root cause.

I first apply the 80/20 rule. For example, typically 80% of sales or profit will come from 20% of customers. This rule can be applied to several areas of a business (revenue, profit, products, customers, sales force, etc.)
The analysis will point out where to focus attention; for example, which customers to favor and which to not waste too much time on.

Most businesses should be using profit as their most important measure. I calculate profit by week or month and view the trend in a chart. To measure year-over-year progress, I plot the prior year profit on the same chart.
The chart gives immediate indications of business health
Since profit is the difference between revenue and cost, trend charts for each should accompany the profit trend chart.

Utilizing the data from the Profit Trend chart, we can drill down in a couple of directions; by customer and by product/service.
Every business owner should know the profit margin he/she is attaining from EACH customer and EACH product/service being offered.
The data will point out the best - which to exploit further
When overhead cost of running the business is known, the overhead-to-sales ratio can be calculated. Now we can identify customers and products/services which are causing the company to lose money (profit margin is less than overhead cost ratio), and by how much. Here is where the more you sell the less profit you make!

Profit has two components, revenue and cost. Keeping costs low increases profit, so I analyze all cost data available from the business. Usually a budget can be used to categorize it.
Trend charts by category will point out where costs are rising and falling, and lead the business owner to action.
A drill-down into the data will point to specific expenditures and places to focus.

Next I look for trends in sales of our various products and services. This analysis points out which products and services have growing or shrinking sales over time.
I add to this the profit margin of each. Now we have targets of where to increase or decrease pricing, where to reduce costs, where to offer incentives, and which products/services to retire.

Companies with inventory must carefully manage a balance between carrying enough stock to keep order-fill high and the cost of carrying too much stock. Instead of measuring the frequency and loudness of customer complaints, company data can not only measure these values, but also predict the proper inventory levels.
I develop measures and data, as necessary to measure order-fill, stock levels, and future sales.
An inventory control system can signal when to reorder (reorder points) product and if MRP is available, indicate the economic order size (the most cost efficient size of a reorder based upon predicted sales).
Further analysis can determine the speed that each item moves through the warehouse, from fast movers to dead stock. This analysis becomes important for layout of the stock room (fast movers should be nearest the door).

Car drivers and pilots rely on gauges on their dashboard to keep them informed of key indicators in real time.
Yet standard financial reports only give us a view of the past (rear view mirror), and even then it can be very daunting to really decipher what took place.
So why not have a business dashboard that is updated daily, weekly or monthly showing the key indicators needed to keep a business on track?
A business dashboard can be sophisticated and expensive, or pretty simple and easy to produce.

Utilizing much of the data analysis discussed in Business Data Analysis, I create trend charts that are easily updated at the desired interval.
I place these charts on a single page so that they can be viewed as a whole dashboard. The page can be on a PC or on paper.
The charts I think most useful for a business owner are:

Sales results	Order fill
Costs	Customer satisfaction
Profitability	Work progress
Margins	Project progress
Cash flow	Inventory
Budget adherence	Marketing and sales initiatives
Projections

Before releasing it to the business owner, I make it a habit of reviewing the dashboard and adding comments to point some things out. For example...

If the business requires new and different indicators, I create them.
Finally, I try to be very prompt to update indicators at the desired time interval so the information is as fresh as possible.

Although business process reengineering was a fad several years ago, it shouldn't be thrown out from any business.
A business process defines the flow of steps and checks of how work is done. If inefficient, the business is wasting time, money and speed.
Examples of business processes in a small business are:
- Selling
- Delivery
- Collections
- Employee objectives and reviews
- Back orders
- Procurement
- Etc.
These and more are used by most companies, so somewhere out there, there exists a ‘world class' process flow for each.

Once I interview the participants and stake-holders of a given process, I chart the current process (ASIS) using simple flow diagrams. For example:

It is important to look for weaknesses, gaps, inefficiencies and missing controls in the ASIS process
I then search out what the ‘world class' process would be for this area of the business. It will serve as a guide for the TOBE process design.
Then I design one or more TOBE processes.
These are reviewed with stakeholders and responsible management. Adjustments are made to form an optimum TOBE process.
Finally, I map out the steps necessary to transition the organization from the ASIS to the TOBE process, ensuring that the transition is orderly and without negative consequence to the business.
I am then ready to apply the steps found in Organize, Plan and Manage Projects.