There are three levels of business analysis. What does the most powerful one look like?

Business analysis has become an important part of corporate business strategy, helping companies better understand their own business conditions and market situation, and providing strong support for the formulation of scientific strategic plans. How to conduct advanced business analysis? This article gives the answer, I hope it will be helpful to you.

Many students are frustrated: when they talk about business analysis, they feel that it is just moving the income and cost statements around and writing "to be high-level". What does advanced business analysis look like? Today, I will systematically explain it to you.

1. Negative grading operation analysis

The basic tasks of business analysis are to present business results and monitor business processes. Therefore, the most basic business analysis is just to bring out the income and cost statements, which usually include three parts:

1. Operating performance: revenue, cost, and profit values

2. Business objectives: annual target completion progress and gap

3. Business risks: accounts receivable, inventory, and cash flow

Most of these data can be extracted from financial statements, so it feels like they are just being moved around. At the same time, these data seem complex, but they are very weak. This is because they are all result indicators and cannot explain the source of the problem. For example, if there is more inventory or more accounts receivable, there is less cash... These are just appearances.

To explain further, consider:

• Why is there so much inventory? Is it because the production plan is not reasonable, or is there a problem with sales?
• When encountering problems in sales, is it a problem of price, quality, customer demand, sales...?
• Is the problem temporary or long-term? Do short-term/long-term plans need to be adjusted?

None of these can be answered in the primary analysis. Therefore, relying only on the result data, we can only answer: "Revenue should be increased" and "Cost should be reduced". This is also the number one reason why business analysis is complained about. Some financial departments do business analysis with this effect. In the final analysis, it is because they do not understand the business process and can only see the numbers.

2. Primary Business Analysis

If you want to analyze more deeply, you first need more data. If you want to explain: where is the income generated, how is the cost generated, you need to dissect the income source and cost structure.

To decompose the source of income, we need to understand the business logic of generating income. This is usually described by the people-goods-field model. Each business model has a main income logic.

for example:

• Retail revenue depends on the stores. Revenue = Number of stores * Average output per store
• The revenue of the game comes from users. Revenue = Number of active users * Payment rate * Payment amount
• Manufacturing revenue comes from commodities. Revenue = downstream demand for commodities * order winning rate
• Understanding the logic of income can explain how income is generated.

Of course, if we have more process data, we can further break down the revenue model and understand the revenue source in more detail. The way to break down the revenue model varies from industry to industry and needs to be based on the characteristics of the business (as shown below).

The cost depends on the cost structure. For example, the manufacturing production line is huge and the cost is heavy, usually including: raw material cost, storage cost, logistics cost, R&D design cost, production cost, factory water and electricity, etc. The cost of the consumer goods industry is relatively light, and its products can be directly outsourced to manufacturing factories for production. You are responsible for brand building, marketing, etc.

Note that in addition to looking at the structure, the cost part also looks at the benchmark quantity to facilitate cost control. For example, in the production process of manufacturing, the technical department can set standard production costs based on product design/material requirements, and standardize the standard materials and labor for each product. In this way, by comparison, it is possible to find which link has problems.

The above are all adding analysis indicators. Analysis dimensions can also be added. For example, the revenue/cost situation of different regions, channels, and products is different. Regions, channels, and product lines can be used as analysis dimensions for comparative analysis.

However, even if we do this, it is only a primary analysis. Because through indicators + dimensions, we only locate the problem, but do not answer: why does the problem occur? I see that the cost of raw materials has increased, so what? So is it because the entire market is rising, or our procurement plan is unreasonable, or our suppliers are not good? There is still no explanation. Complex business problems require the construction of reasonable analysis logic to solve them.

3. Intermediate Business Analysis

The core of intermediate business analysis is to answer the question: how much influence do internal and external factors of the enterprise have on the business results? Only in this way can we answer the questions raised in the previous article and support business decisions.

What’s interesting is that the business department always attributes good performance to their own diligence, and bad performance to “bad environment”. Therefore, if you want to do a good job in intermediate analysis, you must clearly list the problem situation, logic of occurrence, and data arguments of each problem. Only in this way can you achieve the effect of “convincing people with numbers” and avoid arguments.

External factors are relatively easy to observe and should be eliminated first. Only by eliminating external factors can we focus on internal actions without distraction. We often say that external factor analysis should look at PEST. These four points are too illusory and need to be implemented into specific indicators before further analysis (as shown in the figure below).

Attention! Once the external factors are confirmed to exist, they may be devastating problems. For example, if the price of raw materials rises, if the whole market is really rising, it cannot be solved by the purchasing department talking to suppliers. It may be necessary to redesign the production line and cut high-cost materials; it may be necessary to cooperate with sales to raise prices or reduce sales of high-cost products. Once the external factors really happen, the impact on the internal situation is huge, and the whole company may need to work together to find a solution.

But in most cases, external factors are not that exaggerated, so we have to focus on internal actions. Internal actions need to be sorted out: what impact does each action have on revenue/cost, and how does it change the revenue/cost indicators. Some actions can directly increase revenue, some are indirect auxiliary, and some simply have no effect. Therefore, it is critical to sort out internal actions and distinguish the effects on revenue/cost (as shown in the figure below).

Note! When evaluating internal actions, you need to pay attention to completeness and comprehensiveness. For example, a promotional activity may have a pull effect, or it may overdraw the user's future consumption, so you need to continue tracking for a period of time and pay attention to the real results (as shown in the figure below).

For example, launching a new product may increase total sales, or it may simply replace the sales of an old product, with no change in total sales (as shown in the figure below).

For example, the previous mid-tier management system was expected to improve the efficiency of the production line, but it turned out that the process became more complicated and the capacity/output rate did not change much. These are all very common problems. When doing mid-level business analysis, a key topic is assessment: increment. After excluding the normal trend of the business, pay attention to the effect of the addition.

However, it is very likely that there are more than one or two business activities, and there may be many activities carried out together. At this time, the activities overlap and influence each other. The situation is very complicated and requires in-depth analysis to understand it.

4. Advanced Business Analysis

Advanced business analysis mainly solves the problem of overlapping due to too many business activities. In the intermediate analysis, we already know that there may be overlaps between activities, new and old products may be substituted, new and old channels may conflict, and R&D upgrades may not be effective... In short, everything will incur costs, but not everything can make money.

At this point you need to consider:

1. What is the proportion of profitable and unprofitable projects?

2. How to balance the progress of short-term and long-term projects

3. How to deploy troops and enable various businesses to develop in a coordinated manner

4. How to highlight key points and enable key businesses to grow smoothly

This is not a simple 1+1=2 approach, but requires overall thinking and the business insight of decision makers to a great extent. If there is no business insight, relying solely on data, there are only two ways:

1. Benchmark analysis: find excellent benchmarks and let everyone copy their homework

2. Problem diagnosis method: find out the problem link and then eliminate it

However, benchmarks may not be 100% replicable, and solving problems one by one can easily lead to the dilemma of treating the symptoms without addressing the root cause.

Therefore, the business insight of decision makers is very important. If decision makers have a judgment, they can combine the judgment and do tests to directly verify the judgment effect. In this way, they can intuitively see whether the strategy is feasible, so as to find a solution while analyzing the problem.

V. Summary

Looking at the elementary, intermediate and advanced practices, it can be seen that business analysis cannot be completed by analysts alone.

1. The degree of digitalization of data collection and business processes should be high

2. Standard cost and revenue logic require business participation

3. The business plan must be conditional and can be verified by data

4. Make business judgments based on data and put them to the test to achieve digital management upgrades and make decisions based on data.

Without these conditions, analysts will only have a few financial figures, no process indicators, no classification dimensions, no business assumptions, no test feedback, and will have to rely on their own guesses to write reports, which will certainly not allow for in-depth analysis.

Author: Teacher Chen, Source: WeChat public account "Down-to-earth Teacher Chen"