Analytics – a cure for InfObesity

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I’ll put my hand up and admit that if you hand me a Profit & Loss (P&L) and Balance Sheet (BS) report and ask me to provide insight, I’ll probably stare at it like one of those magic eye books praying for the ‘aha!’ moment when it is all miraculously revealed.

The information I need to analyse and understand the business is in the reports, but it isn’t presented in a way I can intuitively understand or use.

How do I analyse to gain insight?

There are two steps; first distil the information in to something understandable, and then look for patterns.

Step 1) Distil the information to something I can understand.
If I start with a basic P&L in its raw form, I struggle to derive any meaningful insight. My first step is to identify the metrics that allow me to distil vast volumes of data into something I can intuitively understand.

Let’s look at a simple metric

Gross Profit Margin=Revenue-COGS/Sales

Gross Profit Margin distils a heap of transactional data into something I can understand.

In plain English, GP margin tells me that every $1 of sales we get so many cents of gross profit.

Step 2) Identifying Patterns

Once I have a metric I compare it against various other elements within or outside the business.

For example:

  • What if I compare the companies GP against other companies or industry benchmarks?
    I get a sense of how we compare to the broader economy and competitors.
     
  • What if I compare the company GP against individual territories?
    I can immediately see which territories are above or below average. I then look at what is working well for leading territories and transpose that ‘best practice’ across the entire group.
     
  • What if I compare the GP Margin of each Sales Rep?
    I immediately see that my gun sales person actually has the lowest GP of the entire sales team. Clearly he gets the sales because he discounts so heavily.  Maybe my commission structure needs to be based on a combination of gross revenue & gross profit.
     
  • What if I compare the GP margin to product groups or individual products?
    I immediately see that my leading products by sales volume have unsustainable margins. Could we raise the price to increase GP?  Do we stop selling those products? Maybe I just go and put some pressure on the supplier to drop the buy price?

 

The real power of analytics is delivered when you analyse a business comparing multiple elements at the same time. Comparing GP by Territory, and by Rep, and by Product Group often reveals gems of information that operational reports will never highlight.

Analytics for everyone
Analytics tools have traditionally been ‘secret business’ reserved for the exclusive few. The good news is that analytics tools are now more readily available to a wider audience.

Companies with the foresight to place analytics tools in the hands of frontline employees have a strategic advantage over traditional businesses where all the analysis was done by the ‘exclusive few’ who were removed from the business’s operational heart.

So who in your business has access to analytics?

Luke Thomas

Luke Thomas

Luke Thomas is the Financials Product Manager for ERP vendor Pronto Software. @LukeTwit

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