Analyzing your business performance: a simple guide
A good strategy to achieve business success is to always evaluate your business performance at least monthly. Your business performance is measured by your statement of profit or loss. This statement has its key elements to be revenue or sales, expenses (both direct and indirect), gross profit, and net profit or loss. In this article, I provide you with a guide on how to analyze your business’ performance.
Analysis means using certain metrics and mechanisms to gain insights into your performance. The following can be used to analyze the performance of your business:
- Horizontal or period-on-period analysis
This involves comparing an item of a period with another. For example, comparing the revenue of May 2020 with that of June 2020. This allows you to see the change (increase or decrease) that occurred in absolute and percentage terms.
It is done by subtracting the figure of the preceding period from that of the current period, dividing the result by the preceding period’s figure, and multiplying the outcome by 100%. A positive result means better performance for the current year whereas a negative outcome signifies under performance.
Consider this example:
ABC Ltd made sales of GHS25,000 in April 2020 but GHS20,000 in May 2020. To analyze this horizontally, we get the result below:
Change = GHS20,000 – GHS25,000 X 100%
= – 25%
This means that ABC Ltd has declined in its revenue performance by 25%.
- Trend analysis
This is similar to horizontal analysis. The differentiating feature is that trend analysis uses a particular period’s figure as a base. This base remains “static”. Thus, changes are determined by comparing other periods’ figures with this base figure.
For instance, if you were using trend analysis for the wages and salaries analysis of a firm for a set of months, one of the months will be used as a base month and all others will be compared with this base month. The horizontal analysis determines change by comparing a period’s figure with the preceding period’s, but trend analysis uses a base figure.
Consider the following:
|Wages and salaries (GHS)||
With the above, the figures for Feb, Mar and Apr will be compared with January.
- Vertical analysis
This analysis involves expressing all items of your statement of profit or loss as a percentage of your revenue or sales. This helps you to appreciate what percentage of your revenue, for example, is spent on your direct cost of operations or other operating expenses.
Consider the below:
Statement of profit or loss for the year ended 31st December 2019
Less cost of sales 18,000
Gross profit 7,000
Selling and distribution costs 2,100
Administrative and general expenses 10,500
Earnings before interest and tax (5,600)
Interest expense (2,200)
Earnings before tax (7,800)
Earnings after tax (7,800)
With the scenario above, any of the elements can be expressed as a percentage of revenue. For example, XYZ Ltd spends 8.4% of its revenue on Selling and distribution costs (2100/25000*100%). The same can be done for all the others.