Tag Archives: financial analysis

The numbers are the answer, now what’s the question?

 

In The Hitchhiker’s Guide to the Galaxy  by Douglas Adams one part of the story is the creation of a super computer to determine the “Answer to the Ultimate Question of Life, The Universe, and Everything”. This takes the super computer 7 ½ million years and the answer turns out to be 42.

I was helping a contact understand some accounts the other day. My way of looking at financial analysis is fairly straightforward, I look at the movements between the two years and against the budget / plan and try to understand what has happened in the business to create those movements.

Like the answer in HHGTG, the absolute numbers are not very helpful. They answer the question, but the trick is to work out what the question really was!

Apply that thinking to your planning process whether that is for a new project, a market entry or the overall businesses next quarters plan.

That means you start with the activities that will generate the numbers, not the numbers themselves. If you take sales as an example, the temptation is to take what you did last time and add on a bit.

That can leave you completely unaware, until you fail to make the plan, that you don’t have enough marketing leads for the sales team to convert.

You could apply the same thought process to customer service, or delivery or manufacturing – in fact, throughout the business.

So start with (for example) lead generation. You know (of course you do, you’ve done the analysis haven’t you?) what percentage of leads convert to sales. You have a certain level of capacity for lead generation, so you know what is achievable with the present level of resource. That gives you the first constraint, and the first question – are we investing enough in lead generation?

Now we know how many leads we are generating, let’s look at the sales conversion. Do we have enough sales resource to convert those leads, or too much? We don’t want sales people with idle time, so perhaps this element causes us to reconsider the lead generation question.

When you have those two questions, you have the answer – that’s your revenue number. Perhaps it’s not big enough? Revisit the two questions.

This approach to planning, effectively from the bottom up, allows you to spot opportunities (sales team not fully utilised) and identify constraints that you will never see by just taking last quarters numbers and adding a bit!