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Business Performance Analysis: Reports & Tools

Instructor: Greg Hanichak

Greg has a Bachelor of Business Administration degree from the University of Scranton and is an operations manager with a leading logistics provider.

There are a number of tools available to analyze business performance and generate informative reports about a business. This lesson explores those tools and reports and their use in business analysis.

What is Business Performance Analysis?

Business performance analysis refers to a variety of techniques used to quantify the performance of a company over a given period of time. A performance analysis could be done on just about any area of a business, provided the correct key performance indicators are factored in the analysis. A key performance indicator, or KPI, is a metric that best depicts the performance of a particular area of a business, regardless of other factors. KPIs allow for a proper review to be done independently of external circumstances and drills down to the actual performance of a particular unit.

For example, Joe is the shipping manager for a large furniture wholesaler. Other than his primary goal of delivering orders on time, his main focus is keeping shipping costs as low as possible. It's time for Joe's annual review, and he walks into the meeting very confident he will receive a positive review as the company saw sales growth of 40% from the previous year, thanks in large part to Joe's department delivering 98% of orders on time. His manager shocks him by telling him that while the rest of the company outperformed the previous year, Joe's performance declined significantly. Joe asks for an explanation, and his manager tells him that on-time delivery held steady, but total shipping costs increased 25%.

In Joe's case, his manager is not using the correct KPI to measure his performance. Total shipping cost, or freight spend, is not an effective KPI because it is dependent upon many other factors. A 40% increase in sales brings a 40% increase in shipments and deliveries, all of which bear an additional cost. External forces, such as fuel prices, new regulatory requirements, or weather-related issues, could all impact the total freight spend through no fault or control of Joe's. After reconsidering other KPIs, his manager discovers that last year freight spend comprised 8% of sales, and this year it only accounted for 5%, proving Joe actually made major improvements in the area of his control.

Choosing the Correct KPI

To properly analyze the performance of a company, or a single unit within a company, choosing the correct KPIs is critical. A strong indicator should be independent of all other variables and focus on how the business performed given the circumstances it faced.

Think about Mike, a cross-country runner racing weekly against the same competitors. He averages 5 minutes per mile, and his best finish is 4th place. If Mike ran a 7-minute mile on a rainy day and a muddy course but came in 2nd, should we say his performance improved or declined? In business, as in sports, the most important factor of all is how one performs against the competition. In this case, Mike performed better against his competition despite not having a personal best time, so we will say he improved.

Business Performance Analysis Tools

There are a number of formulas and ratios used to measure how well a business is performing financially, operationally, or in other areas of the business. Some of the most common tools used to measure financial performance are ratio analysis formulas. Ratio analyses are broken down into four basic categories: activity ratios, liquidity ratios, solvency ratios and profitability ratios.

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