This is the fifth in an 8-part series especially for new subscribers to the Creative Finance & Management email newsletter. Every week we are sending you an article aimed at helping you to think about a different aspect of the financial management of your business. This is in addition to the normal bi-weekly newsletter. We are doing it to give all new subscribers the same orientation to the way that Charis FD thinks about small business performance management. That way we can have confidence that all our subscribers have been given the benefit of foundational advice in all aspects of business performance management.

If you miss any of these articles, don't worry. They are on the Creative Finance & Management blog. Just look for the "New_Subscribers" tag.

These are the articles in the New Subscribers series:

1. The ingredients for success in Finance
2. Strategy and Planning
3. Business Change - implementing your strategic plans
4. Measurement and Management go together
5. Paralysis without analysis
6. Your Finance team - a valued asset
7. Stakeholder management - the importance of keeping people happy
8. Internal Control - 3 fallacies that add risk to your business

Here we go: ...

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Paralysis without Analysis

Over the last three articles that we've sent to you as part of our new subscriber series we've covered the points around the outside of the business performance management wheel - strategy, change, and performance measurement/reporting. There is one more thing to talk about briefly before moving on to talk about the Finance function (next time) and then other key concerns such as risk, controls and stakeholders. That is performance analysis. I like to call it performance improvement analysis.

If you've read the previous articles in the series you will have picked up the philosophy underlying my advice - be intentional and analytical. Mostly, though, we've talked about being intentional - if you mean business, then you are intentional, you know where you want the business to get to and you know how you intend to get there. And you know whether you are making progress because you are intentional about measuring performance.

Now I want to talk about being analytical.

I started writing something a bit philosophical here at first, and then I heard myself yawn! So I deleted that. Do you want to get under the skin of the performance of your business? Do you see things that are happening and wonder why? Do you wonder which of your products is really the best? Is it the one that sells the most? Do you wonder which of your customers is really the most important? Is it the one that buys the most?

Analysis is all about asking "why?" And "what if?" It can be as basic as "why have we made a loss this month?" Or it could be more complex, such as, "what if we offered early payment discounts of x%?" Or even more complex, like, "what if we paid £xmillion to buy a business?"

It doesn't have to be financial data. Other numerical analysis is useful too. In fact, if you can make it numerical or financial then it is often easier to get a qualitative understanding of the issue - i.e. is it good, bad or ok. One example of numerical analysis that I dealt with in one large group was looking at absenteeism. How many days of work did we lose through sickness? And in which locations? Which teams? Was it seasonal? Was it improving or getting worse? You may be asking, "where is the why question in that?" Well, think about, "why are our staff costs so high?" There are accepted benchmarks around, so we could tell whether the sickness absence rates were better or worse than the average for those types of people. That enabled us to focus on particular areas, ask further questions and put actions in place to improve. Reducing absenteeism eventually led to lower staff costs, because we didn't need as many people to do the work. That's another example of what we saw last time - that measurement enables you to manage and therefore improve.

Analysis enables you to drill right down to cause and effect relationships. The idea is that if you can measure and manage those cause and effect relationships then you can reduce things that drag the business down and enhance things that positively influence the business.

Many big businesses suffer from what they call, "analysis paralysis", which basically means they have gone too far. They have analysed everything and now have so much information that they can't make sense of any of it. Smaller businesses very often suffer from the reverse - "paralysis from lack of analysis"! Have a think about what information you have available in your business. How well do you really understand the cause and effect relationships?

But where do you start? Here's my suggestion: Take a key performance measure, one with strategic importance, and ask, "what would I have to do to make it better?" There may be several things you could do. Get information on what the current situation is for each of them. Then for each of those things, ask, "what would I have to do to make that better?" And keep on going through that cycle until you feel you have got somewhere close to root causes. Along the way you will have analysed your business performance and got valuable insight into the things you have to do to improve.

Here's an example: Let's say that in my business, staff costs represent 70% of the cost base. What would I have to do to make that better? Reduce headcount or reduce remuneration. Let's discount the latter for now. So we should analyse how our headcount is made up - by department, by grade, by location, etc. What would we have to do to reduce headcount in each of those categories? Reduce work or become more efficient. So let's analyse what work the people are doing and how efficient are they - what do they produce and how many do they produce per day, hour, week, month, whatever is appropriate? So with that information, what do we have to do to reduce work? Stop doing certain things - so what would be the impact? And what do we have to do to become more efficient? Do things quicker. So in order to see which things we need to do quicker, we need to analyse what activities have to be done to produce the outcome and how long each activity takes. Then we can look at the main activities and ask for each of them... you've guessed it! "What would we have to do to make that better (or quicker)?"

So to conclude, in order to manage business performance you need to measure it first. But you need to do more than that. You need to understand what the figures are telling you. And in order to understand, you need to analyse - financially, numerically and logically.

But one final word of caution - only measure things that are useful and you can act upon. If you find yourself regularly looking at figures that you do nothing with, then ask yourself what they are for... and if you can't find a satisfactory answer, STOP producing them and go and find some more useful analysis to look at!

In the next newsletter for new subscribers we'll look at your Finance resources - people, systems and processes. Are you getting the best out of them?

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Until then, take care...

If at any stage you want to talk to us, we're quite happy to give you a call to talk more about your business and the challenges you face. And you may be eligible for a free Finance Strategy Review session. To set that up either email us at enquiries@charisfd.com, remembering to leave your phone number and email address; or go to our website and complete the contact form.

Thanks again for subscribing to Creative Finance & Management. We hope you find it helpful.

© Charis Business Consulting Limited 2009