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How To Analyze The Performance Of Your Business
By David E Coffman CPA/ABV, CVA
How is business? It is the superficial question many people ask business owners in lieu of the standard "how are you". Few really care about or even listen to your response because they know it is just meaningless chi-chat. But do you really know how your business is performing? Meaning more than just sales growth or profitability trends. Have you ever done an in-depth analysis of your business? Here’s how you can.
SWOT Analysis
A common and long-standing tool is to list your strengths, weaknesses, opportunities, and threats (SWOT). It is a simple concept that makes lots of sense. Knowing your SWOT is important and useful information. Strengths and weaknesses measure internal performance and competence. Opportunities and threats assess the level of risk from external conditions. There are many articles about SWOT, but because this type of analysis is so broad and each business is so unique, it is difficult to describe how to apply it to any specific situation. One simple SWOT method is to divide a sheet of paper into four sections. Draw a vertical line down the center and a horizontal line across the middle of the page. Use the top left section to list your strengths, bottom left for weaknesses, top right for opportunities, and bottom right for threats. Then prioritize the items within each section by importance.
Whether you should focus on fixing the negative things or developing the positive ones is a ‘glass half-empty or half-full’ kind of debate that depends on your attitude and perspective. Either way a SWOT analysis really doesn’t provide much guidance. Many attempts at a SWOT analysis fall flat when the enormity of the task is realized. Where do you start? What factors should be considered? Where should you focus? SWOT analysis is a great tool, but users need some guidance and structure to make it work.
Five Forces Analysis
In his books "Competitive Strategy" and "Competitive Advantage", Michael Porter introduced the five forces of competition. They are the: 1) bargaining power of customers, 2) bargaining power of suppliers, 3) threat of new entrants, 4) threat of rivalry from existing competitors, and 5) threat of substitution. The five forces provide a framework that makes external risks easier to grasp and evaluate.
Combining SWOT and Five Forces
Both SWOT and Five Forces are analytical tools that are widely used by consultants, researchers and other professionals. The Five Forces method is basically a refinement of the external part of a SWOT analysis. So it makes sense to combine these tools to create a hybrid method.
Factors to Consider
For any analysis to be worthwhile, it must consider all aspects of the business. There are many factors that are common to virtually every type of business. To insure that no significant factor is overlooked, the analysis must be structured. Internally, five business sectors should be analyzed: 1) management, 2) workforce, 3) sales and marketing, 4) operations, and 5) financial. Externally, each of the five forces needs to be evaluated. Since every business is unique, the specific factors within each sector must be tailored specifically for the business being analyzed.
Rating the Factors
After the specific factors are established, the business must be rated by each factor. Each item should be rated in two ways: 1) the importance of the factor to the business, and 2) the business’s competence (internal) or risk level (external). Rate the importance using an alphabetical scale from A to E, with A indicating very important and E not important. Rate the competence or risk level using a numerical scale from 1 to 5, with 1 being very proficient or not vulnerable and 5 being deficient or very vulnerable.
Categorizing the Results
Using the dual rating system the results can be categorized by priority. Important, but deficient or very vulnerable (A5) factors may be life threatening. Important, and proficient or not vulnerable (A1) factors are core strengths. The results between the extremes are classified into: critical flaws, moderate weaknesses, potential weaknesses, neutral, potential strengths, and secondary strengths.
Plan of Action
Each category helps determine what needs to be done and when. Life threatening factors must be addressed immediately. Critical flaws come next. Moderate weaknesses aren’t killers but correcting them can greatly improve performance. Potential and secondary strengths should be evaluated to determine if it they are worth developing. Core strengths are what the business does best. Too many core strengths indicate that either business resources are being spread to thin, or the analysis wasn’t objective. Relying too heavily on a core strength can turn into a big weakness if the business environment changes in ways that make the strength much less important or even irrelevant.
Conclusion
Analyzing the performance of a business is a tough task to tackle, especially for owners whose expertise and time lies in running the day-to-day operations. The hybrid method, described above, provides a framework that breaks the task into manageable pieces, and automatically prioritizes the results.
Analyzing your business will show you how and where to improve its performance. Then when someone asks you "how is business", you will have something worthwhile to say, even if they aren’t listening.
About the Author
David E. Coffman CPA/ABV, CVA has 30 years experience working with and operating small businesses. He has published his collective knowledge in a number of works. His "Scorecard for Small Business" provides an easy to use framework to analyze any small business in-depth. Information about the "Scorecard" is available at http://small-biz-scorecard.
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