The Basics of Numerical Analysis: Decomposition and Mapping
Good morning!
The weather is terrible outside, so I'll spend the day at home carefully thinking through my strategy.
Financial forecasting is crucial for business strategy.
How much can we increase future profits, and what is the worst-case scenario?
I want to be in a position where I can simulate these things.
Let's think about this a bit more concretely.
How much profit do you make from selling one unit?
When talking about business figures,
most business owners have a general grasp of their sales.
However, when asked about profit, the answers are often vague...
Furthermore, when asked,
what is the profit per unit? The answer often doesn't come.
While it is important to understand overall profit from financial statements,
profit per unit,
and even profit per unit by item...
if you can break it down and grasp it this way, the resolution of your numbers will increase significantly,
and things that were previously invisible will come into view.
Decomposition of Sales
Sales should be broken down intoUnit Price × Quantity.
Item: Unit Price × Quantity (Date, Client, Remarks)
If you can record data by linking it to these figures, that's a good start.
Simply aggregating total amounts is not useful for analysis.
To think about what actions to take—what to increase or decrease and by how much—
Unit Price × Quantity is the first step!
Additionally, if you record information for each transaction, such as
date, client, item details, and category classification (tagging, etc.),
you will be able to perform multi-faceted analysis.
In Excel, it's like recording everything in a single row.
Decomposition of Expenses
Just like with sales, we will break down and analyze expenses by item.
What items (expense categories) are involved in the costs associated with sales?
-
Variable Costs
Material costs, raw material costs
Labor costs (it is also acceptable to group these into personnel expenses)
Outsourcing costs
Others (consumables, etc.)
-
Fixed Costs
Personnel expenses (labor costs, sales, management, etc., for the entire company)
Others (selling, general and administrative expenses excluding personnel expenses)
Does this look about right?
The classification might differ slightly depending on the industry or company.
Using the expense items in your financial statements as a reference, let's also break down the costs per unit of sales.
Material costs, outsourcing costs
You should be able to find out how much is spent on material costs and outsourcing costs for each item by looking them up.
It is a bit tedious, but you need to map and record them for each item.
If you slack off here, analysis becomes impossible.
Starting with rough mapping and recording is fine.
If direct mapping is difficult,
it is also acceptable to break down the figures from your annual financial statements or
monthly trial balance,
and consider proportional allocation to determine how much to assign to each item.
Personnel expenses (labor costs)
Calculate personnel expenses based on the operating hours and work hours of the people directly involved in each item.
Record who was involved in which item and for how many hours,
and map this information.
Once you know the time spent per item, the rest can be handled through calculation.
Personnel expenses are also broken down into Unit Price × Quantity (Time).
Many people find that even if they know the time per item, they do not know the unit price.
Here is how to calculate it roughly.
Extract the total annual personnel expenses for the entire company from financial statements, etc.
(Includes salaries, bonuses, statutory welfare expenses, welfare expenses, etc.; excludes training expenses)Roughly calculate the annual personnel expenses per person.
(Total company personnel expenses ÷ number of employees)Roughly calculate the personnel expenses per hour.
(Annual personnel expenses per person ÷ 2000 hours)
I am sure there is variation in costs among employees.
It would be better if you could account for this numerically, but
if you are worried about it, it is also acceptable to treat them as roughly the same amount and divide by the number of people.
If you do not know the annual working hours either,
I recommend using a rough estimate of 2000 hours per year.
In reality, it is often between 1500 and 2500.
Here, since all we need to do is trend analysis, don't worry about the fine details.
It's important to abandon perfectionism and first get an overview of the whole picture!
Many people are concerned about the details, but
in the end, if you can't see the big picture, you can't achieve your goal, which is putting the cart before the horse.
First, get a rough idea of the whole picture, and then
it's okay to gradually increase the resolution.
For personnel costs of sales staff, accounting, and management that are not directly related to items,
it is easiest to calculate the total value and then distribute it based on the sales ratio.
Ultimately, it is important that the total of the financial statements matches the total of the figures broken down by item.
If the totals do not match, just remember that you will need to make adjustments somewhere.
What is the profit per unit?
Once you have mapped sales and expenses and performed the calculations,
you can easily calculate the profit per unit as well.
Profit = Sales - Expenses
And it's too early to relax here!
Analyzing the variation in profit by item
Once you have calculated the profit per unit for each item,
list them all out across the entire company.
In Excel, the profits for each item will be lined up vertically.
Sort them in order from the largest profit to the smallest!
Aren't there some items with negative profit (losses)?
If you turn this into a graph,
you can clearly understand the company's profit structure.
A case where only a few products (items) are generating profit
A case where profit is generated on average
A case where many products (items) have zero or negative (loss) profit
And so on
If you have time, try plotting it on two axes: sales amount and profit, and
you will often notice even more.
Looking at this will make it clear what you should start with.
Rather than overthinking, it is important to have the mindset of
getting your hands a little dirty and finding hints for your next move yourself!
Numerical Analysis → Action (Design, Planning)
First, decompose and analyze.
Beyond that lies the design and planning of strategic actions, such as what to change and by how much.
Instead of just enduring and holding on,
why not start by analyzing what you can, little by little?
A bright future is sure to come into view!!
I would be happy if my previous articles are also helpful!
This article was written by
Shigeki Kawahara, a "Future Realization Partner" who helps increase revenue pillars
https://mousoubiz.com/
https://twitter.com/mousoubiz