If something isn’t working within a company, it can be confusing not knowing where to begin to address the issue. Objective frameworks such as funnel analysis, issue trees, and business canvasses provide a systematic and data-driven method to determine the source of the problem and provide solid evidence to plot a practical path to take.
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If something isn’t right in the business world, the desire to solve the issue immediately could lead to an unplanned strategy. In an unorganized firefight, an assumption will be made that a specific part is certainly not in order, and its validity will not be verified beyond the depths of a gut feeling. The people charged with repairing problems will have to cover various areas, which can result in an energizing, dilutive impact.
Planning a strategy to extinguish a fire isn’t indecisive nor a way to avoid wasting time. There’s nothing wrong with taking the time to look over the situation. In this article, I’ll share ways to help businesses with solution-oriented thinking – starting by assessing the problem and before moving on to some specific tests to dig deeper into the issue’s root.
The signs of business problems are usually exhibited quantitatively, e.g., decreased sales. However, the symptoms could result from factors of a qualitative nature, e.g., culture. While I will concentrate on objective analysis, I will end with some suggestions for addressing the more subjective factors that are the primary reason for business-related problems.
Income Statements
The most critical skills the finance professional acquires in the early years of their career and relies on throughout the rest of their jobs include the capacity to comprehend financial statements in a way that can translate into “words” for the layman. The notes accompanying the financial statements are designed to give this information but often obscure their root causes or confuse them with terminology.
One of the most effective methods to start an argument is to analyze issues to determine what happened in terms of financials that led to the topic at hand. Although at first glance, it might be obvious there is a problem and “sales have fallen,” an analysis of the issue tree could reveal a degree of mutual exclusivity about other elements that could have a second effect on the overall number.
Issue trees should be created by the MECE business problem-solving framework, in which everything is compiled mutually exclusive and comprehensive, down to the smallest fragments. When it is applied to your income report, this could aid in breaking the numbers into smaller pieces and identifying the problem.
This allows an analyst to determine the root of the problem and gives an obvious method to demonstrate the issue visually.
Identifying which ratio is responsible for poor performance will allow the company to pay attention to fixing the problem with a greater focus. For instance, if lined because of price increases within a particular region, instead of criticizing other regional sales teams, the company could focus its efforts on a more proactive proactively is in trouble.
Further work
Analysis of funnels The mapping of customers’ conversion processes is beneficial and should be carried out regularly. Analyzing the past where sales declined will help to determine the most painful stage in the chain at which customers stopped leaving.
Cost segmentation. Cost reduction strategies merit an entire article;e however, an excellent place to begin is to classify all costs in your business into practical buckets. Make use of a four-tiered classification system by importance.
Business as expected costs to maintain the lights running and on (e.g., rent for the head office, rent).
Unavoidable costs that are required for being “in the game” (e.g., licensing for registration of companies).
The secret sauce: What distinctness gives rise to the company’s competitive edge? (e.g., an eminent designer or an IP license agreement, etc.).
Not required cost that does not objectively reflect aiding sales (e.g., old software that duplicates functions in a newer suite).
Return on talent. Separating and evaluating employees based on their roles within a company line of work helps determine whether certain areas are overstretched and not being served. This is particularly useful for back-office positions that only fulfill one purpose but are integral to the entire company. Correctly mapping employees (an issue tree is helpful in this regard, too) can result in correctly changing cost accounting measures for assigning staff costs to the appropriate business departments.
Balance Sheets
Issue trees can be enlarged to include balance sheet components when the issue is related to the more significant financial health of the company. Frameworks like DuPont analysis may blend income statement indicators with the company’s leverage to identify the areas of concern in returns to equity (ROE).
The income to equity capitalization ratio is essential for businesses with more shareholder bases geared towards dividends (e.g., banks) and aren’t only considering a topline metric expansion (e.g., VCs). Although a business might perform well when a significantly greater equity base supports it, it might have a lower financial efficiency about the risk of opportunity.
DuPont Analysis Issue Tree
ROE is vital in banking, which has recently been at lower levels. Although, on the surface, a financially successful bank might appear solid, utilizing the DuPont issues tree to examine the interconnection between the balance sheet will reveal that even though profits could have increased if equity has been raised in the capital, it will not bring a higher return on equity.
In the wake of decreasing prices for interest, We have witnessed banks reduce their investment in specific areas to improve their profitability and increase their ROE.
Utilizing a MECE mentality of listing the various factors that the DuPont issue tree results in a complete financial overview of the business in an easier-to-digest format than spreadsheets, streams of spreadsheets, or financial documents.
Liquidity: Cash Conversion Cycle
The cash conversion cycle is a measure that potential investors and lenders of a company regularly use. It measures how fast the company can transform its operations into cash. The longer the period is, the less liquid the business is. If this isn’t addressed, it could escalate and cause serious consequences. For instance:
In time, lenders may limit their lending or put stricter terms on their payables or short-term loans.
If you chase sales too much, it could cause many accounts to be extended to clients.
The accumulation of inventory can cause fire sales, which affects margins.
