PERFORMANCE ANALYSIS - MEANING AND IMPORTANCE

 Performance Analysis 

Humanly it is not possible for us to remember each and every details of our business. This is why everyone has defined responsibilities and authorities which are delegated to them. In order to get work done properly and with minimum chances of error we prefer a specialized person. But, again that specialized person is also a human and still there is a room for error. And then we use computers or electronic platforms to help us store data, to reduce or eliminate the chances of errors or omission.

Consequently, Now we have stored data but nobody can get any conclusion from that data. Instead, we use it to get some useful information by converting it into tables, formats or in some prescribed order. In simple words, we derive information out of data, Right?

Now, In this article we try to understand the importance of performance analysis and why it is an essential for every business. What is the role of information we derived in performance analysis? 

Why Performance Analysis is crucial for every business? 

Performance Analysis is an essential aspect of managing any business and if done correctly, can help management team use data analysis to their advantage to further business growth.

The adage "where gets measured get improved" isn't entirely true. What gets measured gives us provisional basis for improvement. I can stand on the weighting machine and measure my weight every day, but if I change my eating habits despite being unhappy with what machine is reading, the number will stay the same.

Metrics and measurements are valuable, but the ability to derive insights from numbers and implement changes accordingly is the true motivator of improvement. But before we jump into implementations of performance analysis in business, let's first observe some of it's benefits.

Benefits of Performance Analysis

Is it okay to assume that we all plan some last time revisions Topics and test series to evaluate our preparations for exams and that process evaluation applies same to business. We use information derived from data to analyze and forecast the progress in our business. 

There are three time frames possible i.e. past, present and future. We can use our past information in present to forecast future. But isn't it sound like we are forgetting lots of factors while just considering our past information. 

But before that let's take a glance at the benefits of Performance analysis for business -

Performance Analysis in Finance 

we all are aware that finance plays a vital role in smooth operations and expansion of our business. But the question of concern is How financial performance analysis help business ? 

Financial performance analysis is the process conducted on organization by internal and external parties to gain better understanding of how company is performing.

We use Cash flow statement to know where our cash flows and whether it is favorable or not, we use balance sheet to know the financial conditions, assets, liabilities; we use different ratios to know the soundness of the business, we use peer company details in industry to compare and many more methods are there to analyze the financials of the business.

While analyzing the financial performance there are certain ratios that are extensively used in business world to assist and evaluate company's overall financial performance.

• Gross Profit Margin 

Gross profit margin ratio is a measure of company's profitability, calculated as the ratio of gross profit as percentage of Revenue. Gross Profit is the amount remaining after deduction of direct costs of earning revenue or cost of goods sold. 

The Ratio is useful because it indicates  as a percentage of portion of each Rupee sales that can be applied to cover company's operating expenses.

• Working Capital 

Working Capital measures used to determine the organization's liquid net assets to operate it's day to day operations.

This ratio is useful as it shows if organization itself sufficient to operate it's business and have liquidity for day to day operations.

• Current Ratio 

Current ratio is the measure of business short term soundness. This ratio is useful as it shows whether current assets of the organization is enough to cover it's current liabilities.

• Inventory Turnover Ratio 

Inventory Turnover Ratio is the measure to know about the efficiency of inventory management. It is used to measure number of times a company sells its average inventory in a financial year.

• Leverage 

 Leverage is a equity multiplier to determine how much debt is actually being used in business to buy assets.

The leverage multiplier remains at one if all assets are financed by equity and gradually starts increasing as more and more debt introduced in the business.

• Return on Assets 

As name suggest this ratio help organization to analyze how well its assets have been employed in the business to become more profitable.

 

• Return on Equity 

Similar to Return on asset , Return on Equity is a profitable measure to analyze the equity effectiveness, which in turn earn profits for the investors.

Higher Return on Equity suggest that investors are earning much more efficient rate, which is more profitable to business as whole.

Performance Analysis in Human Resource 

It's Business Human Resource which plays the role of fuel in the engine and undoubtedly the reason behind business success.

HR analysis is the process of collecting and analyzing   human resource data in order to improve and organization's workforce performance. The process can also be refereed as talent analytics, people analytics or even workforce analytics.

This method of analysis takes data that is routinely collected by HR and correlates it to HR and organization objectives. doing this provides measured evidence of how HR initiatives are contributing to the organization's goals and strategies.

For example, if a information technology firm have a high employee turnover, the company is not operating at a fully productive level.

It takes time and investment to bring employees to the fully productive level.

HR Analysis provide data - backed insight on what is working well and what is not so the organization can make improvements and plan more effectively.

As in the above example above, knowing reason behind high employee turnover can provide useful insight into how it might be reduced. By reducing it company can increase it's revenue and efficiency.

Performance Analysis in Marketing 

In today's dynamic environment no business can ever think of growth without marketing. and because growth is one of the objective of  every organization it's necessary to keep track on marketing. 

The adage "Marketing is not just a process, it's the whole business seen from the customer's point of view", tells itself how important it is for our business.

There is no business without customer. 

Marketing performance analysis is the practice of  measuring, managing and analyzing the Marketing Performance to maximize it's effectiveness and optimize return on investment(ROI). 

Beyond the obvious sales and lead generation applications, marketing analytics can offer profound insight into customers preference and trends in market which in turn helps you to stay update in the market. 

Thankyou for your Patience!

Hope you learn something new today..

This article will continue with next post as there are many more activities in business on which performance analysis are important.

And we will also learn some tools to do Performance Analysis in Business.

I'll be back some more interesting and useful topic.