4. Considering relationships - analytical review
Interpreting figures is an analytical process, but analytical does not mean simple crunching of numbers to give percentages or other ratios; it is about the numbers and ratios in context. Analytical reviews and now analytics, the term coined for the science of logical analysis, are very powerful in understanding and challenging the figures or the events behind them and whether they truly relate one to another.
Comparisons with external benchmarks
Benchmarking is often misunderstood. It would be good if you could find a company in the same sector, of the same size and operating in the same locations as you but a much better performer, as then you could identify what financial strategies they were following and try to emulate them.
Best-in-class or 'world-class' benchmarking has its merits but may be quite impractical from an overall financial perspective. What may be much more significant to understand and improve upon is how your processes compare to the best. For example, what are your costs for processing customer orders compared to companies that operate similar processes but much more cost-effectively? These companies do not necessarily need to be in the same sector, rather operate similar processes. Benchmarking can be internal; what are your measures now and can you improve them?
Benchmarking and scorecards are considered further in Chapter 9.
FIGURE 7.1 The trends are clear!
6. Charts and graphs
A picture paints a thousand words, often true from a literary point of view. If a graph is considered to be a picture, it is true that many people who are, by nature or lack of training and practice, blinded by rows and columns of numbers find lines progressing over time far easier to comprehend.
Figure 7.1 is an example of an early warning not heeded. The solid black line represents the slowly increasing sales of a venture over a year, the dotted line the lower but continually declining next year's sales - time to shut up shop? The dashed line represents the year after - stopping on liquidation!
Dangers of reading things into numbers
Interpretation and particularly analytical review often leads to inference, but the problem is that you may not have the whole picture or sufficient understanding of the context of the numbers you are interpreting. Do be aware not to:
- extrapolate unrealistically;
- look at too short a period;
- look at gross figures;
- get bogged down or mired in detail;
- bring your own prejudices.
Only looking at what is 'wrong' can be an efficient way of analysing numbers, but does everything being 'right' truly indicate neither problems nor inefficiencies?
Some claim that there are no such things as coincidences, that there is a logical explanation for everything. I disagree: truly random events do occur; maybe in the entire cosmos and over millennia all is logical, but we are looking at one speck of business and over a minute timescale and thus an event will be random to us. Random events can sometimes mask other events and their reported numbers.
Automating the interpretation - intelligent interpretation
Computerized analysis of figures makes sense, taking the drudgery out of crunching numbers. Exception reporting is an obvious example of setting a program to sift out unnecessary reporting. But questions to ask are: How intelligent is your program? For example, would the program identify compensating random events?