Business Analysis In Today’s Uncertain Times

 
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When people learn that I am a "forensic accountant," I am not surprised if they picture an accounting sleuth diligently searching for the proceeds of crime. However, the field in which I specialize, namely loss quantification, lends itself more to using business "smarts" than the "Sherlock Holmes" image of a detective finding the criminal.

The need for "loss quantification" arises in many types of insurance or litigation claims, particularly when an earnings loss has occurred. This need is often accompanied by the underlying question: "How much income would have been earned if the adverse event had not occurred?" And from this "what if" beginning, one quickly moves into the arena of financial and business analysis, gaining a real understanding of the business issues behind the numbers.

Accountants and business owners alike are used to seeing financial statements. And, of course, detailed accounting records, with all the "debits and credits" involved, are familiar territory for accountants. But the problem is that, in most cases, neither financial statements nor detailed accounting records provide an adequate route to business problem solving. Simply, financial statements provide insufficient information by business segment and by product/market, and detailed records contain too much information to gain a summary picture.

Financial statements may provide the 50,000 feet picture, and detailed accounting records provide a view at ground level. However, business problem solving often requires a 10,000 feet view. For example, let's say we are dealing with a hotel. Detailed accounting data may be helpful, but is unlikely to readily provide revenue analysis based on different customer segments. Further, financial statements may provide summarized data with regard to room revenues, but do they provide data to distinguish between occupancy trends and average room rates? From this example, it is not difficult to envision why detailed records are not useful for analyzing business trends, while consolidated results may aggregate different business sectors at a level which precludes useful further analysis.

Many years ago, I worked as a controller in a multi-division manufacturing company. One particular plant (which manufactured custom products) had incurred a significant loss during the first six months of one fiscal year, but was forecasting to earn a profit during the subsequent six months. After several hours of developing a business model based on...

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