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Financial Vs Operational Analysis

Meaning of analysis

The word analysis is generically defined as follows:

“The examination and evaluation of relevant information to select the best course of action from among various alternatives”

From the definition, we can clearly see that analysis is very closely linked to relevant information and decision making.

In short, making informed decisions.

Informed Decision Making Model

Informed Decision Making Blog post small.jpg

Informed decision making requires that that we ask a particular sequence of questions:

  • What are we trying to achieve?
  • What information do we have?
  • Did we achieve what we wanted?

Keeping this concept of informed decision making in mind and before we dive into the world of financial analysis, it is only fair to visit an area which is equally, if not, more important.  This is the world of operational analysis.

What is Operational Analysis?

Operational analysis is the study of the operation or service delivery process on which the entire business is built.  There can neither be any operational analysis nor any financial analysis without the existence of this operation.

So, what then is the operation?

In the case of a hotel or resort, the operation refers to the entire process beginning with the guest room reservation, check in at the front desk, use of the facilities in the hotel including food and beverage, laundry, transportation, business centre, health club etc., and ending with the checking out of the guest after settling his or her room charges.

We shall be dealing with the hotel industry when discussing financial or operational analysis in these series of blog posts.

Quantitative Vs Qualitative analysis

Financial Analysis mainly deals with the financial statements and related reports that are generated on a monthly basis like the Profit and Loss Account, Balance Sheet, Cash Flow and Capital Expenditure Statement.  

In a manner of speaking, financial analysis looks at the end result or the output of any operation or service.  By virtue of looking at the output, financial analysis may not reveal qualitative aspects of the operation or service.  For instance, the monthly Profit and Loss Account may show a good profit for the month, but it will not be able to say whether customers were happy with the service provided.  It is conceivable that customers are unhappy with the service or facilities and decide not to patronize the organization in future.

Operational analysis on the other hand goes behind the financial statements and takes a look at the processes that contribute to the key elements in those statements, namely revenues and expenses. Often, they emphasize the qualitative aspect of a financial index which is related to revenues and expenses and may relate to functions like human resources, training, engineering, etc.,

In the informed decision making model and set of questions we looked at earlier, one of the questions was what information do we have. Operational analysis provides that basic information which we must have before we conclude anything on the basis of financial analysis.  In short, an operational analysis is a pre-requisite for effective financial analysis.

While operational analysis deals with a myriad of indices that are studied and reported upon, we shall be listing a some key ones that throw significant light on the performance of the hotel operation.  These complement the financial analysis process perfectly providing a comprehensive picture of the business results of the hotel.

What are the Key Indices of an operational analysis?

The following are the key operational indices that we shall be looking at in these blog posts.  These cover various areas of the hotel operation (rooms, food and beverage, other operating departments etc., as well as other functions like sales & marketing, human resources, training, engineering:

  • Market Segmentation Reports (including demographics,  geographical origin, reservation source reports etc)
  • Repeat Guest Ratio
  • Average Length of Stay
  • Staff to Room Ratio
  • Table Turnover Ratio
  • Meal Period analysis
  • Staff Opinion Survey Results
  • Employee Turnover Ratio
  • Personnel Development Cost as % of Total Basic Pay
  • Training Hours per Employee
  • Credit Card as a % of Gross Revenue
  • Utility Consumption per occupied room
  • Up-selling Niche facilities

In our next post in this series, we will be looking at Market  Segmentation Reports and how they contribute significantly to financial analysis carried out on monthly financial statements.

Next Post: Market Segmentation Reports

5 Myths about Financial Analysis

The reasons why Financial Analysis is something considered outside the realm of an individual with a non-finance background are the myths that surround it.  The fact that the phrase “financial analysis” sounds very technical contributes to these myths to complete the aura of mystery.

Finance professionals and those with finance background have not helped the cause any by refusing to de-mystify financial concepts.  Perhaps, in their way of thinking, they hold the power of this knowledge and hence are reluctant to share it.

Financial Analysis can mean different things depending on how broad or narrow an interpretation of the definition we choose to take.  The term “financial analysis” in a narrow sense refers to:

“process of evaluating businesses, projects, budgets and other finance-related entities to determine their suitability for investment. Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to be invested in.” 

From a broader perspective, financial analysis can also mean the process of evaluating businesses, projects, budgets etc of a business venture that is currently in operation.

Before diving any further into the world of finance and financial analysis and simplifying concepts, I would like to explode 5 major myths about financial analysis.

You need a Degree in Finance to understand Financial Analysis!

While by no stretch of imagination is financial analysis a generalized area or body of knowledge, it is equally true that it is not something which requires a full degree in Finance to understand and utilize.  The concepts underlying financial analysis are quite simple and while a few of the terms need to be digested, a lot of the work can be achieved through logic and common sense. This requires that a very lay person approach is adopted while breaking down concepts into understandable chunks. For example, cash flow is one of the many expressions that is used in financial analysis and which does sound technical.  However, if we chunk this down as “cash” and “flow” the intrinsic meaning becomes more clear and all then is left to explain what flow means. In this instance, flow simply means the movement. 

You need to be an Accountant to understand Financial Analysis

While it is true that an Accountant by virtue of being the individual tasked with the primary responsibility of producing financial statements tends to understand financial analysis more quickly, it is definitely not true that one has to be an accountant to understand and utilize financial analysis. This ease of understanding for the accountant comes from the umbilical cord connection between accounting (books of account) which are the source for production of financial statements.

However, any Business Manager who is responsible for results can pick up concepts of financial analysis without knowing any technical aspects of accounting and in fact it is true in most industries, that the head of the unit is a non accountant who is responsible for the results and performance of the unit. Again, it is important the accountants make an effort to lift the veil that surrounds the concepts and make them simple to understand for those not from a finance or accounting background. This is a responsibility that many of them unfortunately fail to carry out resulting in a deeper fear in the minds of the non-finance people.

You need to be a wizard in Math to carry out Financial Analysis

 This is another of those classic myths.  Since a major part of the financial analysis exercise deals with numbers and figures, people immediately jump to the conclusion that you need to be some kind of wizard in Math to carry out effective financial analysis.  This is as far from the truth as the first two myths which dealt with having a finance or accounting background.

While again, numbers and figures do behave in a certain manner and understanding those behaviors makes the analysis that much more impactful, it has nothing to do with math per se.  I will even go as far to say that if you can do basic addition, subtraction, multiplication and division and have a working idea of percentages you are good to go.

 People with non finance background cannot be good at Financial Analysis

 This myth is purely the result of the handiwork of accountants and people with finance background who have resolutely refused to cede what they consider their territory. However, as I said earlier, more business unit heads are those from a non-finance background and thus this in itself blows the myth that they cannot be good at financial analysis since they are responsible for the performance and results of their unit.  You have to remember that the accountant merely produces the financial statements from the books of account, he does not hold singular rights or for that matter mastery over their output.

I have regularly come across business unit heads with a non-finance background who have a very healthy head for finance and financial analysis and by virtue of this have actually performed excellently. It is something that can be emulated with a bit of effort and support from the accountants/finance people.

 You need to wade through difficult technical terms before understanding Financial Analysis

 The last of the five myths and a big one at that is that you need to go through complicated technical terms before understanding financial analysis.  While it is true that there are technical terms to be understood and used in analysis, they are by no stretch of imagination insurmountable and definitely not out of bounds for non-finance people.

As an accountant and finance person myself, I can without hesitation say that a good chunk of the understanding will come from logic and common sense and knowing cause effect relationships.  In fact, I would go as far as to say that knowing cause effect relationships will de-mystify financial analysis a great deal and I will be actually using this approach to do just that in this blog series.

So, fasten your seat belts (as opposed to putting on life jackets which will frighten all and sundry), this ride may be bumpy but I promise it will be exciting and at the end of it you will be as savvy in financial analysis as any of your esteemed accounting or finance colleagues. I promise it will not give rise to sleepless nights or hair pulling or head bashing.

This is really Financial Analysis sans Tears!

Welcome to Ignite Insight's Blog

Welcome to all non-bean counters from a bean counter who is different!

Bean counters are those venerable folks whose claim to fame is the knowledge of that indispensable commodity called "finance" (layman terms: money).  Financial analysis is a hot topic at all times irrespective of whether the economy is on a surge, is booming or is in the doldrums and in depression.

Financial analysis is something that all business organizations have to carry out since it is a measure of their actual performance not to mention means to continued survival. It is a necessary evil.

Very interestingly financial analysis is something that every business manager needs to get a grip on whether they have a financial background or not. Many Operational managers are business unit heads and mandatorily have to understand and utilize the indisputable power of appropriate financial analysis.

Unfortunately, financial analysis and in general financial concepts can become so full of jargon and technical terminology (much like the Information Technology function) that an aura of mystery starts shrouding them.  Individuals with a non finance background shun these like the plague although it is the lingua franca of business.  Oops, there I go! (Lingua franca in Latin means legal currency and is actually not part of financial analysis!)

It is my goal in this blog to de-mystify all matters relating to finance and financial analysis in such a way that there is a level playing field between those with a finance and accounting background and those without. Incidentally, accounting has an umbilical cord relationship with finance and financial analysis. This makes it even more critical to simplify concepts for better understanding and utilization.

Enough of this! Watch out for the next blog post which will on 5 Myths about Finance and Financial Analysis.

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