Guide to evaluating and analyzing business performance

Analyzing business performance and evaluating business performance is extremely important. The process of analyzing indicators will help administrators see opportunities, challenges or problems being encountered to make necessary adjustments. In the article below, 1C Vietnam will help businesses better understand these indicators as well as know how to analyze them most accurately and effectively!

1. Concept of business performance

Production and business efficiency is an economic category associated with market mechanisms and directly related to production resources such as capital, machinery, labor, raw materials,...

Simply put, a business's operations are only considered effective when the business takes full advantage of internal resources and optimizes processes to achieve the highest results at the lowest cost.

2. Indicators to evaluate business performance

The analysis of business performance will be based on assessment criteria. Depending on the business model and field of the enterprise, administrators will use appropriate indicators for the most accurate analysis. Below are the indicators to evaluate the business activities of the enterprise.

2.1 Financial indicators

Financially, the business performance report of a business is shown by its ability to generate profits and company size. Therefore, financial indicators will show administrators the following information:

• Interest payment ability: Reflects the ability to pay interest from earned profits.
• Proportion of components: Analyze the proportion of components that affect the profit of the business. From there, the administrator will find unreasonable points to make adjustments to increase or decrease to achieve the expected level.
• Level of efficiency: Shows the level of efficiency of business activities based on investment capital and revenue.

To present the above information in the most scientific and clear way, financial indicators are divided into groups: Cost index, payment index and profitability. Specifically:

• Cost index group: One of the first options businesses propose to increase profits is to cut costs. In conditions where the business operates stably, when business costs are optimized, profits increase. In case an enterprise expands its business scale to increase cost, revenue and profit indicators, the enterprise needs to keep the increase in costs lower than the increase in revenue to ensure profits.
• Payment index group: If a business wants to prove that the organization is borrowing within its capacity, it needs to achieve pre-tax profit >=0, then the interest payment ability index meets the criteria >=1. . The larger this coefficient is, the more positive the business performance is. If a business can maintain a positive pre-tax profit combined with timely collection of payments, the company will be proactive in cash flow to pay interest and loan principal when due.
• Profitability index group: Profitability index group refers to financial indicators that measure the success of a business in generating profits. This is also a group of indicators that reflect a business's ability to use resources to bring value to shareholders.

2.2 Indicators in terms of socio-economic efficiency

Enterprises, in addition to maintaining business operations, need to ensure they comply with the State's requirements for the sustainability of the national economy as well as make positive contributions to society. Therefore, in addition to financial indicators, analyzing business performance is also based on socio-economic indicators. Specifically:

• Increase budget revenue: When conducting production business activities, businesses are obliged to pay taxes such as profit tax, special consumption tax, sales tax,... to the State Budget. This revenue will be used to develop the national economy as well as non-profit sectors.
• Create more jobs for workers: The process of businesses expanding production scale and finding ways to improve business efficiency will create jobs for workers. From there, the unemployment rate will decrease, helping workers quickly escape backwardness and poverty.
• Improving workers' lives: In addition to creating jobs for workers, businesses have the responsibility to improve business efficiency to create better income, contributing to improving people's living standards. . This process also helps increase social welfare levels, per capita income as well as social investment levels.
• Redistribution of social profits: To limit uneven development between economic regions, effective businesses need to have profit sharing policies for disadvantaged communities or support policies. Support such as job creation, low interest loan policy,...

3. In-depth analysis of the enterprise's business activities

In addition to the indicators that need attention, when analyzing business activities, administrators need to perform analysis according to appropriate models. Depending on the purpose of the report, you can choose vertical analysis, cross analysis or both to achieve the best results. Below is the specific calculation:

3.1 Vertical analysis

Vertical analysis is the process of reviewing and calculating the proportion of components in the report. If we consider actual revenue as the base of comparison, accounting for 100%, then how many % of net revenue do the remaining factors account for? This ratio will often be compared over many periods to find unusual high and low ranges that can affect profits.

Here's an example of effective vertical business analysis:

The analysis table above shows the indicators regularly over a long period of time to help the business planning department allocate costs more appropriately. Based on the analysis results, it can help managers know what the breakeven output is and what the normal cost structure is. From there, businesses can determine the appropriate selling price to both bring profit and be competitive in the market.

3.2 Cross-sectional analysis

Cross-sectional analysis is the process of using vertical and horizontal indicators to compare with corresponding indicators of a group of businesses in the same industry or the industry average. This process will bring an objective perspective to investors and administrators in evaluating a business.

Below is an example of the process of cross-analysis of financial indicators on the business performance reports of two large companies in the construction sector from 2018 to 2022:

From the above analysis table it can be seen:

• Revenue and profits of CTD and VCG have both tended to decrease since 2019, especially hitting bottom in 2020 and 2021. The reason for this may come from the outbreak of the Covid-19 epidemic, stalling most activities. social movement.
• In 2022, we will see a return to growth for both businesses, but not significantly.
• In terms of absolute indicators, CTD's total revenue is 2 times higher than VCG's, but VCG's profit is about 1.1 times higher than CTD's profit. Besides, the annual compound growth rate of revenue and profit shows that VCG is always better than CTD.

Analyzing business performance is the basis for administrators to make decisions for the development and operation strategy of the business. Hopefully through the above article, your business has gained more useful knowledge about this field to apply in practice. If you have any questions, please contact 1C Vietnam for support.