Billy’s Thirtieth law: The Three Business Skills Every Entrepreneur Needs - Being an Analyst

I never guess. It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts.

·         Sir Arthur Conan Doyle’s Sherlock Holmes, A Study in Scarlet

When we facilitate planning sessions with our clients, we begin our session with the diagnostic section. Diagnostics form the second of the three important skills all entrepreneurs must acquire in order to ensure the sustainability of the business. All entrepreneurs managing in a changing environment must master the art of business analysis.

Analyzing a business is not simply using a series of metrics.  As you know, I believe that Happiness is a warm spreadsheet, but by the same token, the spreadsheet and information found are the tools…the entrepreneur is the craftsperson. Here are some key ways to use both analytics and business judgment to help you grow and develop your business.

Step One:  Determine important measures

Many entrepreneurs look at financial metrics.  There are other important metrics in other parts of the business.  Marketing, Human Resources and operations all have measures that help keeping an eye on the health of your business.  Establish a series of monthly and even weekly measures that allow you to take fast action, and annual and quarterly metrics that give you a sense of the ‘long term’ health of the business.

Step Two:  Look for changes

Spotting trends and changes is an essential part of analyzing the business. For example, a drop in sales may represent a downturn, or simply a seasonal shift.  Comparisons to the previous year help reduce these seasonal factors.  Changes can come due to three factors.  Internal factors are changes to the metrics caused by internal actions of the company.  External factors are changes to the metrics caused by outside forces.  Anomalies are random fluctuations with no identifiable cause.  A single change does not necessarily indicate a trend, but may have no cause. 

Step Three:  Take Action

Once you have examined and sorted the changes, create strategies, or execute tactics to overcome these changes.  Alternatively, take action adapting to the change.  For example, if sales are down, execute a marketing strategy to increase sales, or reduce staffing levels.  In the case of an anomaly, keep an eye on the metric involved and see if there are any underlying factors that are driving change to the metric and to your business.

Underlying Conditions / Assumptions

When performing your analysis over a longer period of time.  For example US consumption of soft drinks is off by 20% over the past ten years.  This trend indicates a change in the ‘underlying conditions’ under which beverage companies are operating.  Demographics changes also change the underlying assumptions in healthcare, financial services and travel & leisure. 

Spotting these changes longer term changes is challenging.  Missing such changes often trips up large businesses. Ken Olsen, CEO if Digital Equipment Corporation (DEC) was quoted as saying, "There is no reason for any individual to have a computer in his home."  DEC went on to merge with COMPAQ and then…disappear.

Good entrepreneurs often started their businesses by sensing changes.  Great entrepreneurs, with the help of great analytics, sense these changes and adapt before the changes overwhelm them.