By Lauren Prosser, Director of Profitcents Consulting Services
When coaching firms on crafting an industry niche-driven growth strategy, there are three critical questions that we work together to answer. In a series of upcoming posts we will address each of these questions in detail. The first step is to assess how well aligned your firm is to the industry.
• What is going on in the industry? – What industry trends and changes (regulatory, technological, etc.) have and are defining the environment?
When working with firms that have access to industry data on how to answer the first of these questions, I often recommend a 7-step approach to gaining a better understanding of an industry:
1. Begin by analyzing an averaged Common Size Statement for the industry. A Common Size Statement is used to compare financial statements by displaying accounts as a percentage of a common base figure. This format (vertical analysis) provides for easy analysis between companies or time periods and provides an excellent way to gain a better understanding of the financial and operational structure of businesses within an industry.
Common Size Income Statement: Accounts are shown as a percentage of Sales. Use to analyze the average (1) distribution of various revenue/income sources and (2) breakdown of expenses /cost centers for businesses in the industry.
Common Size Balance Sheet: Accounts are shown as a percentage of Total Assets. Use to analyze the industry average (1) composition of assets and (2) breakdown of debts/liabilities.
2. Recent Trends: Analyzing changes between the prior year(s) and the current period will provide insights around the industry environment in which the client or prospective client is operating and the types of challenges, opportunities and decisions they are likely encountering.
3. Growth Metrics: At the core of any business’s financial health is their ability to drive revenues (sales) and control costs to generate a profit. Analyze how successful other businesses of similar size and scope within the industry have been in their efforts to drive profitability.
4. Margins: Has the industry improved its ability to control costs and generate a profit? If so, use the Common Size Income Statement to gain an understanding as to where and how costs have been controlled.
6. Operating Cycle Related Ratios.
7. Industry-Specific Key Performance Indicators (KPIs). Industry-specific (financial and non-financial) KPIs define how similar businesses measure success and should yield meaningful talking points.
Our next post will tie these initial insights that you’ve gained in addressing this first consideration to the second question which must be answered: How do these conditions create opportunities and/or obstacles for a business operating in the industry?