Analyzing or evaluating a business is a task that involves a variety of different factors, and many different elements. Every business comes with a different set of circumstances, and understanding the way it operates, is something that incorporates many different areas. Each business comes with a different set of finances, a different business model, different types of historical performance, and a different market as well. There is a lot that goes into the evaluation and analysis of a business or company, and it’s important that you have a strong understanding and feel for the type of operations it has.
The Underlying Business Model
Each business generates its revenue or it’s income in a different way, and the underlying business model is an important element to consider when trying to evaluate or understand the way a business operates. The business model a company utilizes, is an important factor to their business, and the primary way it’s able to produce income, and earn a profit. The business model a company decides to use, determines the type of costs it has, the type of value it provides, and the formula the business has. Depending on the type of value a company provides, the point of payment customers or client pay at, and the nature of the business they’re in, there are lots of different business models available. Seeing how replicable a business model is, where the value is created, and understanding the scalability it possesses is important in figuring out the potential a business has, and the way it’s able to grow or develop.
Where The Value Is Produced
One of the main elements to running and operating a business, is in delivering value to your customers or clientele. How a business is able to generate its value, or produce value for their customers, is an important element to the underlying business and the way the business operates. Without a particular or specific value proposition, companies may be in a commoditized business, where the primary separating factor is price. The value a business is able to generate, whether it be a particular service, a certain product, or a result that is desired, is important in understanding the costs of their goods, and the type of price their goods can be sold and bought for. Once you’re able to grasp the way a business produces value, you can begin to understand how much of a stronghold they have on a particular demographic or market segment, and whether their performance or income can be easily or difficult to replicate by another party or competitor. It’s important to understand where a business produces its value, to see if they have any unique or competitive advantage, and the type of longevity or success it may be able to experience in the future.
The Market They Operate In
Each business operates in a different market, and within a different market segment or location. Depending on the types of products they produce, the types of services they offer, and the demographics or audience they cater to, each market comes with a variety of different variables. Within each market, there are likely other players and competitors vying for similar business or customers. Understanding the position, a company has within a marketplace, can give you a sense of the type of products they offer, the type of customers they have, and the type of security they have on the market share they currently have. It’s important to have a sense and understand the market a company operates in, as it has a major effect on the amount of revenue it’s able to generate, and the type of profit it may earn. Depending on the state of the market they operate in, whether it’s growing, expanding, or contracting, often has an impact on the businesses success and the way it performs. Markets that are growing or expanding, are often seeing an influx, or an increased interest in their business, or the products or services they are offering. In markets where they’re contracting, companies are often fighting or competing for a limited amount of business and seeing interest or demand decrease.
The Businesses Performance
The way a business performs or operates is an important element to its success, and in understanding or evaluating the prospects of the business as well. Depending on the type of numbers a business produces, you can get an idea of what to expect moving forward, and what has happened in the past. Within the numbers or performance of a company, you can see how the company has been growing, where it has been experiencing success, the major costs or expenses associated with the business, and places or room for opportunity to increase the profitability of the business as well. There are a variety of different costs associated with a business, like marketing, advertising, operating, managing, repairs and maintenance, general and administrative, and much more. Once you’re able to see the historical performance, or the numbers behind the business’s operations, you can see which areas can be improved, which costs can be eliminated, and which places to invest into as well. All of these are very important in trying to understand how a business has been running, the type of future or outlook it may have, and in gaining a strong understanding of the business you’re evaluating.
Analyzing and evaluating a business, is a task that comes with a variety of different variables, and many different factors. Understanding a company’s or businesses underlying business model is a key component to any business, and one of the essentials of its operations. Seeing where a company is able to deliver value, provide the customers or clients what they’re looking for, can show you whether a company has a value proposition that others don’t, and a competitive advantage within the market. The market a business operates in plays a factor in the type of performance it may be experiencing, and in understanding its position within the marketplace. Part of what business analysts do, is to understand the way a business is able to operate and perform, and something that’s very important to understand and grasp in order to determine the type of potential a business may have, and the type of performance it’s had in the past. There are a variety of different factors that play into the evaluation and analysis of a business, we tried to highlight a few that we believe to valuable and important in understanding the way a business operates.
Howie Bick is the founder of The Analyst Handbook. The Analyst Handbook is a collection of 16 guides created to help current and aspiring Analysts advance their careers. Prior to founding The Analyst Handbook, Howie was a financial analyst.