Basic Accounting: Financial Analysis
Want to compare your performance vs. a competitor? Or evaluate a potential vendor? Then you'll need to conduct a financial analysis. This course will teach you how to use three financial statements and evaluate financial performance in terms of profitability, efficiency, soundness, growth, and overall strength.
A happy couple has an anniversary coming up, and they want to buy gifts for each other. Cue the numerical analysis: How much should they spend? What value will each of them expect? Can you find the perfect gift on a budget?
How you do calculate the price of love?
When I ask my Business Analytics students this question at GLOBIS University, students come up with lots of methods for solving the riddle. Some convert gifts and time spent going on dates into money. Others try to work out a price from the value of life insurance or the cost of a divorce settlement (hardly the cheeriest algebraic equations).
Of course, many say that love is priceless and cannot be converted into money. But is that really true?
Getting good with numerical analysis, especially for quantitative business analysis, means setting aside emotional attachments and thinking about problems more objectively. Cold as that sounds, it can help you open up your mind and learn to think differently about all kinds of problems. When it comes to business analysis and numerical solutions, that objectivity can be endlessly helpful.
Basic Accounting: Financial Analysis
Want to compare your performance vs. a competitor? Or evaluate a potential vendor? Then you'll need to conduct a financial analysis. This course will teach you how to use three financial statements and evaluate financial performance in terms of profitability, efficiency, soundness, growth, and overall strength.
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A Numerical Analysis of the Price of Love, Measured in Annual Income
To think about love (an emotional topic if ever there was one) using numerical methods, try to think beyond obvious expenses, such as a simple gift. Consider the analysis of my colleague, Atsushi Nishiguchi, an expert on weddings and matchmaking.
Nishiguchi references a survey conducted by life insurance company AXA. According to the survey, which focused on single Japanese working women aged 25 to 44, the average annual income of the ideal man is 5.52 million yen (as of 2018, anyway).
Now imagine one of these women finds her match, a man she loves with all her heart. And he proposes. But she’s practical. She needs to think about her future with this man. What is the lowest income she would settle for to accept his marriage proposal? Does she need a science and engineering background to sort through big data and work that out?
The answer turns out to be no. The survey says she’ll settle for a mere 2.7 million yen.
From this, we can determine that the difference, 2.82 million yen, is the price of this woman’s love for one year.
What Nishiguchi has accomplished here is applying numerical analysis to the original problem (the price of love) without ever asking “How much?” Instead, he relies on the answers of women to understand when love was a factor, and when it was not. Then he compares those numbers, applying simple subtraction.
Put that way, comparative analysis hardly seems so daunting. And in fact, we all do this kind of thing every single day without even thinking about it.
Imagine you usually buy milk from a supermarket for $2.00. One morning, you run out of milk for breakfast, so you head to a nearby convenience store. The price is $2.50. This is obviously more than you planned to spend, but you decide to buy the milk anyway because those few extra blocks of walking to the supermarket just don’t seem worth saving $0.50.
“If we manage to become aware of what we are comparing and why our analytical skills begin to sharpen.”
Kenichi Suzuki
Numerical Analysis Speaks Louder Than Words
When applying formulas (even the simple ones) to your business analyses, bear in mind that there is no analysis without comparison. Comparative analysis is how we extract meaning from numbers.
We often do this, too, without even thinking about it. But if we manage to become aware of what we are comparing and why our analytical skills begin to sharpen.
The root of the word “analysis” comes from the Greek analyein, which means “to break up or loosen into smaller parts.” The Oxford Dictionary defines analysis as the “detailed examination of the elements or structure of something.” It goes further to say it is the “process of separating something into its constituent elements.”
In other words, in addition to comparing, division is also important for analysis. Divide, then compare. Point by point.
The Price of Love: A Problem Worth Solving
Why do we need numerical analysis in the first place?
That’s easy. We analyze to solve problems.
You’ve probably been asked by your boss to explain why you believe a certain action will fix a problem, or perhaps why your solution will lead to a specific outcome. Knowing exactly what to say in response requires a firm grasp of the cause-and-effect relationship between an action and its result.
Roughly speaking, analysis in business must answer the following types of questions:
- Where is the problem?
- Why did the problem occur?
When you see numbers, divide and compare them. Set your emotions aside, and you can find some truly intriguing results. Always remind yourself what you are comparing, as well. This will help you understand the problem more deeply and keep yourself focused on your goal.
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