How to Analyze Business Structure and Predict Profits?

On How to Analyze your Business Structure, What does 'Profit' and 'Growth' Mean to Startups?

Predicting your profits are important, but first, you'll need to analyze and organize your business structure/

Of course, there are some changes in the perception of startups that succeed with new strategies.

One of them is 'profit'.

Rather than going through a rigorous review as in the past, it has become a trend to grow a business by repeating small failures and successes.

The 'profit' of a company is no longer considered as important.

In the process of expanding the market in the early days, it was natural to accept the loss and accumulation of losses.

Rather than slowing the growth rate by making small profits, I came to pursue a strategy to expand the business bigger and wider and take profits later.

The business environment is changing, but there are facts that startups should be aware of.

The Essence of a Company is 'Creating Profit'.

The strategy of growing in size first and then harvesting the fruit only delayed the time when it was supposed to make a profit.

Corporate value is inevitably linked to current or future earnings.

Whether you want to make a profit right now or grow the pie to make a bigger profit, the choice is yours.

However, it does not change the fact that corporate value ultimately moves about profits.

Let's talk about how to measure when and how you can make a profit.

How to Analyze Business Structure (1) Benchmarking

Income statements for companies in the same industry look quite similar.

This is because, as mentioned above, the income statement is the result of arranging the outputs made by the members of the company numerically.

So, by looking at a competitor's income statement, you can also see what activities this company cares about.

It may be different from a large company in the beginning, but as the company grows, it changes into a similar form.

If the strategies to win the competition are similar, and if the business models are similar, then small companies will increasingly resemble large, top-tier companies.

Therefore, the first way to analyze the business structure is 'competitor benchmarking'.

How to Benchmark and Analyze my Business Structure?

First, I define the business I am in, and I get information about companies that are currently doing this business or are in the same area.

Competitors for reference are large companies that have already achieved economies of scale.

Small companies have strong characteristics of their own, and they have not yet reached the industry average.

Let's take an example.
Company A's income statement is as follows:
\ㅇ Sales of 100
|ㅇ Cost of sales 30
|ㅇ Each item of sales and administrative expenses are 40
/ㅇ Operating profit 30

* Operating profit = sales-cost of sales-selling and administrative expenses

Let's find the ratio of each item to the company's sales.
\ㅇ Cost of sales/sales = 30%
|ㅇ Sales and administrative expenses/sales = 40%
/ㅇ Operating profit ratio (operating profit/sales) = 30%

In other words, if the current company grows as large as the number one company, the future operating profit margin is likely to be close to 30%.

Of course, it could be higher or lower than this, but it is unlikely to deviate significantly from the industry average profit margin.

Now let's see which items make up a big part of this business.

Naturally, the higher this ratio, the more important it is.

Are labor costs higher than sales?

It is most likely a labor-intensive industry with many high-paying people or a huge need for manpower.

Marketing cost is high.

It can be interpreted as an industry that should not neglect communication in the market.

If you want to keep up with the No. 1 company, you will have to keep increasing your marketing expenses or find another way.

From this analysis, it can be inferred that if the company adheres to the existing method, it will grow with a similar structure.

For reference, the reason we are looking at data for the last three years is that there is a possibility that the number may be distorted in one year due to changes in the environment.

Changes that occur over a period of three years or as long as five years are not temporary.

Rather, it is more likely to be a structural change affecting the industry.

How to Analyze Business Structure (2) Analyzing Our Company (when data is available)

Now that we have analyzed the industry averages, it is time to analyze our numbers.

First, arrange the numbers on the income statement, then arrange the income statement for 1 to 3 years from the most recent year, and then find the ratio to sales.

It's the same way as benchmarking.

And compare it to the number one company. Would the difference be huge?

Through benchmarking, the overall characteristics of this industry have come out as revenue and cost structures, so we need to analyze why our company is different.

What if our company's labor cost ratio is higher than that of the benchmarked company?

Most likely, the process or organizational structure is inefficient or has not yet reached sufficient scale.

You can also analyze other items such as marketing costs, payment commissions, and shipping costs.

Now that you know the difference between us and the top vendors, let's break down our costs.

The nature of each cost is quite flexible. So, you need to figure out how you're spending.

\ㅇ It is an expense that can be changed in line with sales → It is a variable cost.
/ㅇ It cannot be easily changed or it moves in a fixed manner regardless of sales → It is a fixed cost

Now that we've broken down our costs into two characteristics, we'll calculate our contribution margin.