SPECIAL TOPICS IN
MIDTERMS
FM
OPERATIONAL ANALYSIS
Operational Analysis is a method of examining the
current and historical performance of the operations and
maintenance (steady state) investments and measuring
that performance against an established set of cost,
schedule, and performance parameters.
Why is operational analysis important?
Operational analysis is conducted in order to understand
and develop operational processes. ... Ideally, a thorough
operational analysis should seek to examine a number of
functional areas including strategic planning, customer
results, and business results, financial performance, and
quality of innovation
Operational analysis is conducted in order to understand
and develop operational processes. Using various
mathematical models, statistical analyses, and logical
reasoning methods, operational analysis aims to
determine whether each area of the organization is
contributing effectively to overall performance and the
furthering of company strategy.
Most notably, operational analysis is a strategy that works
to ensure that your operations plan is aligned
appropriately with your strategic planning. By examining
the current performance of the operational portion of an
investment, and then measuring that against an
established set of performance parameters and goals,
operational analysis can reveal company strengths and
weaknesses as well as any opportunities for
improvement.
Ideally, a thorough operational analysis should seek to
examine a number of functional areas including strategic
planning, customer results, and business results, financial
performance, and quality of innovation. The objective of
this process should principally be to reassess existing
processes and determine how objectives might be better
met, how costs could be saved and even, on occasion, if a
particular function is worth being performed.
Conducting Operational Analysis
Though it is often considered overly complex, operational
analysis is a relatively simple process that is well worth
the effort. Through a few manageable steps, companies
can assess their productivity and reallocate investments
to ensure activities are in line with company strategy.
First and foremost, a schedule must be established. This
schedule will outline the timeline and resources necessary
for completing the operational analysis. This stage also
includes the gathering of any necessary resources.
Next, information must be collected. Methods of data
collection vary depending on the operation being
assessed. However, in all cases, strategies and methods
ought to be outlined first and then adhered to during the
process. Also, all data collection ought to provide key
insights into actual performance in comparison with
strategic planning and performance goals.
Lastly, a gap analysis should be performed. This entails
identifying and reporting performance, cost, and benefits
based on an analysis of the actual performance data. This
should all be considered in comparison with company
goals. Such a comparison permits the company to
determine the root causes behind any gaps. Then it
becomes possible to determine what, if any, additional
functionality or resources are necessary in order to align
actual performance with company performance goals.
Operational Analysis Goals
Thorough operational analysis ought to address a few
principal questions in its effort to ascertain if operations
are efficiently meeting strategic planning. The first key
area to be considered is whether financial and resource
investment is delivering planned output to the optimum
consumer base.
Operational analysis can also determine if there is any
existing need for additional investment in order to satisfy
customer demands, or if any other adjustments ought to
be made, such as lowering prices for the same level of
services. Adjustments might also include considering
shifts in resource allocation so as to ensure that planned
output is being produced at the lowest possible cost.
Operational analysis will also look closely at whether the
current level of financial and resource investment is
sufficient to meet strategic goals. This process will look at
how other similar businesses are accomplishing this work
and determine if the company is working in the best,
most cost-efficient way. Operational analysis can
recommend areas where investment could be reallocated
or streamlined, as well as areas of production that could
use additional resources.
In addition, an operational analysis will assess if there are
better or lower-cost ways of meeting customer needs,
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aligning with company strategies, and achieving benefits.
This also entails looking closely at operations to
determine if any financial or resource investments could
be combined with others to more effectively meet
strategic and organizational goals. In some cases,
technology or other methods could be utilized to meet
strategic goals more efficiently or at lower cost.
Lastly, operational analysis investigates the financial
performance of the business, determining whether the
cost of production is compatible with the performance
numbers and meets strategic goals. Ideally, a thorough
examination of the business’s operational processes
ought to determine the financial success of the business,
by considering whether the current investment is being
used effectively, to yield optimum results. This process
also entails considering corrective actions that will allow
tasks to be performed effectively and within specified
fiscal limits. This is achieved through cyclical appraisals
for rationality and cost efficiency.
Types of Financial Analysis
Types of financial analysis is analyzing and interpreting
data by various types according to their suitability and the
most common types of Financial Analysis are:
Vertical Analysis, Horizontal Analysis, Leverage Analysis,
Growth Rates, Profitability Analysis, Liquidity Analysis,
Efficiency Analysis, Cash Flow, Rates of Return,
Valuation Analysis, Scenario and Sensitivity Analysis,
And Variance Analysis.
Horizontal Analysis
Horizontal analysis interprets the change in financial
statements over two or more accounting periods based on
the historical data. It denotes the percentage change in
the same line item of the next accounting period
compared to the value of the baseline accounting period.

Operational analysis is an efficient means of determining

if operational assets are contributing effectively to
performance and in alignment with strategic planning. In
conclusion:

● The efficiency of operations for the furthering of

company strategy can be established through a
few simple steps. Operational analysis primarily
involves the collection of information and the
analysis of that data. A comparative study ought
to be drawn up, comparing actual performance
with performance goals, so that a gap analysis
can be conducted, and adjustments may be
made. [Horizontal Analysis]
● Operational analysis looks closely at financial Measures the financial statements line of items with the
and resource investments and determines base year. That means it compares the figures for a given
whether adjustments must be made so that the period with the other period.
company’s strategic goals may be met in an
efficient, cost-effective manner.

● Operational analysis is also an excellent method

of assessing the financial performance of the
business, determining whether the cost of
production is compatible with performance Pros of H.A.
numbers and strategic goals.
It helps to analyze the growth of the company from year
on year or quarter on quarter with the increase in
FINANCIAL ANALYSIS operations of the company.

Financial Analysis means the analysis of the financial

statement to reach up to the productive conclusion, which
will help the investors and other stakeholders to maintain
their relationship with the company, and there are
various types that experts and analysts use to do a post-
mortem of financial statements.
Cons of H.A.
The company operates in the industrial cycle, and if the
industry is downgrading in spite of the company is
performing better, due to specified factors that affect the
industry, trend analysis will show negative growth in the

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company. future and to check whether the company is able to
pay all the long-term liabilities and obligations. It
gives stakeholders confidence about the survival of
the entity with proper financial health.
Vertical Analysis
Solvency ratios like Debt-to-Equity ratio, Equity
Measures the line item of the income statement or
Ratio, Debt Ratio, etc. give a correct picture of the
balance sheet by taking any line item of financial
financial solvency and burden on the firm in the
statement as a base and will disclose the same in
form of external debts.
percentage form.

For example, in Income Statement, to disclose all the line

items in percentage form by taking base as Net sales

Likewise, in the Balance sheet on the asset side to disclose

all the line items in the percentage form of total assets.

Pros of V.A.

The vertical analysis helps in comparing the entities of

different sizes, as it presents the financial statements in
absolute form.

Cons of V.A. Profitability Analysis

It represents the data of a single period only, so miss Profitability financial analysis helps us understand
comparison across different time phase how the company generates

The investment decision is one of the most

important decisions to be taken by all the
Trend Analysis
businesspersons. The main aim of all the
investment decisions is to ensure the maximum
Trend analysis means
profit out of theidentifying
investmentpatterns
made in from
the project. In
multiple order
time periods
to verifyandthe plotting those
viability of the in a
decision, they
graphical carry
format such that actionable information
out profitability analysis, which will check the
could be derived.
rate of return in a given period. This will help the
investor in obtaining assurance of the safekeeping
of funds
Liquidity Analysis

The short-term analysis focus on routine expenses.

It analyses the short-term capability of the
company with respect to day-to-day payments of
trade creditors, short-term borrowings, statutory
payments, salaries, etc. Its main intent is to verify
the appropriate liquidity being maintained
thoroughly for the given period, and all the
liabilities are being met without any default.

The short-term analysis is carried out using the

technique of ratio analysis, which uses various
Scenario
ratios like liquidity & Sensitivity
ratio, Analysis
current ratio, quick ratio,
etc.
In business, day in and day out, various changes keep on
coming. In addition, based on the economic outlook,
different kinds of changes in tax structures, banking
Solvency Analysis
rates, duties, etc. Each of these determinants highly
affects the financials; hence it is of utmost importance
The long-termthatanalysis is also termed
the treasury as Solvency
department does such sensitivity
analysis. The focus under
analysis this analysis
with respect to eachisfactor
to ensure
and try to analyze the
the proper solvency of the company in the near

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effect of the same with the company financials.

Book Value may not be equal to fair value

Variance Analysis

Business runs on estimates and budgets; after the Sum of Parts

completion of transactions, it is of utmost importance to
check the variance in between budget and estimates with Divides the business into separate sun-entities (parts)
the actuals one. Such variance analysis will help in
Add the value of each part to find the total value
checking any loopholes in the process, and hence it will
help an entity to take corrective actions for avoidance of
the same in the future. Variance analysis can be carried
out by standard costing by technique, comparing
budgeted, standard, and actual costs.
FP&A Analysis

Every company will have its own financial planning and

analysis

(FP&A) department whose main work is to analyze the

Valuation
Valuation analysis is a process to estimate the
approximate value or worth of an asset, whether it’s a
business, equity, fixed income security, commodity, real
estate, or other assets.
internal organization’s various data points and to
construct the Management Information System (MIS),
which will be reported to top management. Such MIS
circulated by the FP&A department is of the highest
importance for the company as there will be both
published as well as unpublished information. Such
analysis helps top management to adopt strategies which
will be preventive in nature and can help in avoiding any
major setback.

Financial analysis is nowadays considered as the main

[Valuation]
Discounted Cash Flow
Present value of projected unlevered free cash flow
Captures the “intrinsic value” of the business
ingredient in business activity; without this, to run a
business will turn out to be futile. Hence for every
organization, to do financial analysis is not only necessary
but to handle the same diligently, and all the findings of
the analysis should get duly implemented.

Comparable Company Analysis

Based on the market trading multiples of comparable

comp

Usually focuses on forward looking Profit/EBITDA/Cash

Flow

PERFORMANCE IMPROVEMENT
Comparable Transaction Comps

Based on multiple paid for comparable comp. assets in

sale transaction What is a Performance improvement plan?

Focus mainly on multiple of Historical A performance improvement plan is a document that lists
Profit/EBITDA/Cash Flow where an employee is falling short and what he can do to
improve.

For instance, the performance action plan may detail

Asset Valuation skills or training the employee lacks. Alternatively, it
could specify how the employee needs to change his
Based on fair value of individual assets

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behavior. In either case, the PIP will clearly state the
steps the employee needs to take to make the necessary
improvements.
The purpose and benefits of a performance
improvement plan
Why do employers use performance improvements plans
to resolve issues leading to poor performance when they
could simply fire the employee? There are actually several
benefits to using PIPs.
1. Better company culture
Using PIPs promotes a sense of accountability.
Employees know that they must meet expectations or face
disciplinary action.
This contributes to positive company culture. Hard-
working employees feel appreciated, as they know that
everyone must pull their weight. Employees who are
struggling know that managers will support them if they
fall behind, by providing them with actionable objectives.
Everyone better understands what is expected of them.
Bear in mind that you can use performance improvement
plans for more than just problematic employees. A
performance improvement plan is also appropriate for
workers who want to move up in the company (but are
unsure how to do so) as well as for employees who would
be a better fit for a different position — i.e. they would
like to move laterally.
In other words, PIPs help workers feel valued in the
company, as they know their employer will support them
to reach their long-term career goals. At the same time,
performance action plans allow companies to improve
their workforce with better-motivated employees.
2. Save time and money
Every employer wants to minimize staff turnover, as this
saves time and money. Helping current employees
improve their performance eliminates the expenses
associated with firing workers and searching for
applicants to fill positions.
It also prevents the need to hold interviews and schedule
training for new hires. Although the employee receiving a
PIP may need training, it will still be less training than
what a new worker would require.
3. More effective than reviews
Reviews rarely have consequences. Plus, some people
react poorly to criticism, even when it is constructive
feedback. To make matters worse, most people believe
that feedback is inaccurate. These factors combined mean
that employees often dismiss reviews and continue
performing exactly the same as before.
In contrast, PIPs provide employees with a clear idea of
where they are failing and what they need to do to
improve. When framed the right "why", performance
improvement plans can even encourage employees to try
harder.
Performance improvement plan examples
After your initial conversation with the employee, his
manager should draw up a draft performance
improvement plan and send it to HR for review. Here are
a few performance plan examples you can use for your
own PIPs.
#1 Example to improve customer service
Our first sample performance improvement plan is for
customer service. This kind of performance improvement
plan could be necessary if clients are complaining about
the attitude or support they receive from a particular
employee.
Goal: The overall goal of such a PIP may be to improve
interactions with clients.
Objectives: Possible objectives to meet such a goal could
be to see better customer retention or engagement.
Action: To achieve the above objectives, the employee
could work more closely with customers to resolve
problems or attend a customer service training session.
Metrics: The most appropriate metrics would likely be
the customer churn rate or customer satisfaction score.
#2 Example to improve the low-quality of work
In other situations, an employee may have little or no
contact with customers, but he could still be delivering
poor-quality work in other ways.
Goal: Improve the quality of work.
Objectives: Meet deadlines or produce work that is free
from errors.
Action: The first objective is simple — the employees
need to miss no deadlines within the timeframe set out in
the PIP. The second objective requires collaboration with
a senior team member to check for errors and judge
whether the quality is acceptable.
Metrics: Number of late deadlines and quality of work
(the latter may be subjective).
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#3 Example for productivity
This next example is most suited to someone in a middle
management position. Let’s say that the employee is in
charge of growing a program by increasing the number of
subscribers. After several months, there is minimal (if
any) change.
Goal: Grow program by X amount of subscribers.
Objectives: Increase the number of clients subscribed to
the program and decrease the number of unsubscribes.
Action: Improve campaigns, better advertise (or
increase) the benefits of the program, and implement a
retention strategy.
Metrics: Subscriptions and unsubscribes.
#4 Example for unprofessional behavior
The last of our performance improvement plan samples is
for unprofessional behavior. This type of PIP could be
necessary for a variety of situations, ranging from
mistreatment of subordinates or coworkers to persistent
lateness and unauthorized absences.
Goal: Cease behavior entirely
Objectives: Arrive on time, treat others with respect, or
attend all required meetings.
Action: Only miss work when authorized for personal or
medical reasons. Receive appropriate workplace behavior
training.
Metrics: Some behaviors are easily measurable (for
instance, did the employee arrive no more than 5 minutes
late every day?) Other situations are more subjective. For
example, you may need to talk to subordinates who were
finding it difficult to work with the employee.
How to write a performance improvement plan
Now you know what your PIP needs to include and you’ve
seen some examples. All that’s left is to put everything
together and start writing a performance improvement
plan for a specific employee and issue.
You’ll only receive the benefits of performance action
plans when you create effective PIPs.
5 Steps to create a performance improvement
plan that truly works
1. Determine acceptable performance
State what would be acceptable performance and
compare this to what you are currently seeing from your
employee. Be specific as to where exactly the employee is
falling short, including examples of behavior and
performance.
Instead of presenting an employee with a PIP
unexpectedly, have a meeting beforehand where you
discuss performance issues.
All parties (the manager, HR, and the employee) should
have the chance to provide input. You want the employee
to feel engaged and committed to meeting targets.
2. Create measurable objectives
Use the SMART framework to define the objectives your
employee needs to meet. Determine how you will
measure success
You need to be sure that a PIP is worth the effort. Find
out what is causing the poor performance.
It could be that the employee feels overwhelmed by
expectations at work or perhaps he is dealing with
personal problems you are unaware of. Alternatively, the
problem may be that the employee has no interest in
staying with your company in the long term.
3. Define what support the employee will
receive
List how the employee’s manager will help him reach the
PIP goal. This could include training, coaching, or using
additional resources.
The whole point of a PIP is to help the employee improve
to keep him on your team. Rather than expecting him to
achieve the objectives alone, consider what he may be
lacking from you that could better his performance.
4. Draw up a schedule for check-Ins
Specify how often you will meet with the employee to
provide feedback. Create a calendar of check-ins.
It’s no use creating a PIP and then waiting until the
deadline to check the employee’s progress.
Regular check-ins will allow the employee to voice any
doubts or difficulties. Plus, they will allow you to confirm
that he is on the right track or if further action is
necessary.
5. State the consequences of a lack of
improvement
Make it clear what the consequences are if the employee
fails to meet the improvement goal.
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By this point, you should know why you want to use a Being positive.
PIP, how to create a performance plan for your unique
situation, and what exactly to include. There is still one Go to work every day with a great attitude. Don’t let small
thing left: your employee needs to know how to respond challenges get you down.
and pass the PIP. Share the following advice with your
employee to ensure that the process runs as smoothly as
possible.

It is critical that your employee doesn’t perceive the PIP
as a sign he will soon be fired.
Remember to talk about where he is excelling and make it
clear that you want to see him improve. Set a goal the
employee feels confident he can achieve
and that will be beneficial to everyone.
A PIP is a great strategy to retain an employee whose
performance has been lacking recently but who does have
the potential and motivation to remain a strong team
player.
Whether you are the employer or the worker, you should
never see a performance improvement plan as a
superficial step before termination. Rather, it should be a
useful tool to transform a struggling employee into a
valuable asset for the company.

How to respond to and survive a performance

improvement plan

As an employee, you need to know how to get past a

performance improvement plan and gain something
positive from the experience.

How to respond to a performance improvement

plan

Your manager should have set performance objectives

that are reasonable and attainable. Now it’s up to you to
decide whether these targets are worthwhile. If you are
uninterested in staying at the company for much longer,
you can save everyone time and stress by starting a search
for a new job instead.

If you do decide that your job is worth keeping (which

should be the case the majority of the time), try to see the
PIP positively. Consider it useful feedback to help you
learn and grow both within the company and in your
career as a whole.

How to survive a performance improvement plan

The next step is to survive your performance

improvement plan and come out as a better-qualified,
more valuable worker. This involves:

Making your job a priority.

Avoid staying out late on work nights, accept all the

optional invitations to work events, and spend your time
at work on job-related activities only.

Seeking help when you need it.

A PIP is often an indication that your company believes

you are worth having as an employee. Talk to your
manager or HR if you are unclear about anything.

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