Capability vs Performance
Roger Knocker • November 30, 2023
Capability vs Performance
Capability measures the future whereas Performance measures the past.
For many years, Capability has been measured as part of Key Performance Indicators [1]. In some organisations, this is explicit and formalised, but for most it’s bundled into performance management and it confuses the proper assessment of performance.
In recent years, organisations have separated Key Risk Indicators [2] from performance to reduce the confusion surrounding performance. We believe it’s better to separate KCIs, KPIs and KRIs as they are fundamentally different and provide measurements of different business issues.
Corporate Finance
In corporate finance, investors assess the strength of a company’s balance sheet to determine the sustainability of future earnings. The earnings are ultimately measured through the Income and Cashflow statements. The strength of balance sheet is therefore a measurement of capability rather than performance.
Military
The capability of a country’s military power is measured in terms of the amount of equipment/arms and number of vehicles, planes, ships and personnel. The performance of any army can only be assessed during and immediately after a war.
Sport
The capability of a football player is measured in terms of their fitness, physiology, track record, experience and reputation. Their performance (depending on their position) is measured by (among others) the number of goals scored, goal assists, successful tackles, goal saves, metres gained and successful passes during the match.
Footnotes:
[1] Key Performance Indicators are the selected measures that provide visibility into the performance of a business and enable decision makers to take action in achieving the desired outcomes.
[2] Key Risk Indicators are metrics used by organizations to provide an early signal of increasing risk exposures in various areas of the enterprise.
For many years, Capability has been measured as part of Key Performance Indicators [1]. In some organisations, this is explicit and formalised, but for most it’s bundled into performance management and it confuses the proper assessment of performance.
In recent years, organisations have separated Key Risk Indicators [2] from performance to reduce the confusion surrounding performance. We believe it’s better to separate KCIs, KPIs and KRIs as they are fundamentally different and provide measurements of different business issues.
Examples:
Corporate Finance
In corporate finance, investors assess the strength of a company’s balance sheet to determine the sustainability of future earnings. The earnings are ultimately measured through the Income and Cashflow statements. The strength of balance sheet is therefore a measurement of capability rather than performance.
Military
The capability of a country’s military power is measured in terms of the amount of equipment/arms and number of vehicles, planes, ships and personnel. The performance of any army can only be assessed during and immediately after a war.
Sport
The capability of a football player is measured in terms of their fitness, physiology, track record, experience and reputation. Their performance (depending on their position) is measured by (among others) the number of goals scored, goal assists, successful tackles, goal saves, metres gained and successful passes during the match.
Footnotes:
[1] Key Performance Indicators are the selected measures that provide visibility into the performance of a business and enable decision makers to take action in achieving the desired outcomes.
[2] Key Risk Indicators are metrics used by organizations to provide an early signal of increasing risk exposures in various areas of the enterprise.
In the world of finance, numbers tell a story. However, that story is often buried beneath layers of spreadsheets and complex datasets. For financial professionals, the challenge is not just about understanding these numbers but also presenting them in a way that drives decision-making and inspires action. Enter data visualisation – the art of transforming data into clear, compelling visuals. Among the tools that have proven especially powerful are the line graph and the waterfall chart. These visuals help finance teams translate dry statistics into impactful narratives. In this article, we explore how these graphs can transform financial storytelling. The Importance of Data Visualisation in Finance Finance professionals are accustomed to handling vast amounts of data, from profit margins and revenue growth to expense tracking and risk assessments. Yet, presenting these figures effectively to stakeholders is a different ballgame. Visualisation simplifies this process, turning complex data sets into accessible insights. When done correctly, data visualisation: Enhances comprehension: Humans process visuals 60,000 times faster than text, making it easier for stakeholders to grasp key information quickly. Drives decision-making: Clear and compelling visuals help executives make informed decisions without wading through dense reports. Highlights trends and outliers: Visual tools can bring hidden trends and anomalies to light, prompting timely actions. Improves understanding and communication with business - Business doesn't always get what Finance is trying to communicate and good visualisations go a long way to bridging the gap. Better communication improves alignment to strategic financial goals. The line Graph: Unravelling Trends Over Time The line graph, also known as a stream graph or a stacked area graph, is a powerful tool for visualising changes in data over time. It is especially effective in showing how multiple categories contribute to an overall trend. In finance, line graphs can illustrate revenue streams, expense categories, or investment performance in a visually engaging manner. Use Case: Revenue Streams Analysis Imagine a financial report for a company with diverse revenue streams, such as product sales, services, and subscriptions. A line graph can display how each stream has evolved, highlighting peaks and troughs. The thickness of each ‘line’ represents the contribution of that revenue stream to the total, making it easy to spot which areas drive growth. Benefits of line Graphs: Trends Made Simple: Displays how multiple components evolve over time. Visual Impact: The fluid, organic design makes it easier to follow changes. Comparative Insight: Helps compare different categories intuitively. The Waterfall Chart: Bridging the Gap Between Figures Waterfall charts excel at breaking down the cumulative effect of sequential data points, making them ideal for financial analysis. They help bridge the gap between figures by showing how individual elements contribute to a total. Commonly used in profit and loss statements, budget analysis, and variance reports, these charts provide clarity in understanding how specific actions impact the bottom line. Use Case: Profit and Loss Analysis A financial analyst preparing a quarterly report might use a waterfall chart to demonstrate how various factors—like increased sales, higher marketing spend, and cost savings—impacted net profit. The chart’s structure, with its clear progression from starting figures to the final result, makes it easy for stakeholders to follow the financial narrative. Benefits of Waterfall Charts: Clarity: Simplifies complex financial data by showing individual contributions to total figures. Transparency: Clearly distinguishes between positive and negative impacts. Decision Support: Helps executives understand the key drivers of financial performance. Choosing the Right Visual for the Right Data Selecting the appropriate visual tool depends on the story you want to tell: Use line graphs for illustrating trends across multiple categories over time. Opt for waterfall charts when you need to detail the step-by-step impact of specific factors on an overall financial figure. By mastering these tools, finance professionals can enhance their storytelling, transforming raw data into insights that drive strategic decisions. Conclusion: From Data to Decisions The ability to visualise data effectively is a powerful advantage. The line graph and waterfall chart are more than just visual aids—they are essential tools for financial professionals looking to make data-driven decisions that resonate with stakeholders. By adopting these techniques, finance teams can turn numbers into narratives that not only inform but also inspire action. In the end, the power of finance lies not just in analysing data but in presenting it with impact.
In the rapidly evolving world of data analytics, understanding foundational techniques is only the beginning. To truly stand out, data professionals need to go beyond the basics and leverage advanced methods that transform raw data into actionable insights. Building on Roger Knocker’s top 10 tips, this article explores advanced strategies to take your data analysis skills to the next level.