Methodology

Taxonomy

Industry Classifications:  BizMiner reports utilize an expanded, proprietary version of the North American Industrial Classification System (NAICS). Reports through the December 2012 release utilize the NAICS 2007 version. Beginning with our Spring 2013 release, reports will utilize the NAICS 2012 version, which incorporates minor changes.

In addition to the standard NAICS coding, which classifies about 1200 industry segments through the use of 2-3-4-6 digit industries in 19 sectors, BizMiner applies further in-house segmentation of many NAICS-6 industries by incorporating a decimal point and up to eight digits after the decimal. This allows us to classify and report on specialty industry segments (for example, [Pizza Restaurants (Limited Service & Take-Out) NAICS 722211.0623] rather than only the broader [Limited Service & Take-Out Restaurants NAICS-722211]. When using our drill-down search, or our code input search, industry segments will be displayed in numerical order, with specialty segments indented under the NAICS-6 parent industry.

Financial Reporting Series

Data Point Timing: Financial data represents end-of year averages for the industry and each sales class report. Summer release reports display calendar year-end content in each data column marked by a year; Winter release reports display calendar year-end content plus an “extra” final column that displays content for the running 12 years through the second quarter of the following year. The December 2012 release, for example, displayed calendar year content for 2007-2011 and a final 2012q2 column that displayed content for the running twelve months 2011q2-2012q2.

Sales Trends: Our US Industry Financial series analyzes corporate reports, Our Micro-firm series analyzes sole proprietorships. Dollar-based sales and other dollar-based data in these reports reflect averages for sales of the industry segment, not total industry-wide averages. In order to maximize the data available for smaller areas, our Local Industry Financial series aggregates available data from corporate, sole proprietorship and other firms and bases its format on corporate (IRS 1120) reporting. Dollar values in all reports may not sum due to rounding.

In US and Local Financial reports, the rollup process is identical (see below). Average Annual Business Receipts in Local Financial Reports may differ from average annual sales in our Industry Market Report series due to one of two reasons: a) some firms may not be included in the financial series, and b) specific sales classes may not be represented in sufficient numbers or integrity to be displayed or included in roll-ups. Additionally, specific industry sales classes segments must display  data in sufficient numbers and integrity for five years in order to be included in industry-wide or parent rollups, and in specific offspring classifications for five years in order to be included in parent NAICS roll-ups.

Local Financial Data: Local Financial Data is projected from US data through the development of algorithms using available localized state and metro data, including sales, wage and other proprietary input-output metrics. In local Industry Financial reports, the "Other Income" line item percentage is applied directly from US averages for this industry. Local In local Industry Financial reports, the "Other Income" line item percentage is applied directly from US averages for this industry. Local percentages may differ. Other P&L percentages and all dollar calculations are based on actual local data.

Year-to-Year Overlap: Although year-to-year overlap is consistent, and may approach 100% in some cases, our financial databases do not require 100% overlap of firms from year to year. It is important to understand that this is an impossibility, and not be swayed by other sources that may claim a 100% overlap. A 100% overlap suggests that no firms enter the market, no firms cease operation, and no firms transition between sales classes in any given year. This is some not the real-life situation, because all of these dynamics occur every year in every industry. As well, due to the dynamic of firms transitioning from one sales to another (up or down) in any given year, year-to-year dollar sales in specific sales classes may be affected by firms which have transitioned in or out in either direction

Business Revenue includes receipts from core business operations. Interest Income and Other income (such as rents and royalties) are generally detailed separately below Operating Income. While Business Revenue is separated from Interest Income for most classifications, Business Revenue includes interest income from the private sector where it is central to financial industry operations, including Credit Intermediation and Related Activities (522xxx); Funds, Trusts, and Other Financial Vehicles (525xxx); and Management of Companies and Enterprises (55xxxxx).Beginning in October, 2011, Other income in Real Estate (531xxx) and Lessors of Nonfinancial Intangible Assets (53311xx)is reclassified into Business Revenue, and in some cases, may recast 2010 Cost of Sales with other compensation-related items.

Cost of Sales includes materials and labor involved in the direct delivery of a product or service. Other costs are included in the cost of sales to the extent that they are involved in bringing goods to their location and condition ready to be sold. Non-production overheads such as development costs may be attributable to the cost of goods sold. The costs of services provided will consist primarily of personnel directly engaged in providing the service, including supervisory personnel and attributable overhead. To allow for common reporting practices, Cost of Sales is fixed at zero for NAICS industry groups within these ranges: 522-523-525-55 (except 5242).

Compensation: In addition to the labor portion of Cost of Sales, wage costs are reflected in the Officers Compensation and Wages-Salary line items. In many cases, SG&A (Sales, General and Administrative) costs also include some overhead, administrative and supervisory wages.

Balance Sheet: Liabilities, net worth and ratios are calculated for each industry segment and class, while asset line items are blended with the closest four digit industry segment.

Sources and Uses: The Sources and Uses of Funds table tests the accuracy of the balance sheet and distinguishes the sources of funds from their use. It is the basic worksheet preliminary to a formal cash flow statement examining the liquidity of a business. A multi-year industry benchmark common size balance sheet, which includes overlapped but not identical sets of firms in each year, is not well-suited for the presentation of a formal cash flow analysis.

Roll-up Protocol:, Industry-wide financial reports (both Industry Financial and Micro-Firm series) include rolled-up data only from sales classes which are available in each of the prior five reporting years. Sales classes included in the NAICS-6 roll-up of a particular release are now listed on P1 of each NAICS-6 industry-wide report. As additional sales classes become consistently available, they will be added to new NAICS-6 industry-wide and rolled-up NAICS-2-3-4-5 report releases.

In addition, NAICS 2-3-4-5 reports are roll-ups from those NAICS-6 industries for which we have complete (3-year or 5-year) data. Offspring industries applied to roll-are listed on P1 of NAICS-2-3-4-5 roll-up reports.

Negative Ratios: To avoid confusion regarding division display of negative value line items, adjustments are made to display "n/a" rather than negative ratios except in cases of negative net income.

Treatment of Interest Income and Other Income: Certain industry sectors consistently reflect ambiguity and overlap between core Business Revenue, Interest Income and Other Income allocations. This issue is particularly prevalent in industries, such as Finance-Insurance, Real Estate and Management of Companies which rely heavily on all three. Differentiating these line items has in the past resulted in confusion around the display of the P&L breakdown and the Asset:Sales relationship (since the Sales portion is based on Business Revenue only). For this reason, all three income lines in the affected sectors (NAICS 52xxxx-53xxxx-55xxxx) are now collapsed into a single top-line Income item. Because of persistent inconsistencies in Cost of Sales allocations in financial statements, Cost of Sales has been fixed at zero for NAICS 522-523-525-55. The Insurance Agencies, Brokerages, and Other Insurance Related Activities (NAICS 5242) industry group does not exhibit any of these same income or Cost of Sales variances, and is not subjected to either of these special treatments.

Because of heavy and consistent dependence on Other Income in agricultural industries 1111xxx-Crops and some 112xxx-Animal Production (likely subsidy income) and in NAICS 813-Religious, Grantmaking, Civic, Professional, and Similar Organizations (likely non-program revenue and donations), we considered the aggregation of Other Income into Business Revenue in these industries, but did not make that adjustment in this release.

Financial Data Quality Control Project

After our update in December 2011, customer feedback and our own internal review process noted larger than usual year-to-year fluctuations in some financial reports.

In part, continuing ripples from the 2008 recession generated less consistent profit and loss statements and balance sheets in many industry groups. This is the result of both relative economic instability and concentrated efforts in some industry sectors to attain greater efficiencies. Either tendency can disrupt the consistency that is most comfortable for those reviewing aggregate financial statements.

However, two other factors also affected our reporting: The first involves the relatively relaxed parameters we have used to filter out outliers during our analysis process (see more on Outlier Values below). The second concerns widely varying line item allocation choices, especially in the profit and loss statement, among companies in some industries. In the past we have been reluctant to “normalize” these, but have now changed course (see more on Line Item Allocation below).

In response to these two factors, we completed a four-month quality control review of our Industry Financial and Micro-Firm Profit and Loss reporting series. While with few exceptions previously displayed data was correctly analyzed and reported, we recognized that our previous approach to outlier data and line item allocations may have made the interpretation of the data more difficult than it should have been. Our quality control review process addressed these and other issues, with major focus on the Profit and Loss section of reports.

Micro-Firm Profit and Loss Series Quality Control: Both the Sole Proprietor and Startup versions of the Micro-Firm Profit and Loss series have been subjected to a QC review similar to the Industry Financial series described above. However, because of the peculiarities of the sole proprietorship reporting format, parameters have not been drawn as tightly as is the case for the IF series, and the normalization process has been modified. This is largely due to complications caused by the Net Profit line in the Micro-Firm series, which (like IRS sole proprietorship reporting) includes all owner compensation, whether it represents strict profit or some form of labor in any of the other line categories: Cost of Sales; Wages-Salary; Commissions or SG&A. Broader line item variations in the Micro-Firm reports invariably result from varying levels and type of owner activity in day to day operations. For example, the owner’s Net Profit line may be 20% three years in a row, but the portion of that 20% that represents actual profit in one year might be total; the portion representing owner’s labor which would otherwise be classified as cost of sales might be half of the 20% in a second year; and the portion representing administrative work might be half of the 20% in the third. Due to the nature of standard reporting formats, more specific breakdowns of the composition of the Net Profit line are not possible. In addition, due to a programming error in the previous release, the previous Micro-Firm series release included some incorrect dollar content, which has now been revised across the board.

Industry Financial Quality Control: After a final review round which eliminated previously unidentified outlier data points in <5% of the Industry Financial series reports, the entire series was re-released in August 2012. In addition, due to a programming error in the initial release, sales data was revised in some industry segments (2007-08-09 only). Reports accessed before the August release are not revised, and continue to bear a June 2012 release date.

Outlier Values: Based in our 2011 quality control review, we have tightened our outlier parameters to improve consistency of numbers in our financial statement. This process has reduced year-to-year variances while maintaining the integrity of the common size statements themselves. Narrowing filters naturally increases the stability of displayed values and changes numbers that may have appeared in prior releases. In some cases, we have modified the composition of our sample pool. In others, we revised specific measures which were unduly influenced by outlier firms.

Line Item Allocation: We have undertaken a “normalization” process regarding subjective allocations of related line item data, especially in regard to the labor portion of Cost of Sales, Salary-Wages; the labor portion of Sales, General & Administrative; and, to a lesser extent, Benefits-Pension. Our review evaluated significant swings in the base data that reflect subjective allocation choices in company statements, rather than changes in expenditure. We found that in many cases, even within a given industry, choices to allocate the same expenditures could result in three or four different results in different company statements, significantly affecting our efforts to develop a common size P&L. The normalization process is aimed at smoothing some of these variances. For example, where we saw a dramatic drop in the labor portion of COS and a corresponding increase in Wages-Salary, we might have revised the allocations while maintaining overall compensation costs.

In small business sales classes, we also conducted a review of Officers Compensation and Net Profit, since these items often represent tax decisions rather than a real difference in operations. For example, a small firm that allocates 20% of revenue to officer compensation one year with 5% net profit, and 5% officer compensation the following year with 15% net profit has not performed differently so much as made different tax decisions. In such a case, we might have revised the allocations to normalize the year-to-year result, increasing year-to-year consistency. The most significant use of this process was in small service industries (such as offices of physicians, other professional or technical services) where a limited number of owner-operators or partners tend to capture a large share of compensation and profit.

The result of these changes is financial statements that appear more stable and are more easily interpreted, in most cases without much if any impact on the bottom line result. This process also necessarily means that some data displayed in prior years will change., Some troughs and spikes do remain; this is a normal result of industry fluctuations (especially around recessionary or high growth periods) and, quite often, the scale of business activity.

The QC review process has not yet been completed for legacy data (pre-2006).

Industry Market Series

Cessation Rates: Cessation rates track the actual experience of business establishments, firms, small businesses, branches and startups doing business at the start of the time series, and still in operation today. "Survivors" are business operations within a given category which have maintained operations during the time series. Cessation rates for all industries are specific to the selected industry and market area.

Firms which have experienced a transfer in ownership but continue as independent firms are considered "survivors". Firms which relocate but maintain independent operations are considered survivors if they do not move out of the jurisdiction being analyzed. Firms which are purchased or merge and become subsidiary locations, or whose location is terminated, are grouped with the ceased operations. Any business entity which does not evidence ongoing operations (for example, by registering with government agencies, credit reporting services or business directories) is considered to have ceased viable operations and is classified as a "ceased operation."

The cessation rate analysis is developed for discrete business segments by segregating the original pool of tracked firms by industry classification, location, and population segment (all firms, small businesses, startups etc.) That beginning universe is segregated and tracked to develop the cessation rate for that group. As a result, cessation rates occasionally reflect performance above 100% or below 0% due to business migration among industries (changes in primary business line) or (in the case of location-specific cessation rates) due to business relocations during the analysis period. Migrants within a NAICS-2 industry sector are considered as survivors in the in-migrant classification.

Annual Market Volume reports sales volume of US industry business operations, based on the number of industry employees and sales per employee data developed by BizMiner. This number includes headquarters operations and branches of any industry firms located within the US. It excludes branch operations located outside the US. Local subsidiaries of firms headquartered outside the country are included. Statistics in our reports are always based on firms that identify a particular classification as their primary line of business. This is important for researchers assessing market volume, which in our reports is based on businesses primarily in a given classification, and does not include sales data for firms which may operate this type of business as a secondary or tertiary line.

Average Annual Sales: Average Annual Sales tables displays “snapshot” average dollar sales for all industry sites (including branches), firms, and small businesses in each of the three years in the time series. For the purposes of our Industry Market reports, a “small business” is a firm with  25 employees or less. While there is significant overlap of firms in each category between years, results can be affected by business failures, mergers and the migration of companies between the three categories. Migration between business classifications has a much lesser impact in most cases.

Employment Class Tables: The 6-table Employment Class table group displays the employment and sales-related information for industry operations which fall into each of three employment brackets (1-24 employees; 25-99 employees; 100-plus employees). This data reflects all establishments in the selected industry market area; the Small Business population and sales data on earlier pages of Industry Market series reports refers to firms with fewer than 25 employees only (not establishments). Projected employment and sales of operations for which that data is not reported are noted in the Unknown column and are based on average industry site information.

Sales per Employee: As a common indicator of productivity Sales per Employee data is presented for each of the three years in the time series. Local reports generally calculate industry-specific local sale per employee data. Where localized data is unavailable, industry-specific projections may be applied from larger market areas.

Industry Startup Activity: The Industry Startup Rate considers both new firms and newly developed branch operations. It measures the percentage of industry startups which indicate one year or less of operation during the one–year period reflected by the Time Series table -- and which maintained operation through the end of the time series. These startup operations are compared to the number of all operations in the industry for which ages can be identified to create the Startup Rate. This is then compared to the US All-Industry Startup Rate, the national economy-wide startup percentage. The Industry Startup Index benchmarks the industry rate against national all-industry patterns, expressed as a two-digit decimal where the all-industry rate equals 1.00. An Index of 1.10 indicates an industry rate 10% above the national all-industry average.

Sales Growth Index and Employment Growth Index: The Sales Growth Index compares the change in total sales over the time series displayed in the report. The industry specific growth rate is displayed, followed by a two-decimal index benchmarking the industry against economy-wide growth percentages. The US Index equals 1.00 in all cases, so an Index of 1.10 indicates an industry growth rate 10% above the economy-wide average. Similarly, the Employment Growth Index compares the change in total employment over the time series reflected by the report. Again, the industry specific growth rate is displayed, followed by a two-decimal index benchmarking the industry against economy-wide growth percentages.

Industry Concentrations: The Establishment Concentration compares the number of operating establishments in this industry and market area to those in the market area economy overall for each of three years. The Employment Concentration is comparably analyzed, displaying reported employment in the local industry to the economy. The corporate-based Sales Concentration shows the industry percentage of total local economy-wide sales. (Corporate-based sales data attributes company-wide sales to the location of headquarters operations.) In each case, the three year trend indicates the increasing or decreasing importance of the industry for the economic metric under review.

Consolidation Trends: The Consolidation Trends table displays three years of national all industry-specific data reflecting the percentage of branch operations to all establishments (Industry Branch Concentration), and compares that to three years of economy-wide data reflecting national all-industry branch operation percentages (All US Branch Concentration). Taken together, the two measures indicate increasing or decreasing trends toward industry consolidation, either as a stand-alone metric or benchmarked against economy-wide patterns.

Other

As is the case with any databases this large, some errors are inevitable. Some firms are missed and specific information on others is lacking from the database. Not all information received is uniform or complete, resulting in the need to develop projection algorithms for specific industry segments and metrics in some report series. No representation is made as to the accuracy of the databases utilized or the results of subsequent analyses. Neither the Brandow Company nor its resellers has undertaken independent primary research to confirm the accuracy of the data utilized in the Profile analyses. Neither the Brandow Company nor its resellers are responsible for conclusions drawn or decisions made based upon this data or analysis. In no event will the Brandow Company or its resellers be liable for any damages, direct, indirect, incidental or consequential resulting from the use of the information contained in BizMiner reports.


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