How far to drill down
An analyst will drill down into the elements of the data. Then,
they decompose each element into its parts and then refine their perspective. As they
continue modeling, a comprehensive understanding emerges. They create visual graphics to explain the relationships and test the data. Once they see
the impact of each element on the whole, they return to the top two levels
to draw conclusions. Financial folks are very good at this. You continuously revisit your assessment, never done! It is hard; I am not a great analyst but I try ...
How many levels of detail?
For example, to judge the stability of the business to business ecommerce
sales, one of several top level element would be the number of customer
bankruptcies. The likelihood of bankruptcies can be estimated by the average
liquidity, historical Return On Assets, profitability and turnover. Here,
two levels in, you have forecast you can explain.
Add another level to confirm your logic or do the math. The problem is
that you will have several elements each for liquidity, ROA, profitability
and solvency, and as it gets more complex, you will have a very difficult
time explaining the forecast.
What people expect
You have to simplify your explanation by moving back up to the top two
levels. Most people expect you to do you homework and not to overwhelm
them with the methodology. They expect you to inform them if something key changes.
The Long View Approach - Understand the Time Late
In my USA Economy observations, I use for the most part comparisons to the same quarter last year so the data is at least one month after the fact from the end of the last quarter (one month to survey and publish the data). If by months is available, I often use a three month moving average to see the trend direction and magnitude. My calls of a trend change are time late.
Let the team know how old the data is!
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