Using Data to Drive Decision-making and Build Businesses
There’s a lot of talk about data and how it will change the way we do business. That’s probably true… but some managers are not benefiting from data in their decision-making. Others are spending money on pricey systems in the hope of utilizing data. Results appear to be mixed. As accountants, we have had access to mountains of data for many years. Mostly it has been organized so that compliance obligations are met.
To some extent the data has been utilized to develop management reports but we still hear many managers who remain dissatisfied that they are not getting the information they want. Accounting systems (including modern cloud-based software) also fall short in terms of provision of management reports, especially those that require customization. That’s why we’ve seen the launch of many ‘plug-ins’ (software which pull data from the accounting system) to create powerful, customized reports. In some cases, this gets managers closer… but there is still a gap in obtaining the information required to make the best business decisions.
So, here’s a different approach which managers (or their accountants) can drive. Start with the business challenge (or opportunity) AND THEN figure out what data we need to tackle it. And keep it really simple.
1. Opportunity (or challenge): Saving Money
Businesses seek to be profitable so reducing costs really matters. Data can show us where the bulk of money is being spent. Is it on personnel, production or rent? If personnel, what does the marketing team cost the business? Or the administration function? Or the board? If we drill into the sales team, how much spend is on ‘interacting with prospects’ versus ‘sales management’? How has all of this changed in the past year? What is driving that change? We can also link this data to outputs. If more money is spent on sales management but sales performance is down, what decisions should be taken?
2. Opportunity (or challenge): Growing Sales
Profit is also driven by revenue so let’s look at the topline drivers. Which products, sales teams or regions are most successful? Which customers are spending the most? What is the lifetime value of customers? Maybe we are marketing the wrong products to the wrong customers? A small adjustment in sales or customer management could bring a significant improvement in revenue and the data can point us in the right direction.
3. Opportunity (or challenge): Driving Enterprise Value
Enterprise value is most important for some businesses, even more so than revenue or profit. A listed company watches their share price carefully and a prospective seller of a business wants to maximize value. If we understand what drives business value, then we can figure out how to increase it. Perhaps those revenue and profit numbers are important but there are often other factors (think data sources) at play: recurring revenues, intellectual property, growth rates, net asset value, debt ratios etc. It may also be helpful to obtain data from outside of the company, for example, the performance and valuations of comparable businesses. Whatever the case, these answers lie in the data.
4. Opportunity (or challenge): Evaluation of New Opportunities
Managers can find themselves ‘deep in the weeds’ when running their businesses. Finding the time to properly evaluate strategic business opportunities is difficult. Acquiring a business, entering a new market, divesting of certain assets, raising debt or equity finance etc. are examples of major initiatives that need careful consideration. The good news is that using data to forecast different outcomes is key to success. And much of that data already resides in the business (historical performance) or externally (market data).
5. Opportunity (or challenge): Risk Mitigation
Business is risky as managers juggle a lot of things they hope will work … but they may not. There is a huge failure rate in business, especially in the early stages. Risk takes many forms: product risk, market risk, regulatory risk, financial risk, personnel risk to name a few. A risk assessment relies on data to properly quantify, then mitigate, risk. Events which may or may not happen in the future are identified and the consequences of these events are modelled to understand possible outcomes (and avoid them, if necessary). Again, analyzing data provides the fuel to avoid business risk.
6. Opportunity (or challenge): Improved Efficiency
Business is about people as much as about profit. Put another way, if people in the business are not motivated and energized, productivity will be low. Measuring productivity is important and based on metrics such as personnel costs, the processes they are involved in, how time is allocated and the outputs of their work. This is data-driven and intelligent analysis can help decision-making to improve productivity.
In conclusion, data is extremely important (and under-utilized) in business decision-making. But there is generally no ‘quick fix’ solution. The business problem has to be properly understood first. Then the relevant data has to be identified before it can be analyzed and turned into sensible recommendations.
As accountants, we like to solve business problems, advise our clients to strengthen their businesses and dive into the deepest data challenges.
Please get in touch to see how we can help you make brilliant business decisions!