Financial and data analysis – what’s in it for me?

by Adina Luca, November 28, 2019

I am glad you asked. You see, big publicly traded companies must report their numbers in detail. It is a legal requirement. But behind the scenes, there is an army of people dissecting, summarising and reporting to the management to help them monitor the course and anticipate the storms. Entire departments analyse what other departments do. Some people are hired just to look at the numbers and make decisions. How good those decisions are is another matter, but the fact is that they do it.

Private companies do not have that requirement. Unless you have more than one shareholder and they want to know what is happening with the business, or pesky investors who want you to account for when and how much they could get in return, you can pretty much ignore any other reporting besides the statutory ones prepared by your accountant.

If you are a small business with one shareholder, then you are totally off the hook. What’s in it for you if you put a finance structure in, analyse your numbers with percentages, look at trends and regular projections and reporting?

Knowledge

Finance and data analysis of your small business is priceless knowledge. Like blood tests or scans, they highlight areas you have not been aware of or, if you were, you did not know their magnitude. It helps in knowing what you can and cannot do. Try running a marathon if your heart rate is well above average when you run 5 km (don’t!).

Data flows constantly through any company as a result of daily activities. It is very easy to let it accumulate until it is impossible to make any sense of it and give up. Modern technology seemed like a saviour at the beginning, and the ads they put out amplify the illusion of control technology is supposed to give. The fact that you regularly put data in an app may solve the consistent data collection problem. But not the knowledge problem. Most entrepreneurs who use a new app never actually download the data to pattern it and look at it in a meaningful and comprehensive way and make informed decisions. In the end, the app has the same effect as if you did not have any data at all. But that is for another time.

Most entrepreneurs look only at sales and have a default answer to ‘what now’ = ‘more sales.’ A well-managed small business works on making sense, turning data into insight and consistently acting upon it. They learn from their own business on a regular basis. For example, knowing the average value of your most profitable clients helps you with sales targeting and compensation. Knowing how the average value of your most profitable clients has changed over the years helps you learn about the market. And so on. You build a watch and presto, you can tell the time.

Predictability

Are you too small to analyse your financials and data? We think you are too small to afford NOT to do it. And here is why. The most frequent story of small business failure goes like this: ‘we were looking after our clients and plodding along, and then one big client did not pay/the orders were smaller than expected, and we had to close down.’ That sort of surprise does not happen to a business that has regular and cautious projections, adjusts and pays attention to reporting with insights drawn from the numbers, and makes proper decisions when the economy is faltering.

The smaller you are, the smaller the fall-back available. Sometimes survival is at stake when it comes to having your finance in order and doing robust projections. You can see in the numbers where the business has been and where it is headed. However, it does depend on who shows you the numbers and how: are there percentages attached, ratios defined, and indicators monitored? Is there a comparison to the past?

Entrepreneurs are intrinsically biased when it comes to looking at their own numbers – they have a tendency to use numbers to rationalise past decisions and ignore the findings as ‘exceptions’. In our experience, two heads are better than one – the more the merrier.  Do people in the company get together regularly to discuss the numbers and think through the results and project for the future? That would be ideal.

Confidence to Grow

Confidence to grow is not confidence to increase the revenue at any cost, but to control what happens when you increase the revenue. The profit payoff takes time – you will be less profitable in the initial stages of fast growth, as your costs go up. Then the pressure on processes that ensues – fast growth has a way of uncovering all your weak spots that you may not have noticed when activity was slower. Lots of companies grow too fast and that gets them into trouble, and they find themselves paddling quickly backwards.

Confidence to grow is being clear on the payoff and having it projected accurately. Growth is usually a given in most companies, provided all other circumstances are right – the entrepreneur is well able to sell, the team is in place, delivery is decent. And of course, the economy does not go belly up. But, counter-intuitively, most of the time small businesses need to lower the financial projection to what is within reach easily, exceed it in results, and by doing so protect the profit margins. They can then create a new positive cycle: expect lower results, exceed expectations and gain an extra profit cushion for the future. And learn to celebrate in the process.

Another sign of confidence to grow is daring to employ skilled people even if their cost is higher. Avoid the pattern of the revolving door of junior hires. When your financials are in a good place and all is accounted for in advance, paying a higher salary that leads to longer-term benefits from the skills brought in is guaranteed.

To try us out on what we can see in your numbers – contact us. We can guarantee increased profits, but only after due diligence.

 

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