Know Your Numbers: A Data Physical For Your BusinessPublished 17th Jun 2015 Archived
Earlier this year I had my annual physical. After giving what seemed like huge amounts of blood, I got back a report with lots of names and numbers, most of which I did not understand. The chart was, however, sprinkled with numbers highlighted in red, yellow, or green. This simple color coding instantly told me which numbers were a problem, where there was a risk, and what was good.
Additionally, the chart had something called a “reference range” that indicated what a normal value was. This allowed me to see how far away from normal I was. Of course, the visit with the doctor provided additional insight — he pointed out what I should really be concerned about, what actions to take, and what the indicators may mean for my future physical health.
Each year we are all encouraged to get a physical, and to “know our numbers.” Businesses need to go through a similar process. While a business can’t give blood, it does produce data. And financial data allows you to perform an analysis that will improve your understanding of your business and help you make good decisions for the future.
There are four key parts to this analysis:
1. Creating the numbers: Generating the account values for the business and organizing the numbers in generally accepted categories, which can then be grouped as financial statements. This is a basic set of data for your business.
2. Ratio analysis: Looking at various data measurements and understanding how they correspond to one another.
3. Trend analysis: Determining if data measures are going up, down, or staying the same, and understanding what that means.
4. Benchmarking: Comparing business data to other businesses to see if a particular business is performing better or worse than its competitors.
Creating the Numbers
The first part of the process is actually getting the numbers. Today even small businesses have access to very sophisticated accounting packages, such as QuickBooks, that accumulate their information and generate preformatted reports at the touch of a button. One of the best habits you can start is recording or posting the transactions of a business on a regular basis — daily or weekly — so the data is up to date and easy to obtain.
A best practice in this process is properly categorizing accounts when you set them up. The accounting package will prompt you on this – when you define an account it will ask you if it’s an asset or a liability, current or long-term, and what the tax return category is. Selecting the proper category is essential to getting the right reports and data analysis later. If you are not sure of the answer, check with your CPA or financial advisor. Your CPA or tax advisor can also help you link each account to the appropriate line on your tax return, making tax preparation much easier at the end of the year.
Once the accounts are set up and your business transactions loaded, this basic data can be used to generate financial statements and other reports that can help you understand how your business is performing. You should run reports on a regular schedule, and determine what schedule best fits the rhythm of your business. For example, you may want sales data on a daily basis, but only need a full profit and loss report once a month.
Once you have the raw numbers for the business, you can move to a more sophisticated understanding of how your business is operating by calculating financial ratios.
These comparisons of two numbers within a company’s financial statements are used by bankers, analysts, venture capitalists, and others to better understand a company’s performance. There are a large number of standard financial ratios, as well as other ratios that compare pertinent data to certain financial measures. This data could include stock prices, economic data such as the Consumer Price Index (CPI), or operating statistics. Many of these ratios are common across all industries, while others are unique to a particular industry or type of business within an industry.
Financial ratios are the common language of business. A business cannot get a loan without demonstrating that it can pay back the loan – financial leverage ratios help predict both the amount of money that can be borrowed and how quickly it can be paid back. A business can begin to predict whether it will make or lose money for the year by looking at profitability ratios. Knowing these ratios can help a business owner or advisor understand the health of a business and provide a basis for proactively improving that health, just like a physical does for an individual.
Trend Analysis and Benchmarking: Developing a Road Map
Once you have your numbers and ratios, you have the power to develop a financial road map for your business. This road map should identify what ratios you want to measure, which ones you want to improve, and what actions you need to take to do so.
While knowing your numbers is important, knowing them in a vacuum can be dangerous. You may be fooled into thinking you are performing better in certain areas than you really are and as a result not look to improve in areas that have room for improvement. This is where benchmarking comes in, comparing your company’s numbers to well a defined peer group. The challenge with benchmarking for private companies is finding reliable data that’s quick, easy to use and to understand. Powerlytics Business Advisor seamlessly integrates with QuickBooks and provides a robust financial analysis of your business compared to a database of the financial statements of all businesses in the U.S. This eliminates any concern that you may be benchmarking with only subsets of the population that are collected via surveys that are often impacted by selection bias and other pitfalls of such methods of data collection.
Many companies already have a business strategy, but integrating the numbers into your road map brings both power and discipline to your actions. By using data to augment your road map, you are able to make decisions based on evidence, not just intuition.
Monitoring progress along the road map is critical. We talked earlier about getting regular reports on the numbers; developing a library of data that supports regular reporting will help you track progress and determine whether you’re meeting your goals. This library can also help you communicate with your business partners – bankers, investors, and others that need and want to know how you are doing.
Knowing your numbers and how they compete is good business. Do you know yours?
As a senior financial and operating executive, Susan Rucker brings extensive experience in helping businesses think about their strategy, operations and business opportunities. She can help businesses quickly identify the critical information needed to make the right business decisions at the right time. Susan has been an audit and consulting partner at a Big 4 firm, a senior business executive in technology and professional services firms, and currently serves as a Consultant with Powerlytics and is the CFO at the Raymond A. Mason School of Business at the College of William & Mary in Virginia.