5 reasons why all businesses should do financial data analysis
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Small business owners are constantly encouraged to make data-driven decisions. But data analysis can be overwhelming; partly because there is so much data available to analyse.
The best way for a business owner to begin the process is to start close to home and review their business performance. This can be done via a financial data analysis. Analysing data regularly can support owners to make informed decisions about where to focus resources and energy.
What is financial data analysis?
A financial data analysis reviews the business’s financial performance. The most common way to do this is by looking at the business profit & loss statement and balance sheet. With programs such as Xero, MYOB and Quickbooks, business owners can easily track their financial data.
These programs also allow you to compare your current year’s performance against the previous year. This enables you to see where you have improved and where you may need to focus.
However, a more comprehensive way to see how your business is performing is to compare results against other businesses in your industry. You can do this with a benchmark report.
What should an owner analyse when looking at financials?
It’s important to note that business owners should analyse different financial metrics pending their industry. For example, a retail business may look at gross profits and the cost of goods sold. Whereas a GP practice may focus on earning per practitioner.
Whilst these areas may vary, all business owners should analyse the below five performance metrics.
1. Profit Margins
There are two key profit margins on a profit and loss: gross profit, and net profit. All owners should track their net profits and industries that track the cost of goods sold should also track gross profits. You can calculate your net profit margin with the following formula:
| total sales income-total operating expenses | x | 100 |
| total sales income |
2. Productivity
It’s important for all business owners to understand how productive their employees are. This insight can help owners to determine if they need to hire more people, undertake staff training or work with employees to streamline processes. A simple way to calculate this is to look at the employee wage to income ratio:
| employees wages and salaries | x | 100 |
| total sales income |
Tracking this ratio annually demonstrates if employee productivity is increasing or decreasing.
For businesses using assets, such as manufacturing, you can also track how productive your assets are by reviewing your asset turnover. This will show how efficient the business’s assets are. The formula to calculate the asset turnover is:
| net sales income | x | 100 |
| total assets |
3. Measure Against Business Objectives
Financials should be measured regularly against the business objectives. This way owners can see if they are on track to achieve their business goals or if they need to refine their strategy. When setting business objectives, owners should always set SMART goals.
4. Business Value
Business value is often omitted from regular financial data analysis – but it shouldn’t be. Knowing the business value can support an owner to make long term strategic decisions and establish a successful exit strategy. There are many formulas for calculating business value. We recommend using a range of formulas and finding the average of all approaches. You can see more about our Business Value Report and Analysis here.
5. Industry Benchmarks
Whilst analysing internal financial data will provide some insights, comparing the business results against competitors will provide a true picture of the business performance. Benchmarking can help identify where a business is excelling again competitors, and where it needs to focus.
5 reasons business owners should do financial data analysis
There are many benefits of undertaking a financial data analysis. Our top 5 reasons are:
There are many benefits of undertaking a financial data analysis. Our top 5 reasons are:
1. Knowing Where To Focus
In business, data analysis should provide owners insights so they can make data-driven decisions. This means, using insights to decide what areas the business should focus on. These areas can then be built into strategic planning for overall business improvements. Knowing where to focus – and what goals the business is trying to achieve – can lead to dramatic improvements.
2. Leveraging Opportunities
Data analysis is also about learning what position the business is in. It is important for owners to know this so they can be in the position to leverage opportunities when they arise. These could be simple ‘day to day’ activities such as knowing how much to spend on advertising. Or, larger decisions such as company mergers or market expansions. If the owner knows their position, they can be ready for any opportunity.
3. Growing Profits
There are many ways to increase profits. However, data analysis can help identify which options will lead to the best results. This can be achieved via a profit gap analysis which looks at what high achieving businesses do best. Improving profits can be both about increasing the dollar amount and improving the profit margins.
4. Owner & Employee Happiness
Can data analysis make employees happy? Yes it can. As data analysis can give owners goals and focus, it can do the same for employees. It is well documented that when done correctly, goal-setting can help improve employee engagement in a way which elevates performance and benefits organisations.[i] Employees also want to know the purpose of their work and why goals are set. Data can provide all this and give teams both a focused and happy environment.
5. Stakeholder Engagement & Buy-In
Data provides proof for ideas. This is vital when talking to investors, board members and other key stakeholders. Using financial data analysis, owners can build sound arguments to gain buy-in. As put by W. Edwards Deming, ‘without data, your just another person with an opinion.’
Can I use data analysis tools to further analyse financial data?
Our Benchmarking Suite simplifies the data analysis process. With our tool, you can anlayse your client’s performance, as well as benchmark their results against industry competitors. You can see an example of data anaylsis here with our sample report.