Do you know how you got to this article? Here’s what I know: you’re here because you have extraordinary intuition and business instinct. You seem to know what is going to happen. In fact, you can feel it—a gift ypu, me, and countless business owners come to rely on. You need more. You need to know how good financial data affects business decisions.
Then the day comes: “I don’t know what to do. I always know what to do.” Scary, right? That’s not going to happen if you read this article: my best step-by-step case for the value of pursuing good financial data now instead of later.
Let’s start with four essential qualities of good financial data
- timely; and
Good financial data reduces uncertainty and prepares you to take risks when you need to and plan for disruptions. So, what does it take to position your company for success? What data do you need, and how can you use it to grow with a solid foundation?
Poor financial data is the opposite: incomplete and disorganized, inaccurate or imprecise, out of tempo with near and long-term goals, and just plain sloppy. It’s an agent of chaos. Imagine if you designed and launched a rocket with bad math. Business is similar to but not as explosive, so to speak.
Look for diverse data sources
How many decisions do you make based on financial data per week? Answers will vary based on industry, but, on average, sour data saps 1% of revenue per business decision.¹
That’s a lot, so it’s okay to feel a sense of urgency, of being behind the ball. Because we’re going to make sure that you leave here today with the incentive to get your financial data right.
Here are the data sources that you need to track:
- Income/profit and loss statement
- Balance sheet
- Cash flow statement
- Cash forecast
- Accounts payable
- Accounts receivable
Bring all reasonable resources to bear if you want reliable financial data. Maybe you’ve been tracking everything by yourself, have a bookkeeper who’s doing that work for you, or a relationship with an account or a CPA. Use everything.
Good financial data affects business decisions in 6 key ways
Six positive results come from good financial data, and I’ve put those in bullet points below. So feel free to move down the list if you’re in a hurry. But for those who can spare thirty seconds, I want to introduce you to the relevant distinction: uncertainty vs. risk.
We want less uncertainty, but our aim here is not to replace it with absolute certainty. Instead, I want you to think in terms of moving from uncertainty to calculated risk.
Financial data that’s reliable, complete, accurate, and timely drives the following outcomes.
- Get a clear picture of your financial situation
- Add precision to strategic planning
- Forecast opportunities, risks, and appeal to investors.
- Maintain compliance
- Create and grow with smart KPIs
- Stay agile and adaptive to change
Here’s a little more detail on each of those points.
1. Get a clear picture of your financial situation
Good financial data provides a clear and accurate snapshot of your financial health. So, don’t rely on how you think things are going. Arm yourself with precise information about profitability, cash flow, and liquidity.
With good financial data, you can engage in a sober analysis of your strengths, weaknesses, and areas that need attention.
An accurate sense of your foundation is key for sound decision-making.
2. Add precision to strategic planning
Companies that leverage good financial data are better equipped to develop robust business strategies that align with their goals.
Again, you won’t need to rely on hunches. Instead, you can make informed choices based on data-driven forecasts.
Whether you’re expanding operations or optimizing resources, strategic planning fueled by reliable financial data minimizes risks and maximizes returns.
3. Forecast opportunities, quantify risk, and appeal to investors.
Quality financial models matter if you want to attract investors, secure loans, and be prepared to sell your company.
Use financial models to
- assess and quantify risk;
- forecast returns and opportunities; and
- determine the viability of investment and acquisition plans.
Precise financial data will help you attract backing from investors. And just as important, it will allow you to feel confident knowing you’re making the right call.
4. Maintain compliance
I’ve written before about the Generally Accepted Accounting Principles (GAAP).
If you ever plan on securing a loan or making an investment (and you will), you’ll need to comply with the 10 fundamental tenets of GAAP.
These are guidelines like the principle of regularity, the principle of consistency, and the principle of sincerity.
Besides blocking investment, non-compliance with GAAP can lead to reputational damage. It just looks bad.
You’ll need to be compliant with more than GAAP
Other standards, like General Data Protection Regulation (GDPR) or Payment Card Industry Data Security Standard (PCI DSS) matter, too (depending on your business). To be clear, the GDPR is European Union (EU) set of regulations, but states across the U.S. have adpted similar privacy regulations modeled closely after the GDPR.
Correct data reporting is essential for showing that you’re adhering to the requirements set by applicable government and regulatory agencies.
5. Create and grow with smart KPIs
You’ve probably heard of Key Performance Indicators (KPIs). They’re essential metrics that help evaluate a business’s performance against its goals.
First, it’s important to choose the right KPIs. Indicators should have the following characteristics:
- Relevant to Near-term & Long-Term Goals
Once you’ve defined your KPIs, start to work towards them.
By continually setting goals and analyzing where you went right or wrong, you can identify areas of success and areas requiring improvement. It’s a rewarding process, but it requires robust financial data.
6. Stay agile and adaptive to change
Adaptability is vital for survival. Equip yourself with the agility to respond to changing market conditions and unforeseen challenges.
If you’re tracking your financials correctly, you can identify emerging trends and potential risks and pivot quickly to seize opportunities.
Accurate financial data matters for your business
Here’s the takeaway: Businesses that can collect, qualify, and analyze data that is useful and actionable have the competitive advantage. So, when you think about how good financial data affects business decisions, think about it as a capability that separates non-scalable businesses from scalable ones.
Financial data resonates across every aspect of your business, which means you can use it to draw all those functions closer together and orient them toward a clearly-defined goal.
Contact me for help with financial data. I’m here to help.
If you’re not sure how to get started organizing or collecting your financial information, or you just want to get better at it, give me a call.
I lead a Fort Worth-based CPA firm with over a decade of experience helping businesses of all sizes.
Jeremy A. Johnson, CPA
- Finance analytics and data analysis. Gartner. 2019. Available from: https://www.gartner.com/en/finance/insights/finance-analytics