“Data is the difference between being lucky and being smart.”
Many fast-growing companies seek to be a data-driven enterprise. It’s easy to understand why – every day we hear about examples of great companies employing sound data practices to drive rapid growth. The problem for emerging companies is getting the right data at the right time to make informed decisions. Entrepreneurs are overwhelmed with too much data, too many systems and too little time to distill data into knowledge that can be monetized.
Companies that are truly data-driven have a competitive advantage. Small companies have access to data today that was unthinkable a few years ago. What you cannot do is avoid data – you will lose in the marketplace. If you feel your business data is not telling you what’s really happening then read on to see what you can do to be better informed.
Is Your Data Good?
The #1 complaint of our customers is bad data. Sometimes the data really is bad. Often, the issue isn’t the data itself, it’s that data from two different systems seems to be telling a contradictory story. For example, sales data in a point-of-sale system doesn’t line up with sales reported on a financial statement. There are actually sound reasons why this may be happening, but without spending time to reconcile the two systems users may simply dismiss the difference as bad data.
Maintaining good data requires three things:
- Software to automate data processing and report a single source of truth
- Sound processes that post accurate data, then catch and rectify errors
- Trained staff
Software will only be as good as the people using it and the processes developed to maximize its effectiveness. To maintain data integrity you need systems that are cross-functional, have built-in error checking and are redundant. Cross-functional teams allow members to validate data both for their area and others (think sales vs. collections). Error checking can be automated through exception reports that kick out data anomalies automatically. Redundancy is a regular review process, such as a month-end financial close, where deeper reviews are performed to validate data. We’ve seen companies with this setup use their data with devastating effectiveness.
Keep Track of the Right Data
Data changes. Metrics that were tracked before may not matter anymore. Don’t just track data because it has been tracked before. Instead, research companies in your space that are really leading the market and see what data they track. If they are a publicly traded company, chances are they’ll tell you in their annual report (10-K) where they report Key Performance Indicators. For privately held companies, there are places where you can get financial scorecards that show KPI performance against peers for a specific industry.
What Your Data Should Be Telling You
Early stage companies need data to prove that their business model is sustainable. For these companies there are only three metrics that matter: sales growth, profitability and cash flow. If you are overwhelmed where to start, then begin with these three. What you want is regular reporting over time so you can detect patterns. Eventually your analysis will become more sophisticated… you may start to slice sales data by customer, channel or product. You can create a financial plan to track actual vs. budget.
Effectively Analyzing and Reporting Data
The most popular and simple analysis is a trend analysis. For example, plot monthly sales for the past 12 months and see what that graph shows you. Update each month to see a rolling 12-month trend. Is there seasonality to your business? Is the trend generally up or down? If you see any spikes in the trend, drill down and understand why. Perhaps the company ran a sale or got favorable press coverage. We want to see causality: something the business did that proved it increased sales, profits or cash flow.
The next analysis we often see is a comparison to a prior period. This is useful to isolate a specific period and then see what changed. For example, an increase in sales during holiday season could be the result of many things: new products, deeper discounting, or new distribution. Find out what the drivers of change were and then determine how much cash those drivers added to your business.
Communicating data analysis can be done very effectively using management dashboards. Some companies dump data into Excel and prepare a weekly management flash report. We did that, too, until we discovered web-enabled dashboards. We put our customers on a cloud-based general ledger system that allows us to customize dashboards and make them readable through any device connected to the internet. They get the latest info when and where they want it.
Accurate data provided in the right context at the right time is what drives sound decision making. Data alone won’t do it… data informs management who then discuss and question the data to arrive at an economically logical decision. Many entrepreneurs built successful companies using his or her “gut feel.” While this is effective during a company’s earliest stages, rapid scale will require more sophisticated data collection and dissemination in order to continuously improve financial performance.