Making Business Decisions Based on the Numbers
The science of analysis does not come easily for everyone, but it’s an essential skill to acquire if you want to do the best you can for your business. While analyzing ratios and statistics can be a tedious undertaking, it holds the keys to seeing the “truth” about where your business stands, without your emotions coloring your vision. Although a good entrepreneur will have to go with their gut at times, using the numbers to inform your decision-making process can help you avoid making mistakes that stem from your biases.
Numerical data can be a window through which you view the business environment and your position within it. While you may be able to use news reports and press releases to gain an understanding about what each company in your field is doing, these sources are often heavily biased and worded in a way that seeks to influence the behavior of investors and customers. However, a company’s quarterly statements are an accurate way to determine how well they’re really doing, rather than how well they want you to think they’re doing. Your own employees may also seek to overstate their success, but you can easily determine the truth of the matter when you have the company’s accounting sheets in front of you.
The degree to which your organization will make decisions based on the numbers will depend on factors such as size, competitive environment, and the specific demands of the industry. If you’re running a greasy spoon diner in a small town you won’t be relying on the numbers nearly as much as the CEO of a tech startup, but all business owners make decisions based on data, whether or not they realize they’re doing it. The budget and revenue sheets are examples of decision-making data that are implemented at the lowest levels of business.
The activity of making decisions based on the numbers is sometimes called Data-Driven Decision-Making, or D3M, and it’s a well-established business process. D3M can be implemented on a daily basis, becoming a fundamental business activity. Depending on the size of your business, the use of data can be implemented at all levels to drive decision making. Managers throughout the organization can use data to set targets and decide what activities to undertake from day-to-day, and employees can use it in the form of quotas and other numbers that guide their behavior. The complexity of such numerical analysis systems vary from simple setups like Mint.com, which show where the money is coming from and going, to full-service packages that produce figures for esoteric things like future sales projections and process capacity utilization.
The degree to which your company needs to be based on these figures is a matter of personal preference and leadership style. While everyone can benefit from analyzing their figures here and there, basing your business on the process is time consuming and can potentially be expensive. Obviously, the size of the business comes into play here; in bigger companies where leadership can’t keep track of everything themselves, computerized data management can be a near-necessity. However, it’s still possible to run a small business with pen and paper accounting.