Is a sufficient understanding of data present across your organisation?
Working with data can seem daunting for some business leaders who feel inclined to delegate these tasks to their financial department. This may appear sensible but can lead to a lack of proper understanding across the company. Knowing the numbers, and why they’re relevant is important for everyone, so a collective direction and motivation can be achieved.
Much of the uncertainty that surrounds data is due to its presentation. Sheets of numbers and packed spreadsheets can be confusing, so contextualising the figures in a meaningful way can make them accessible. Adapting to a suitable method of communication is essential. The way data is reported to external agencies will always need to be consistent with convention, but this does not mean the numbers cannot be rearranged more simply for internal purposes.
Comparing figures can give them more meaning, therefore showing the variance with other numbers can be an effective way to present information. For example, listing the current figure alongside those of the last month, the last year, etc. can be useful for identifying trends and taking productive action.
The percentage variance calculated from these metrics will highlight the urgency of attention each area should receive. Rating each either ‘red, amber’ or ‘green’ (or ‘ragging’) in terms of required scrutiny, can help order your approach moving forward. Having pre-set targets for these figures is essential for this task, as this will clearly demonstrate whether goals are being met.
Ratios are another way of comparing figures, which can provide greater contextual analysis. For the majority of ratios, it’s easy to find both industry specific and more generic benchmarks for comparison. These might include:
Liquidity Ratios – these demonstrate a company’s ability to pay their short-term debts and liabilities. A business model is fundamentally sound if these are in acceptable parameters.
Activity Ratios – these validate how efficiently a business operates, calculated from how well it uses its resources to generate sales and profit. Using these to eliminate waste is vital before a business intends to grow.
Leverage Ratios – these will prove the ability to pay long-term debt, and consequently the risk a company faces. Again, these determine a company’s potential for growth, with regard to their true available resources.
Performance (or Profit) Ratios – these show the ability to generate a return for your shareholders. A successful business should have a good level of profit generated each year to underpin progression.
As important as financial metrics ultimately are, they can seem more relevant and useful alongside other non-financial figures. This could include data such as customer satisfaction ratings, which would contribute to retention and spend, or marketing investment, which would increase an organisation’s visible presence.
Internal dashboards and scoreboards can also be an effective use of data, keeping a company agile whilst removing opportunities for subjective or erratic error. Performances of departments and individuals can be monitored with greater scrutiny, resulting in more accountability and the opportunity to reward high-performing employees.
Is the data in your business presented in an accessible way? Do you (and your employees) understand how each number is relevant to the other figures? Are you utilising metrics to maximise the efficiency of your organisation?