When it comes to financial decisions, your gut feeling is the worst advisor you can rely on. Many people who base their financial moves on intuition end up in failure.
It gets worse when it comes to business finances. Cash flow is the backbone of every organization, and mistakes in the financial sector can be catastrophic. It’s no surprise that 82% of businesses that fail can attribute it to cash flow issues.
In this digital age, businesses have access to limitless amounts of data. While most of these are collected passively as a by-product of day-to-day operations, some are collected through surveys, financial data providers, and other active means.
Organizations that have learned to harness this data and utilize it in their decision-making process have seen numerous benefits.
This guide discusses the importance of basing your organization’s decisions on analyzed data and some of the steps you can take to establish a data-driven culture.
What is the Importance of Data in Financial Decision Making?
The finances of an organization are not something you should gamble on. Taking into account available data will give you a clear picture of where your business stands and help you chart the right way forward.
Here are some reasons you should rely on financial data analysis to drive your business decisions:
Data Improves Visibility
How would you feel in a passenger seat going at full speed in the dark without lights on? Well, that’s precisely what your business feels like when you make financial decisions on a whim.
When operating without data, you will solve problems that don’t exist, making matters worse. For instance, you could blame low productivity on low employee salaries when the real issue is the lack of proper equipment. While increasing their salaries may motivate them to work harder for a while, it will not solve the underlying issue, and the problem will persist.
With insights from a financial data analyst, the manager has a clear view of the organization’s aspects, empowering them to make the best and most accurate decision.
Determining and Mitigating Risks
Risks will ever be present in the business world, and the only hope of staying successful has suitable risk mitigation measures in practice. Mitigation requires that you do your best to anticipate possible risks and prepare to react in case things go wrong.
Forewarned is forearmed, and establishing and predicting the risks before they occur is the only way you can deal with them accordingly. You have a better view of financial risks such as credit risks, market risks, operation risks, and liquidity risks with data. You will therefore be better prepared to take the necessary mitigative measures.
Identifying and Managing Costs and Revenues
An essential part of managing your cash flow to stay afloat is balancing your costs and revenues. Past financial data exchange such as receipts and invoices will give you a better view of where your money is coming from and going. It will, therefore, be easier for you to identify measures to help you improve your revenue while minimizing your expenditure for maximum effectiveness.
How to Achieve a Data-Driven Financial Culture?
As much as financial data decision-making is critical to the success of any organization, making your company data literate requires drastic changes and a lot of hard work. However, the benefits of attaining a data-driven financial culture are well worth the hustle.
So, how do you transform your organization to one that leverages data to make financial decisions?
Start At the Top
In any enterprise, the leaders are the most potent forces in influencing the organization’s culture. For a data-driven culture, the managers should expect that all decisions are anchored in data.
When faced with a dilemma or choosing the following path of action, every organization member will use the collected and analyzed data as the main point of reference.
Invest in Analytics Tools
Given the amount of financial data, businesses are exposed to daily, it is impossible to collect, analyze and organize data manually. Without analytics tools, most companies only use a fraction of the data available to them, missing out on many benefits.
The analytics tools streamline the financial data management process and make it hustle-free. Managers will better view the organization’s data with analytics tools, making it easier to mine it for valuable insights. The final product is highly organized data that managers and other organization members can easily leverage to make decisions.
Improve Data Literacy
For a data-driven culture, your team members need to be data literate. Contrary to what most people think, you don’t need to be a financial data analyst with advanced programming skills to be considered data literate. They only need to understand the role of data and how to leverage it for decision-making.
You should, therefore, ensure that your team members are trained on the basics of data management and the importance of data. As such, it will be easier for them to appreciate the role of data in shaping the company’s future.
Use Only What you Need
The data collection, analysis, and storage processes come at an extra cost to an organization. Therefore, for maximum cost-effectiveness, you should work to identify the kind of data you need to inform future strategies and avoid the rest.
It will be cheaper and easier to perform analysis and develop helpful insights with a manageable data set.
Avoid Data Bias
When collecting data, you should be careful about the kind of data you choose to work with. While you don’t want to overburden your departments with silos of useless data, you also don’t want to miss out on critical sources of insight.
For most managers, confirmation bias is a significant issue, where they only focus on data that supports pre-existing assumptions. The result is that they tend to ignore harmful data that reflect poor performance.
The importance of a data-driven organizational culture cannot be overstated. At Bizbuzz, we shape the future of businesses by collecting and providing valuable insights from professionals to shape their decision-making process.
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