How Can Data Analytics Enhance Financial Decision-making?

Financial analytics

A lot of people base their financial decisions either on impulse or on necessity. This is one of many mistakes people make with their personal finances, but it doesn’t end there. You would be surprised at how many entrepreneurs involve little to no strategy when it comes to financial decision-making.

The truth is that the only right way to do this is to make sure that you first harvest and then process all the right data. With that in mind and without further ado, here are several ways data analytics can enhance your financial decision-making process.

What Is a Gut Feeling?

The first thing we need to address is the concept of gut feeling and what this actually is. You see, your memory processes data even when you’re not aware of it. A situation you see will remind you of a previous situation. If this previous situation ended badly for you, you’d feel the reluctance to repeat the same steps as before. If it ends up favorably, it will be hard to persuade you that this is not a good idea.

Intuition, therefore, also relies on previously collected data. However, it does so in a highly unreliable way.

First of all, the amount of data you’re basing your decision on is minuscule, making it unreliable. What does this mean? Imagine a scenario where you fall and injure your knee the first time you get on a bike.

What will happen if you start drawing conclusions and statistics based on this one injury?

  • First, you will draw a conclusion that you have fallen 100% times you rode on a bicycle.
  • Second, you will conclude that you have failed to complete the initial aim (every single time).

Based on these stats, you will conclude that the injury is inevitable and success impossible.

To make matters worse, a similar thing would happen with the first several instances. This means that drawing conclusions based on one or two situations is equally misleading. In other words, you need vast amounts of data, and you need proper tools for their interpretation.

Professional Assistance

While technically you would be able to keep track of everything that goes on in your company’s financial life, it’s far more reliable to hire professional services. Outsourcing accounting is something that companies have done for a while now, and it’s definitely not a bad idea in your case.

However, today, you have an option of looking for advanced accounting services that already involve financial record-keeping (as a basis for future data analysis). With the right tools and professionals to examine this data, the result of this process will be far more consistent.

The level of accuracy provided by experience in the field is simply impossible to replace. Also, specialized tools make all the difference. While not that dissimilar to regular data analysis, financial data analysis requires more finesse. With so much on the line, it’s hard to ignore it.

It’s Not Just for You

If you’re not running a sole proprietorship, chances are that the results of this financial data analysis will have a far greater value than you think. For instance, you will be able to present the data to your partners and potential investors. This means that, when used properly or integrated into a presentation, it can become a serious tool of persuasion.

Keep in mind that when processed through high-end analytical tools, the data will be represented in a graphic manner and be structured so that it is easy even for a layman to understand. Seeing as how the majority of organizations are already cloud-reliant, sharing these funds will be incredibly simple. This means that it will be quite easy to get your team and your partners on board.

Understanding Value Creation

The only way to make your money-making ability more reliable is to understand the forces behind value creation. Three factors that play a crucial role here are:

  • Financial factors
  • Operational factors
  • Market
  • Competitors

Without understanding them, you risk missing market trends and getting outcompeted by agencies that actually control them.

The financial world is constantly evolving. Meaning that getting real-time information makes a difference that allows you to adapt in time. It means picking up new financial implications in time to adjust to their real meaning. A couple of extra weeks or even months can provide you with a serious competitive edge. Still, making this kind of accurate prediction without proper data analysis is inconsistent, even luck-based.

Identifying Fraud

The key to reliable analytics is that it works within a well-established system where people follow certain rules. This means that any anomaly would be detected quite easily. It would be a lot easier for you to diagnose damage caused by this fraudulent/negligent/incompetent activity.

Understanding that there’s something that you’ve missed in the past and knowing exactly what it was could help you prevent similar mistakes in the future. In other words, we’ve talked quite a bit about how financial forecasting can help you prepare for the future. One of the ways to do so is to minimize the chance of repeating mistakes of the past.

Sustainable Business Model

Running a sustainable business is one of the best ways to ensure that your enterprise actually has a future. You see, rules, regulations, and compliances are evolving, as well. This means that it might not take long until the grey area that you’re currently operating in becomes a black zone.

What you need is to learn how to think years and decades in advance. Otherwise, you will be forced to pivot before you know it. With the help of data analytics, you can make necessary predictions that can give you an edge. This way, you will have a head start to prepare for what lies ahead.

In Conclusion

The point of enhancing your financial decision-making with data analytics is to make your results more consistent. This way, you’re eliminating the element of luck-based outcomes and gambling-like behavior while running your business. As such, it facilitates growth, makes you more competitive, and ensures the resilience of your enterprise.

 

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.