In business, making decisions require something more than intuitions. People in decision-making positions need confidence. Making data-driven decisions will not eliminate risk, but being informed increases confidence and reduces guess-work.
Data helps businesses gain a competitive advantage over its competitors. These can range from understanding market conditions to improving business systems and operations. These improvements in business systems include things such as improvement in employee retention rate, and better inventory management, to name a few.
With the advantages data brings to the business table, it has become a business asset in the modern world. Because if this, it can mean the difference between success and failure.
Although data analysis is mostly done by companies who have the additional resources, our technological advances make data analysis available to smaller companies. Capturing data and data analysis is affordable that it can be done on a free cloud-based spreadsheet. Customized data processes can be created using Excel and VBA. These applications made it convenient for a small business to set-up and accessible to work on.
Why do businesses fail?
Before we can appreciate the role of data in business failure, we need to recognize the reasons why businesses fail. We will do so with the help of Robert Kiyosaki's B-I Triangle.
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| B-I Triangle by Robert Kiyosaki |
For a business to grow, it needs to fill 3 people components and 5 business components. The 3 people parts are; mission, leadership, and team. The 5 business parts, in order, are cash flow, communication, systems, legal, and product. A business has a high risk of failing if one of the parts is missing.
These parts shouldn't be taken in isolation and independent from each other. These parts are interdependent even when these are shown in a hierarchical order. A lack of communication can affect cash flow. A bad team can create a substandard product.
What role does data have in a failing business? In the world of data, leaders communicate to their teams through the use of data from the different systems. The information derived from these data, can be used to monitor the performance of systems, make correlations and monitor its effect on cash flow, produce new products, or can be used to protect the business from any legal litigations that may occur internally and externally.
How can data save your business?
For the most part, I believe that most business problems can be solved using data. Net Income and cash flow problems can be solved when you analyze inventory purchasing, sales, and costs. An underperforming team may be measured when you check the number of undertrained staff, the rate of internal conflicts or by taking note of the number of personnel absences.
Data brings insights and helps everyone be on the same page as everyone else. It can serve as a "neutral ground" where, as long as the data is reliable, any misinformation or information differences is cleared up with facts and figures.
The stories that data tell will help deal with internal issues, discover new market segments, predict potential problems from trends, or present a clear picture of the current situation of the business.
Let's explore 2 possible business scenarios and let's see how data can solve the issues:
First Scenario: Team Issues
Company XYZ's production has slowed due to an increase in employees voluntarily leaving the company. This is a concern since their employee retention rate is considered low in their industry.
A list of HR metrics that XYZ can measure to have an idea of what the problem may be is:
- Management Effectiveness: measures employees satisfaction on management effectiveness in %.
- Job satisfaction: measures the average job satisfaction rate of employees in %.
- There is a low work/life balance: measures the average job satisfaction rate of employees in %.
- Compensation Satisfaction: measures the compensation satisfaction rate of employees in %.
If one or more of the metrics are low, XYZ can try to work on it and monitor its increase (or decrease) in employee retention in the incoming months.
Second Scenario: High Revenue, Negative Net Profit
Company ABC's started expanding 3 months ago. Revenues are high, although profits are down.
In this scenario, we'll look at a couple of accounting metrics we can measure to help company ABC deal with budgeting concerns:
- Training Costs: the average cost of training per employee.
- Total Salary: total salary of employees.
- Cost of benefits as a percentage of Revenue: other employee costs such as health insurance, as a percentage of revenue.
- Inventory Purchases: total inventory purchases.
Company ABC can look at these metrics to analyze company expenditures and make necessary budgeting changes.
In reality, approaching the 2 scenarios may not be as straightforward as it seems. Different companies at different business stages that are run by different people will have different factors laid out to them that make their situation unique. Let's say for example in the second scenario where the training costs of company ABC are considered high. Aiming for a lower training cost may seem impossible to a company where training is an essential step for on-boarding.
Data may be considered a luxury rather than a priority for small business owner's, but the insights and confidence a business owner will receive should be sufficient enough to make it a priority.
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