However idea-fueled your organization might be, entrepreneurs cannot afford to ignore the significance of numbers. Maintaining a regularly updated set of financial data and forecasts will not only provide you with a clearer understanding of your business’s performance but will also part a crucial role when seeking money from investors. After reading an insightful article by Tom Davenport, I’d like to share two essential elements to consider when reading a financial analysis.
Every set of financial analysis, no matter how thorough, relies on a certain set of assumptions. Whatever assumptions you use in calculating a financial forecast, be sure that they are realistic. That doesn’t mean you shouldn’t assume high future growth if that’s what you expect to happen. But if you’re unsure about what to assume, take a look at your competitors to see what expectations their financial forecasts rely upon. Don’t assume 20% quarterly growth over the first 3 years when your closest competitors are only projecting 10% growth during that same period of time. When you’re unsure about what will actually happen, it might make sense to perform a sensitivity analysis based on a range of assumptions.
Financial data should be compiled into charts as a way to visualize your numbers. Know your data well enough so that you can explain how it is distributed on any given chart and explain the distribution as it relates to your business. When reviewing data distribution, be sure to peruse for any correlations that exist between variables. Perhaps there is a significant pattern or trend occurring that enables you to anticipate future numbers. Also, identify any outliers that slant your otherwise consistent data distribution. Finally, put your distribution analysis into words so that you have something to reference in the case that you blank while presenting a detailed chart to a board room.
What variables does your small business consider paramount to its financial data analysis?