Data analytics is a big flashy catch-phrase at the moment but what is it really about?

Data analytics is the science of analyzing raw data to draw conclusions about that information. The processes used to analyze this data have been automated into algorithms and mechanical processes that help us to understand the information we have. Data analytics can help us to optimize our business performance in various ways.

Data analytics can be broken down into four key categories:

The proliferation of data and increasing technological advances in recent years have begun to transform the ways in which industries operate and compete. The explosion of data over the past few years has revolutionised financial services with the advent of algorithmic trading. But where does a small business fit into this big picture?

As a small business owner, you may not feel that you have that much data to work with but every number logged into an Excel spreadsheet or onto your accounting software has a story to tell. When put into context, these numbers have a lot to say about the successes and shortcomings of your business and being familiar with these stories empowers you to take action - to improve profits, decreases losses, and even turn your struggling business around.

Read on for 2 key ways that you can make the most of your data.

Benchmarking entails measuring the performance of your business against a competitor in the same market. Comparing your business to others is a valuable means of improving your understanding of your business performance and potential.

Benchmarking provides insight into how well each component of your business is performing, which helps you find what area need improvement, and how you might go about making the necessary changes. Let's break this down.

Knowledge is power. A sure way to act on your shortcomings begins with knowing what they are.

Figure out which areas in your business need improvement and focus on these areas. Consider your critical success factors – factors which are indicative of how well you are achieving your strategic plan or objectives. For example, you could consider factors such as cost, quality, customer satisfaction, market share, increased revenues, and service.

Benchmark some of the weakest aspects of your operation against other businesses. This can help you figure out what other businesses are doing better and how you can improve.

Look at organizations that are doing well and compare their methods to your own. Considering businesses in the same industry as you can be helpful, but so can looking at businesses from other industries. Other industries may have different ways of resolving similar problems that may be unexpectedly beneficial to you.

Once you have analyzed the data that you have gathered for benchmarking, you’ll have a better understanding of how well your organization is doing compared to others and compared to how well you would like to be doing. To make the most of this information, develop a performance improvement plan to get you to where you would like to be.

It’s a good idea to set this as a task for specific members of staff who can help with both implementation of the plan and the management of employees’ performance as it pertains to achieving your new goals. Try to set yourself SMART goals – that is, goals that are:

Using the SMART metrics when setting goals will improve the clarity, focus, and motivation you need to achieve your goals without the need for specialist tools or training.

Once you’ve implemented your new plan, it's time to review the data to see if you’ve made any progress towards your goals.

Using your accounting data to forecast the future performance of your business can be very useful when it comes to planning for what is to come. Forecasts manipulate historical data to make informed and predictive estimates regarding the direction of future business trends. You can use forecasting to determine how to allocate your budget or to plan for projected expenses for an upcoming period of time. And there has never been a time when financial forecasting has been more essential to your business than now.

During the past couple of years, many businesses have had to radically rethink their operations. 2020 was an unprecedented year and factors such as break even margins, funding requirements, fixed and variable costs, and staffing may need to be reconsidered, while your historic results may not be the best indicators of what's to come. Robust forecasting is predicated on good accounting records, up-to-date management accounts, and financial systems that produce sound information.

A forecast will also enable you to see the anticipated demand for goods or services in the future. Forecasting can also help you to attract investors. Here is some advice on how to forecast effectively:

To counter a natural inclination for optimism, it’s a good idea to look at least two different possible scenarios – an optimistic and a cautious one. To be even more prepared, you can use three different scenarios:

If you are uncertain about any major factors that could impact your business, such as new competition, government regulations, or the economy, it’s very important to consider different possibilities.

Yes, looking at multiple, different forecasts can be frustrating, but in the end, this will help you remain flexible when it comes to strategic planning and it’s a more realistic approach than pure optimism – or pessimism – which can be helpful both to you and your investors.

Usually, it’s easier to predict future expenses than it is to predict future revenues. So, a good place to start your forecast is by outlining fixed expenses, such as utilities, insurance, and rent. Following this, you need to consider costs which fluctuate alongside revenue. For example, if revenues grow by 10%, your cost of sales will likely also go up by 10%. There will likely be vacillations in these expenses, but they should reflect revenue to some degree.

Make sure to project the expenses over which you exert the most control, expenses that you could possibly cut down on if business gets tough, or expenses which might increase if your future growth exceeds current expectations. This is why having multiple forecasts to compare is so essential.

Consider each bone that compromises the skeleton of that great beast of sales, from beginning to end. Just as the spine has, on average, 24 vertebrae, your sales funnel has many individual components of which it’s comprised. Your revenue projections should filter through the entire funnel of your sales channel, not just the top-line number. You need a projection for every step of the sales funnel. These projections can then by combined to reach the top-line number.

Every forecast necessitates a certain level of assumption about things that are beyond your control. Although forecasts can be very helpful, they are not 100% accurate predictions and they rely upon a host of assumptions, some of which may be infused by implicit bias.

To avoid any blind spots, it’s a good idea to figure out what it is you are assuming and to write down a list of these assumptions, including how much the market will grow or shrink, changes in the number of competitors you have, and any technological developments that could impact your business.

To determine just how plausible your predictions are, compare your projections to the projections of your competitors. If you find it difficult to select a comparable business to your own, compare your projections to your own operating history.

Consider various critical ratios, such as those mentioned above, and compare them to other businesses or your business in the past.

If your projections include one of your ratios, for instance, gross margin, increasing by more than 10%, you might be being a little too optimistic. By the same token, if your projections look significantly higher than those of all your competitors, you might want to reconsider your forecasting. Sometimes there is such a thing as ‘too good to be true’.

Just as business isn’t static, forecasts aren’t set in stone. You need to be constantly updating your forecasts and re-evaluating your projections, taking new factors into consideration. The more current your forecasts are, the better able you will be to make the most of these predictions and make informed strategic decisions.

Over time, you will get better at working with forecasts and will be able to pick up on errors in your forecasting methods. By working frequently with forecasts, you’ll also become more confident about making future projections, even if the projections aren’t always what you hoped for.

You don't have to do this all manually though! There are forecasting tools which can help you.