Article

Analytics

How Do Companies Analyze Data? Here’s What You Should Know

Posted on April 7, 2024

By Matt Harwick

May 24, 2024

What’s the secret to big companies’ continued success over decades? The answer is financial data analysts. You can also think of them as fortune tellers who inform the companies of any upcoming financial hazard. As a result, the companies can take steps when there is still time and effectively diminish the danger. So, how do companies analyze data? Well, it’s essentially a three-step process: data collection, setting up statistical models to present them (like data visualization), and finally implementing tools for automated and error-free data analysis. As a business owner, you can benefit tremendously, if you know how this process goes. The following article can shed some light on how to collect data that will drive decision making.

Data Collection and Aggregation Techniques

The first step in data analysis is collecting it. This is a true challenge since even the moderate size businesses generate huge amounts of financial data every day.
For instance, sales, revenue, cash flow statements, expenses, payables, etc. Companies have to meticulously collect and aggregate these data to gain meaningful insights from them. Here are some of the methods they use:

Data Warehousing
You can think of this method as creating a central repository for all the integrated financial data a company generates. The repository draws the data from the business operations and various external or internal sources. Afterward, it processes the data and stores it in a readily accessible format for analysis.

ETL Processes

If Data Warehouses are the physical repositories, then ETL is the process that loads them. ETL means Extraction, Transform, and Load, which is quite self-explanatory. The data is extracted from various sources, then cleaned and mapped for analysis. Finally, it is loaded into the repository.

API Integration

The Application Programming Interface connects multiple applications in a company’s financial system and enables bidirectional data exchange. For instance, it can integrate a company’s banking platform with a third-party application. This makes it possible for companies to process payments, verify IDs, or aggregate accounts using third-party systems without compromising security.

Web Scraping

The website gets richer with data every day. Companies use tools like Scrapy or Beautiful Soap to collect this data and use it to make business decisions. For instance, if you are performing Equity Research before investing in a venture, you might scrape the web for company news, reviews, product info, inventory data, etc.

Companies might also collect Alternative Data like consumer behavior and social media sentiment to gain insights into market trends.

CRM Systems

Customer Relationship Management Systems are software that collects data on your company’s interaction with clients. They store the communication history with customers along with individual contact info.

These systems will also automate tasks like sales, marketing, and basic customer service. CRMs can provide insights into your client’s needs; thus, helping with developing products and identifying trends.

Statistical Methods and Data Visualization

Once companies have their data cleaned and sorted in the repository, it’s time to find meaning in it. Finance professionals use various statistical methods and data visualization techniques to do this. Here are some of the top methods

Statistical Methods

  • Hypothesis Testing: Companies usually use hypothesis testing before launching a high-stakes campaign. They will set a null and alternative hypothesis, then collect population representing data against them. After performing a statistical test they will compare the data and reject/accept the null hypothesis based on how much the data differs/abides by the initial expectation. Such data-driven decisions help companies avoid expensive business losses.
  • Regression Analysis: Any business operation comprises complex relationships between various dependent and independent variables. Regression analysis is used to understand and predict these relationships. Suppose, a company wants to know how much sales (dependent) they can expect against their new marketing budget (independent). Regression analysis can help them make an informed prediction and allocate the budget accordingly.
  • Ratio analysis: Various financial ratios can tell accountants about a company’s performance. These include current ratio, inventory turnover, gross profit margin, debt-to-equity, return on equity, etc. It provides an accurate assumption of the profitability of the business and returns shareholders can expect. Ratio analysis also helps businesses measure themselves with other competitors in the industry.

Data Visualization Methods

  • Pie and Bar charts: These are one of the simplest and most effective methods of data visualization to a moderately knowledgeable audience. Pie charts illustrate specific data as slices of the whole. For instance, the revenue proportion from a company’s various product lines. You can easily understand how this segment looks in comparison to your whole operation. Meanwhile, Bar charts present data in comparable rectangular bars. The length/height of the bars vary according to the value they represent. This visualization method lets you compare different categories of metrics at a simple glance. For example, you can use a bar chart to compare the expenses of the many departments in your company.
  • Gantt Charts: These are advanced bar charts that help in financial analysis by representing the project schedule. One look at a Gantt chart can reveal the deadlines of the project’s components and their interrelations. It helps companies effectively track the progress of the project and allocate financial resources accordingly.
  • Waterfall Charts: These charts present various negative and positive values in sequence or cascading format. As a result, it becomes easy to understand the cumulative effect of these values at a glance. Here, positive value can be cash inflow, revenue, profit, etc. Meanwhile, negative values can be outflow, loss, or expenses.

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Implementing Data Analysis Tools and Platforms

So, you have all the data plus the methods to analyze and visualize them. But is it humanly possible to work with such huge volumes of data with zero error and minimal time? No, and that’s why there are various data analysis tools and platforms. There are also many current and emerging tools. Let’s take a look at the top three.

Datarails

Even the least experienced accounting and business professional is familiar with Excel. Datarails is a platform especially dedicated to these users.
You can use it to automate tasks like data consolidation and reporting. And the best thing is you don’t need to learn the use of a new system. Simply, integrate your current Excel spreadsheets with Datarails.

Cube

The tool is well-known for its Accelerated Financial Planning capabilities. It can add speed to the financial planning process by automating tasks like data collection and consolidation.

Meanwhile, it can provide you with real-time insights into the aggregated data. As a result, you can make instant decisions and correct errors before their impact becomes significant.

Jirav

This tool alone is enough for mid-size businesses to fulfill all their financial needs. Firstly, Jirav automatically syncs your financial data to spreadsheets. Thus, saving the finance staff from hours of mundane data entry.

You can also easily create multiple scenarios and test them to decide on the most suitable for the company. Plus, Jirav easily integrates with all the common finance tools in your arsenal.

Conclusion

How do companies analyze data and use the insights to improve their business? Hopefully, you now have a clear understanding of the process. However, this is easier said than done.

Despite all the tools and methods, financial analysis can be difficult to handle when the deadline is closing and you have years of unprocessed data. Well, KDG’s accounting services can be of great help in such situations. Our expert team can provide tailored accounting services within the shortest time possible. Contact us if you need assistance.

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Matt Harwick is the VP of Professional Services at KDG. Matt shares his passion for user experience with clients in manufacturing, consulting, healthcare, e-commerce, education, and more. Matt leads his team to find ways to build out seamless systems that help these businesses build on their strength.

Want to learn more? Book a meeting with us today!

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