3 Financial Datasets Critical to Small Business Success

Small business needs to integrate financial datasets to adopt in the data-centric tech market

Financial data analysis is essential to small business success. A recent survey by vcita revealed that over 80% of small business owners manage their finances alone, and over 97% see financial literacy as important. What's more, vcita's survey revealed that over 72% of SMB owners operate under the guidance of a planned budget, with 40% indicating their budgets are highly detailed.

Such high levels of financial literacy – or at least financial literacy awareness – among SMB owners should come as no surprise. As business environments become more complex, though, data analysis is critical to remain on top of business finances. Revenue streams are changing, and data offers an easy way of overcoming obstacles in analysis.

Here are three financial datasets that are especially critical to small business success, along with the role that data analysis plays in offering insights.

Cash Flow

Cash is every SMB owner's biggest concern. While plenty of business leaders and finance pros focus on profit and loss numbers, small business owners understand that their companies cannot survive without cash.

The vcita survey found that nearly 61% of small business leaders say they understand their cash flow, and over 77% say they know how to read a balance sheet. Cash flow analysis deals with understanding inflows and matching them to outflows, so an imbalance in this equation reveals the need for critical business decisions.

Most small businesses face seasonal variations in revenues, whether they're selling goods or services. For instance, the holiday season leads to a flush of cash for small retailers, while summer is a low sales period. The issue small retailers face is stocking up in the fall right after they've emerged from a low cash flow period.

Should the company borrow funds from the bank or alternative lenders? How will interest rates affect cash flow and expenses? Will working capital levels remain adequate? Smart cash flow analysis helps to answer these questions. Data analysis can even model cash flow fluctuations and help owners determine the cash buffer they must have on hand to mitigate emergencies.

For example, business owners can prepare for the fall stock-up season in spring by setting aside a cash reserve that could eliminate the need for financing. However, this decision will reduce the availability of cash for other areas of the business. Data analysis helps SMB owners model the negative impact and opportunity cost of every decision.

Funding Costs

The lion's share of SMB owners seeks funding at some point in time. However, under half of the vcita survey's respondents said they're aware of their own business' credit scores.

The good news is that SMBs have several funding options. The bad news is that evaluating these options is tough. Interest rates and terms vary significantly, and SMB owners find it challenging to narrow down their options.

Data analysis plays a small role when choosing the right option and a huge one when evaluating the impact of funding choices. Calculating the cost of capital is an important exercise that every SMB owner must execute. For instance, is the cost of a bank loan higher than a loan from an online lender?

Approval times play a significant role, too. Traditional bank loans can take a long time to receive approval, while online lenders generally clear applications within a few days. The opportunity costs of waiting for longer might increase costs, even if the bank offers lower interest rates.

These days, small businesses can access alternative funding routes such as crowdfunding as well. These options are essentially pre-sales, but they come with significant marketing costs. How will these costs impact the business's balance sheet? An accountant might classify these expenses as marketing and research, but an owner will think of them as the cost of doing business.

Data analysis can reveal the cheapest funding options, in the long run, allowing business owners to reduce their cost of capital. Evaluating this number is crucial since it doesn't show up on any accounting statement. Yet, the cost of capital's impact on working capital levels is significant.

Data analysis simplifies evaluating the pros and cons of each option, helping SMB owners choose the one with the lowest opportunity cost.

Expense Minimization

Expenses are a natural part of conducting business. However, some expenses can be avoided or lowered. The cost of raw materials is an essential expense, whereas a company vehicle is not always essential. Expense minimization is a critical task for every SMB owner, with nearly 10% of respondents to vcita's survey saying that they struggle to cover expenses.

Digital tools these days help SMB owners centralize their expense reporting and automate approvals. For example, virtual credit and debit cards help owners allocate money to expense categories, giving them a clear picture of cash outflows ahead of time. Expenses in these categories are pre-approved, removing the need for clerical work.

These cards also offer SMB owners a wealth of data. Which vendors account for the most expenses, and what is the ROI on those spends? How are employees spending the company's cash, and are those spending justified? Data analysis reveals trends that could mitigate risks such as overspending or double-spending before they arise.

Expense projections will also help SMB owners create accurate budgets. Every budget needs a tolerance limit that accounts for miscellaneous expenses. However, if a business routinely blows past its tolerance levels, the quality of expense data or analysis is poor.

Data Is the Key to SMB Success

Small business owners are financially literate and understand the importance of remaining on top of their cash. Data analysis helps them wrestle with the biggest challenges they face, helping them increase their margins and profits.