Today’s article is written by my business partner, Dan Bowser. Together, we’ve created a company called BusinessCashPulseTM, which provides business intelligence tools for growing businesses.
In his other life, Dan runs a company called Value Insights and for the past 25 years, he’s specialized in business valuations, mergers, and acquisitions.
A friend recently complained of “information overload.” As he described it, he had so much information about his business that he could not sort through it all to make sound decisions. At the risk of quibbling, I suggested his problem was not a surplus of information, but rather he was suffering from “data overload.”
What is the difference, if there is a difference? Data is used as a synonym for information in everyday language. However, in the exact sciences there is a distinction between data and information. Data is a measurement. For example, the temperature is 40°. That qualifies as data because it is a measurement of temperature. However, it is not information.
Information is the result of gathering, processing, analyzing, and interpreting data in a way that is useful to the user. Information requires a context in which it is to be used. In the preceding sentence we have a piece of data, but it is not very helpful. For example, we don’t know whether the temperature is measured in Fahrenheit (“F”) or Celsius (“C”). This is rather important since 40° C is 104° F while 40° F is 4.4° C. Adding the scale may increase the sophistication of the data, but context is needed to convert it to information. Perhaps you are preparing to go out and want to dress for the weather. At the moment you pose the question of appropriate dress, the data becomes useful. It becomes information.
This distinction is important to business people who want to create and build a successful business. The common financial statements (the Balance Sheet and the Income Statement or P&L) are chock full of data. The fact that sales were $1 million last year is interesting, but, in and of itself, it is not helpful. Knowing that the Gross Profit Margin (“GPM”) is 33% is data, not information, because we have not yet put it into a context to be useful.
Let’s add an additional piece of data. Research reveals that the average business in the same industry has a GPM of 50%. Suddenly our two pieces of data become information. We can analyze and compare our business against a known standard (other businesses like ours). We now know that our business generates significantly less gross profit than the average. We have information that our business is less profitable, at least in this one area of measurement. This information is helpful because it replaces a vague feeling that something isn’t quite right with identification of the problem area. Knowing the general nature of the problem directs our attention toward steps to correct the problem.
Additional research indicates two typical causes of a low GPM. The first is setting prices too low and the second is failure to control waste and theft in the delivery of our product or service. Further analysis reveals that we confused margin with markup and priced our goods lower than intended. The problem was discovered and the solution applied because we refused to stop at data collection and went in search of information.
This example is simple. However, it is totally valid in its application. As a business owner or manager, you must constantly seek information that will help you survive and thrive. Advisors and software programs typically provide data. Your job is to ask what it all means. How can you use the data to create information? You need to make strategic decisions for your business and that requires the best information you can get. Data will not do the job.
Recognition of the need for useful information is leading entrepreneurs to develop strategic planning software that converts your financial statement data into information. We’ve done just that. So, if you are looking for how to use your financial data to make more money and keep more of what you make, take a look at BusinessCashPulse.