Be a data-driven business
Small Business Guides
7 min read
Many of the world’s smartest businesses use data to measure and improve their performance. Analytics expert, Jason Andrew, explains why you should too – and says it’s not that hard to do.
Jason Andrew – Co-founder, SmartBooks Online
This guide is brought to you by Xero and our Xero partner, Jason Andrew, because we share a passion for helping businesses everywhere thrive.
Just a little research into your business can tell you how to boost revenue and profitability. By gathering the right data, you can identify opportunities, make strategic decisions, and improve business performance quite quickly.
With modern business software, it’s easier than ever to capture and analyse data. It shouldn’t even require you to do any maths. Find out how to get started.
Business owners are liars, but that’s a good thing
Small business owners and entrepreneurs lie all the time. We tell ourselves that everything is fantastic – that we’re solving the world’s problems and having fun in the process – when that’s rarely the case.
Being a liar in this way is good. Necessary, even. It helps us bounce back when things go wrong. We can lose a big contract, or our best employee, or run out of cash, and still reassure ourselves that everything is going fine.
The reality distortion field and why you need it
This sort of positivity is sometimes called a ‘reality distortion field’. It’s used by leaders to make people feel like anything is possible. Apple’s Steve Jobs was famous for it.
The reality distortion field gives small business owners and entrepreneurs the belief, confidence and sheer bravado to wake up every morning and set out to build something great.
The dark side of the reality distortion field
However, the reality distortion field can work against you. The constant optimism can become so real that you begin to delude yourself. You start to see everything through a rosy lens and reality doesn’t just get distorted, it gets destroyed.
It’s easy to get caught up in the day-to-day rush of running a business. You often don’t have the time to measure how things are really doing, so you make assumptions and estimates. And when the reality distortion field is in operation, those assumptions can be inaccurate and misleading.
You’ll have an inflated sense of growth, or you’ll underestimate the costs of running your business. When those hunches go unchecked, your decision-making can suffer. Some businesses convince themselves they’re doing great and keep running at 100 miles an hour when they should be making changes. The Australian Securities Investment Commission identified poor strategic management as the leading case of business failure.
Data can save you
This is why data and metrics are vital to your business success. The numbers are the source of truth that poke holes in a reality distortion field. A data-driven business is one that keeps it real and makes smart, well-informed decisions. They don’t have to resort to gut feel.
Any business can be data driven. You don’t have to be big. You don’t need expensive technology or mathematicians on staff. There are affordable tools available to extract insights into your business.
An example of a data-driven business
Business data can lead you to make big changes or small changes. But even the small ones can transform your business. It did for a tiny startup you might have heard of called Airbnb.
Today, they’re a powerhouse of tourism with a service that allows householders to rent out space as a hotel alternative. But they didn’t experience explosive growth from the beginning. That only came after they used data to tweak their business strategy.
The aha moment that built a superbrand
When bookings were initially sluggish, Airbnb figured it might be due to the quality of photography on the site. Hosts posted poor pictures of their homes, which didn’t entice guests. So the founders formed a simple hypothesis – “Hosts with professional photography will get more business” – and they tested it.
In mid 2011, they sent 20 photographers to take pictures of host houses. The effect of posting these attractive images was so positive that by 2012 Airbnb were doing 5,000 shoots per month. Airbnb’s founders still say this single strategy was fundamental to their success. And they got there by looking at data and doing experiments to come up with solutions.
Any business can be data driven. You don’t have to be big. You don’t need expensive technology or mathematicians on staff. There are affordable options for small businesses.
How you can be a data-driven business
It’s not hard to be a data-driven business. It’s just a three-step process:
Decide what you want to measure.
Get the data.
- Review and act on the findings.
1. Decide what you want to measure
With modern business software, you can measure just about anything in your business. Generating business data won’t be a problem. Your biggest challenge will be in deciding what numbers are actually relevant.
Think about your business goals and work backwards from there. If you’re focused on increasing revenue, for example, you’ll need to look at:
what drives your sales
the mix of products you offer
your conversion rate
Tying your business goals to measurable numbers is probably the hardest part of running a data-driven business. These numbers will be your key performance indicators (KPIs). An accountant can help to choose KPIs. In fact it’s one of the more important things they can do for you.
Just make sure that:
you keep it simple – tracking too many KPIs is hard work and it makes decision-making difficult
they’re relevant to your business goals – when a KPI improves, it should indicate you’re getting closer to achieving a business goal
2. Get the data
Getting business data used to be expensive. You had to hire consultants or use expensive technology. Now small businesses can get the information simply by looking inside their business software.
Accounting software knows your income and expenses.
Point-of-sale software knows where your revenue came from.
Inventory management software knows how stock moves through your business.
Workflow management systems understand how much it costs to execute a project.
Time-recording software knows where your wage spend is going.
For example, job management software like WorkflowMax will measure the number of steps it takes to convert a sales prospect into a paying customer. With that information, you’ll know which activities you need to start doing today to generate new sales tomorrow.
Accounting software like Xero will automatically record the number of days it takes for a customer to pay your invoice. This allows you to take an average and predict when accounts will be settled – so you can budget and manage your monthly cash flow.
These are just two examples of how common software packages can help you become a data-driven business. You might be surprised at just how much business data you already have at your fingertips. An accountant can help you pull all that data into one place and convert it into graphs and charts so you can track KPIs visually. You shouldn’t have to do any complicated maths. It’s your accountant’s job to make it easy to review KPIs.
3. Review and act on the findings
It’s no good tracking KPIs if you don’t act on the information. Schedule monthly meetings with your management team and/or accountant to review the business data. Set goals. What do you want the KPIs to say at your next meeting? When you get to that meeting, check to see if you’ve succeeded. If not, ask why? If they’ve surpassed expectations, see if you can figure out how you did it.
Data supports your decision-making but, even more importantly, it keeps you accountable. It focuses you on what’s important in your business and makes you answerable to those things. Use your accountant as a sounding board. They’ll do more than help you set and measure KPIs. They’ll also help you:
reconcile KPIs with your overall business budget
come up with realistic goals
develop strategies for improving KPIs
figure out what’s going wrong when you miss your goals
Find an accountant that supports data-driven business
If you don’t already have an accountant, look for one that knows how to use technology to set up a data-driven business. Also try to pick an accountant who has expertise in your industry, as they’re often best at finding relevant KPIs.
Keep it real
Being in business is tough and there are days where we crush it, and other days where we feel like nothing is going to plan.
Irrespective of your state of mind, business data will keep you real and accountable. If you want your business to get to the next level, start with data.