Learning Outcomes
By the end of this section, you will be able to:
- Describe the role of data in finance.
- List and describe the various types of corporate data available.
- Explain how the various types of corporate data can be accessed and analyzed.
- Describe the impact of data digitization.
- Explain how stakeholders use data when making decisions.
Importance of Data
Financial data is important for internal and external analysis of business firms. More accurate and timely data
leads to better business and financial decision-making. Financial budgeting and forecasting rely on the
creation of several types of financial statements including income statements, the statements of cash flow,
and balance sheets, as well as the notes and assumptions used to create the financial statements. Insiders
such as executive and middle managers use financial data to evaluate and reevaluate decision-making. Having
current and accurate data is key to making consistent value-adding decisions for a firm. Data helps inform
managers about how and when to finance projects, which projects to undertake, and necessary changes to
make regarding physical, financial, and human resource assets. “Gut feelings” and “seat-of-the-pants”
decision-making tend to be inconsistent with value maximization.
Outsiders also use publicly available data about firms to make purchasing, investment, credit, and regulatory
decisions. Customers, investors, lenders, suppliers, and regulators must be able to access a firm’s financial
information. Investors need to determine how much they are willing to pay for a share of stock, banks need
data to determine if a loan should be made, suppliers need financial information to determine if they should
supply trade credit, and customers need to know that a firm has priced its products appropriately.
Basic Data Types
Financial statements provide some of the data needed for decision-making. Firms summarize data and
develop at least three essential financial statements or reports.
- The income statement summarizes the flow of revenues and expenses over a specified period. Income
statements for publicly traded companies are available quarterly. - Statements of cash flow identify actual receipt and use of cash over a period.
- Balance sheets show the existing assets, liabilities, and equity as of a particular date.
These statements represent book values and reflect historical costs and accounting adjustments such as
accumulated depreciation. Book values often differ significantly from market values. Market values look
forward and reflect expectations, whereas book values represent what has occurred.
In addition to the internal data summarized on financial statements, firms and outside stakeholders also seek
external sources of information. External data gathering includes surveys of customers and suppliers, market
research, new product development, statistical analysis, agreements with creditors, and discussions with
government officials. Broader macroeconomic data is also valuable as it applies to expected market demand,
unemployment, inflation, interest rates, and economic growth.
The Impact of Digitization
Data digitization makes the storage and transmission of data easier and more cost effective. Some data starts
out as digital data, such as that from a Microsoft Suite product. The Excel files and Word documents we create
are ubiquitous and easily stored and transmitted. Cloud storage and video conferencing are now the norm.
Emails and Zoom meetings are quick, easy, and inexpensive ways to share and store information. Businesses
now create an e-trail, or virtual paper trail, to document, verify, and share processes. Because data is now
much easier to access, firms bear the added responsibility of ensuring that it is stored and secured properly so
that individuals cannot inappropriately alter or delete information.
Data storage has changed significantly in the last decade as companies have moved the storage of digital data
to the cloud. The advantages include only paying for the storage actually used, reduced energy consumption,
access to specialized data protection services, and software and hardware maintenance. However, the risk of
data hacks and the safety of data are key concerns in the storage of digitized information.
Uses of Data
Taken together and separately, the internally generated financial statements can provide managers with a
wealth of information to enable superior decision-making. Harvard Business School identifies six ways
managers can use financial statements.3 - Measuring the impact of business decisions such as new software, marketing plan, or product line
- Aiding in the development of budgets by creating a starting point for future expectations
- Aiding in cost cutting or the reduction of duplicate activities
- Providing data-supported strategic planning and visioning
- Ensuring consistent data and content across departments
- Motivating teams to set, meet, and exceed goals and objectives
