2b. The Use & Limitations of Financial Information to Businesses

How can a business use financial data?

• To identify trends and make calculations for comparison over time and with other businesses

• To support an application for external finance such as a loan

• To attract potential investors

• To support spending decisions

What are the limitations to the use of financial data in decision-making?

• Different interpretations of data

• Data becomes out of date quickly

• Qualitative factors are ignored

How is different interpretations of data a limitation to the use of financial data in decision making?

Statistical information can be interpreted in different ways

• e.g. raw data may show a sharp increase in sales but when compared to competitors this increase may be less impressive

Financial data can be window dressed (presenting financial data in the most positive way) to present a positive impression of performance

• e.g. a business may announce that 80% of customers would recommend a product to a friend without acknowledging that 1 in 5 customers would not

How is data becoming out of date quickly a limitation to the use of financial data in decision making?

By its very nature financial data relating to sales, costs and profit is out of date as soon as it is generated

• Using financial data to make decisions relies on future performance to be at least broadly similar to past performance

How is qualitative factors being ignored a limitation to the use of financial data in decision making?

Businesses measure their performance against a range of financial and non-financial criteria

• e.g. businesses that aim to be socially responsible or behave ethically may find it difficult to measure their successes in these areas in statistical terms