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Posted 3rd June 2024

Why Data Accuracy Is Crucial in Financial Analysis

The financial analytics market is already worth more than $8 billion, and is used to inform decisions with values spiraling into the trillions. This is impressive in isolation, but perhaps not enough to prove that accuracy is the driving force behind the adoption of the technology this industry niche represents. Rather than take it as […]

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Why Data Accuracy Is Crucial in Financial Analysis

The financial analytics market is already worth more than $8 billion, and is used to inform decisions with values spiraling into the trillions. This is impressive in isolation, but perhaps not enough to prove that accuracy is the driving force behind the adoption of the technology this industry niche represents.

Rather than take it as rote, it’s a good idea to stick around as we break down the significance of accurate data in the context of financial analysis, and the steps involved in achieving this while sidestepping common mistakes.

The Hidden Costs of Inaccurate Data in Financial Forecasting

In finance, it should go without saying that precision is a necessity. Accurate data forms the bedrock upon which financial forecasts are built. When this foundation crumbles due to inaccuracies, the repercussions can be far-reaching and severe.

The Immediate Impact

Imagine a scenario where an investment firm bases its stock purchases on erroneous earnings reports. 

The firm may overestimate potential returns and misallocate resources, leading to:

  • Losses from Poor Investment Decisions: Misinformed decisions often result in significant financial losses.
  • Increased Operational Costs: Correcting mistakes involves additional manpower and time.

Erosion of Stakeholder Trust

Stakeholders – including investors, regulators, and customers – expect transparency and accuracy. 

If this is absent, two main issues arise:

  • Damaged Reputation: Persistent data issues tarnish an organization’s reputation. And since brand equity can account for up to 80% of a firm’s market value, slips here have significant costs involved.
  • Regulatory Penalties: Non-compliance with financial reporting standards results in hefty fines.

In 2023 alone, the SEC hit non-compliant companies with fines approaching $5 billion – and while not all of the 784 incidents investigated and penalized by the regulator came down to data inaccuracies, it’s a clear illustration of what’s at stake for any companies that are behind the curve in this context.

This applies in other parts of the world as well – with a notable example coming courtesy of now-defunct UK retail brand Debenhams. It was hit with major scrutiny after it underpaid team members by close to £1 million, with payroll mistakes being fined, a settlement being agreed, and the entire organization entering administration within 12 months.

Long-term Strategic Impacts

Long-term planning suffers immensely without accurate data, resulting in:

  1. Misguided Business Strategies: Inaccurate forecasting leads companies down unprofitable paths.
  2. Hindered Competitive Edge: Organizations struggle to innovate if their strategic decisions rely on flawed information.

Using technology like DocuClipper can mitigate these risks by ensuring precise conversion from PDF formats into usable Excel spreadsheets for analysis, and this is a critical step toward maintaining integrity in your datasets. 

However, embracing cutting-edge tools is only part of the solution; robust internal practices matter too. So hold tight, as we’re just getting stuck into this juicy topic.

Implementing Data Validation Techniques

Without appropriate in-house management, even the best technology can’t prevent inaccuracies from seeping into your financial analyses, as mentioned. So what does this involve?

Establishing Clear Data Governance Policies

First and foremost, strong data governance will anchor the rest of your organization’s data management firmly. 

To get this right:

  • Define Roles and Responsibilities: Ensure that everyone knows their role in maintaining data quality.
  • Implement Standard Operating Procedures (SOPs): Develop clear guidelines for how to handle, store, and verify data.

Vanquis Banking Group put together a comprehensive strategic overhaul of its approach to data governance, including 3 core tools documenting the way data is described and stored, how it is cataloged and accessed, and the means by which non-expert users can be brought up to speed with organizational policies. 

This creates a broader framework used by the firm to cover everything from data quality and cleansing to retention and compliance.

Regular Audits and Quality Checks

In addition to properly put-together policies, frequent checks help identify discrepancies before they spiral out of control. 

This includes:

  1. Scheduled Audits: Conduct regular reviews of datasets to ensure ongoing accuracy.
  2. Automated Alerts: Use automated systems to flag unusual or inconsistent entries immediately.

If you’re keen to see how this is done by the big players, then Amazon’s extensive reporting for investor scrutiny is a good starting point.

By covering both successes and challenges, the company shows that it is aiming for transparency across its operations – including the analysis of its financial status.

Employee Training Programs

Human error remains one of the most significant threats to data integrity, with IBM estimating that imperfect data has an annual cost to businesses in the US that exceeds $3 trillion. 

Counteracting this involves:

  1. Continuous Education: Provide regular training sessions on best practices for accurate data entry.
  2. Certification Programs: Encourage team members to pursue certifications that focus on advanced data management skills. There are even masters-level certifications in data management to consider for those looking to ensure compliance, as well as career progression.

Leveraging Advanced Tools and Technologies

Investing in state-of-the-art technologies aids immensely in upholding high standards of accuracy. 

Tools include:

  1. Data Cleansing Software: Tools like RingLead and OpenRefine automatically cleanse datasets by identifying and rectifying errors.
  2. Real-time Monitoring Systems: Platforms from companies including Dynatrace and Grafana continuously monitor databases for anomalies or inconsistencies, presenting the results to you in unambiguous ways to ensure action can be taken.

This can even be applied in the case of migrating from in-house systems to the cloud – as exemplified in a case study from More4apps. It was able to help a financial services client prepare data for the move to Oracle’s Cloud ERP, dealing with duplicate entries and missing values across various disparate sources, including Excel spreadsheets. 

Wrapping Up

It’s clear that inaccurate data is costly, both in terms of reputational damage and the raw financial fallout. With analytical tools turned to precise and reliable data, these worries melt away, and real benefits can be gleaned.

Now you understand what’s at stake and how to make the most of appropriate policies and tools, the ball is in your court. Will you shoot and score, or misfire by doing nothing?

Categories: News


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