Importance of Statistics in Business Decisions

Very few people have a neutral opinion about statistics. When anyone hears the term statistics they either shiver with excitement or tremble with fear. Generally speaking, people do not like statistics and therefore they try to avoid it. In reality no businessman could afford to avoid or fear statistics as it is an integral process used by business people for making important activity decisions. This tool clearly provides business with information that is necessary for making sound business decisions.

Importance of Statistics in Business

Statistics plays a significant part in successful business decisions. Any successful entrepreneur has to be especially sharp and correct when making business decisions. The entrepreneur should have a feeling for the market demand for the company's products and should therefore be able to identify what to produce products or services that will sell. The volume of sales may also be accurately estimated. Statistics will help entrepreneurs to align production according to the market demand. Utilizing business statistics the quality of the products may also be verified in a more scientific manner to save on measuring cost.

It should be clear that any business manager or entrepreneur could utilize statistical information to make high quality business decisions. These decisions could be about the location of business, the marketing of the products or services, the application of scarce financial resources or the determination of sales bonuses.

In order to illustrate the importance of understanding basic statistical concepts correctly the statistical concept, average, will be used as a basis for the explanation.

Example - Average

Most business people will probably think that using this example is to basic for their liking until the complexities of even this very well known statistical factor.

The term average can also be called the arithmetic mean of the values that are being evaluated. The mean or average, is the sum of the values divided by the number of values. In most cases the mean is the preferred measure of central tendency, both as a description of the data and as an estimate of the parameter. In business statistics this factor (average) is most often used to compare complicated data sets. It is important to remember that one cannot use averages to calculate the average of these averages. The averages should first be converted back to raw data before the average is calculated otherwise an incorrect average will be arrived at which can lead to incorrect business decisions.

Let us take the example of the sales force consisting of two sales persons. They report an average sales value of $3-00 and $10-00 per sale respectively. If the sales manager does not have access to more information and wants to calculate the average sales for the sales force as a whole he or she may (incorrectly) decide to calculate the average by adding the two numbers and dividing it by two. This calculation results in an average sales value per salesperson of $ 6-50 ($3 + $10 = 13 and 13 ÷ 2 = $6-50). This answer sounds correct if one conveniently forgets that the $3 and $10 is already the average for each salesperson.

By interrogating the sales information a bit more closely the manager could discover that the sales person with the average sales value of $3-00 made 5 sales with a total value of $15-00 and the sales person with the average sales value of $ 10-00 made 20 sales with a total value of $200-00.

Utilizing this data the sales manager should calculate the total sales and come up with an answer of $215-00 ($15 + $200 = $215). A further calculation is to determine the total number of transactions which was 25 (5 transactions + 20 transactions = 25 transactions). To now determine the correct average sales value per sale the sales manager should divide the total sales value by the total number of transactions ($215 ÷ 25 = $8-60) arriving at an average of $ 8-60 per transaction.

In order to illustrate the point further the sales manager could have discovered that the sales person with the average sales value of $3-00 made 20 sales with a total value of $60-00 and the sales person with the average sales value of $ 10-00 made 5 sales with a total value of $50-00.

Utilizing this data the sales manager should calculate the total sales and come up with an answer of $110-00 ($60 + $50 = $110). A further calculation is to determine the total number of transactions which was 25 (5 transactions + 20 transactions = 25 transactions). To now determine the correct average sales value per sale the sales manager should divide the total sales value by the total number of transactions ($110 ÷ 25 = $4-40) arriving at an average of $ 4-40 per transaction.

The difference in the answers of the correct and incorrect methodology to calculate the average value per sales transaction is significant and can influence any associated business decision considerably

A very common dimension measured in any business is percentages. Should the calculation of averages involve percentages the impact can be just as drastic if not more so.

Conclusion

For a business manager utilizing statistics to base business decisions on may appear to be excessively scientific and some may even argue that they know their business well enough not to need an endless stream of numbers to base decisions on. The facts reveal that successful business managers more often than not makes use of statistics to base business decisions on.

Utilizing statistically based facts can help ascertain the value of any given business activities. Research clearly indicates that managers who neglect to appreciate the importance of statistical analysis could easily be responsible for the financial failure of the business enterprises.

© Carl Marx