Business Statistics
Statistics help us clarify raw numbers. It involves many formulas and calculations based on a specific set of data. Some of the most basic statistics include the mean, median and mode, but in business, we are also concerned with calculating probability, linear regressions, variability and much more. The process of these methods can be confusing, even if you're good with numbers. However, the main goal of statistics is to gather raw data and process it with formulas to analyze and interpret the data. This will help you learn how to think analytically and communicate your reports.
Statistics provides some of the fundamental concepts used in running and evaluating a business. You must understand this before moving on to finance, accounting, marketing, and operations. Statistics will enable you to solve real business problems with this understanding and thinking analytical about future complex problems. Here, we’ll focus on quantitative analysis that applies directly to business functions.
Statistics provides some of the fundamental concepts used in running and evaluating a business. You must understand this before moving on to finance, accounting, marketing, and operations. Statistics will enable you to solve real business problems with this understanding and thinking analytical about future complex problems. Here, we’ll focus on quantitative analysis that applies directly to business functions.
Decision Theory
Decision theory teaches how to break complex problems into manageable parts. It sets up the necessary framework before a complex problem gets out of control. A decision tree diagram can organize the problem’s alternatives, risks, and uncertainty.
5 Steps in Decision Tree Analysis:
Here’s a quick video tutorial explaining decision tree analysis.
Cash Flow Analysis
The basis of any financial analysis is cash flow, which is often used in connection with leveraged buyouts (LBOs). The overall goal of cash flow analysis is to determine what the investment costs and how much cash will it generate each year. Simple enough, right? Cash can be used to pay off debt, pay dividends, invest in research, purchase new equipment, or invest in real estate development.
5 steps to answer this question:
We are learning about cash flow only as it relates to the cash flow statement and not profits on the income statement. Cash flow analysis is essentially determining the flows.
Please revisit the financial accounting section for a review of cash flow.
Net Present Value
The NPV technique involves valuing the cash in today’s dollars and influences decisions related to purchasing new equipment, increased advertising, hiring new employees, etc. Just remember, ‘A dollar today is worth more than a dollar received in the future’. NPV analysis takes future cash flows and discounts them to their present-day value.
Internal rate of return (IRR) is a derivative of NPV. Simply stated: The internal rate of return of an investment is the rate at which the discounted cash flows in the future equal the value of the investment today. IRR is commonly used to rank projects in an organization, but with no consideration to value gained by the project.
Probability Theory
This is a perfect explanation that can be used to understand how problems are solved through statistics. In situations where multiple outcomes are possible, the result is a distribution of outcomes, and each possibility is assigned a probability. Most statisticians will use historical data of an event to determine the probability of an occurrence happening. Binomial distribution is a well-known probability, because it involves only two choices, such as when flipping a coin; heads or tails. Binomial distribution will be used to assess probabilities for portfolio managers, sales directors, and research analysts.
The normal distribution is the most widely used distribution and is most commonly known as the bell curve. The bell shaped curve is described by two terms, the mean and its standard deviation (SD). The mean is the center and the average of the data. The standard deviation is how wide the curve appears. Other common terms are median and mode. The median is the item in the middle of the list when sorted by size, and the mode is the most frequent value in a data set. Just remember to always use intuition while looking at the data when making business decisions.
Regression Analysis and Forecasting
Regression Analysis (RA) is used to relate sales to price, promotions, and market factors; stock prices to earnings and interest rates; and production costs to production volumes. RA involves gathering sufficient data to determine the relationship between the variables. Here is a great video from Harvard Business School for a visual.
Forecasting principles follow the T equation and checking the standard variation to make sure it’s a good fit for future forecasts. Regression analysis points to both positive and negative correlations. Therefore, the T equation and R Square must be checked before making any type of forecasts. Regression performs well when determining the trend and cycles of moving averages.
Decision theory teaches how to break complex problems into manageable parts. It sets up the necessary framework before a complex problem gets out of control. A decision tree diagram can organize the problem’s alternatives, risks, and uncertainty.
5 Steps in Decision Tree Analysis:
- Determine all possible alternatives and risks associated with the situation.
- Calculate the monetary consequences of each alternative.
- Determine the uncertainty associated with each alternative.
- Combine the first three steps into a tree diagram.
- Determine the best alternative and consider the non monetary aspects of the problem.
Here’s a quick video tutorial explaining decision tree analysis.
Cash Flow Analysis
The basis of any financial analysis is cash flow, which is often used in connection with leveraged buyouts (LBOs). The overall goal of cash flow analysis is to determine what the investment costs and how much cash will it generate each year. Simple enough, right? Cash can be used to pay off debt, pay dividends, invest in research, purchase new equipment, or invest in real estate development.
5 steps to answer this question:
- Define the value of the investment
- Calculate the magnitude of the benefits
- Determine the timing of the benefits
- Quantify the uncertainty of the benefits
- Do the benefits justify the wait?
We are learning about cash flow only as it relates to the cash flow statement and not profits on the income statement. Cash flow analysis is essentially determining the flows.
Please revisit the financial accounting section for a review of cash flow.
Net Present Value
The NPV technique involves valuing the cash in today’s dollars and influences decisions related to purchasing new equipment, increased advertising, hiring new employees, etc. Just remember, ‘A dollar today is worth more than a dollar received in the future’. NPV analysis takes future cash flows and discounts them to their present-day value.
Internal rate of return (IRR) is a derivative of NPV. Simply stated: The internal rate of return of an investment is the rate at which the discounted cash flows in the future equal the value of the investment today. IRR is commonly used to rank projects in an organization, but with no consideration to value gained by the project.
Probability Theory
This is a perfect explanation that can be used to understand how problems are solved through statistics. In situations where multiple outcomes are possible, the result is a distribution of outcomes, and each possibility is assigned a probability. Most statisticians will use historical data of an event to determine the probability of an occurrence happening. Binomial distribution is a well-known probability, because it involves only two choices, such as when flipping a coin; heads or tails. Binomial distribution will be used to assess probabilities for portfolio managers, sales directors, and research analysts.
The normal distribution is the most widely used distribution and is most commonly known as the bell curve. The bell shaped curve is described by two terms, the mean and its standard deviation (SD). The mean is the center and the average of the data. The standard deviation is how wide the curve appears. Other common terms are median and mode. The median is the item in the middle of the list when sorted by size, and the mode is the most frequent value in a data set. Just remember to always use intuition while looking at the data when making business decisions.
Regression Analysis and Forecasting
Regression Analysis (RA) is used to relate sales to price, promotions, and market factors; stock prices to earnings and interest rates; and production costs to production volumes. RA involves gathering sufficient data to determine the relationship between the variables. Here is a great video from Harvard Business School for a visual.
Forecasting principles follow the T equation and checking the standard variation to make sure it’s a good fit for future forecasts. Regression analysis points to both positive and negative correlations. Therefore, the T equation and R Square must be checked before making any type of forecasts. Regression performs well when determining the trend and cycles of moving averages.
