Understanding the Value of Statistical Information in Business

As you learned at the beginning of this course, statistics is the science and art of analyzing, collecting, presenting and interpreting data. These methods of statistics are used in a variety of occupations, and help organizations identify, study, and resolve many complex problems. Statistics make data that is complex in nature more understandable so that managers can make more informed decisions.

Almost all businesses use statistical information to help predict the future. This is called statistical forecasting. By identifying trends, patterns, and business drivers, the data can be used to develop a forecast. Mathematical formulas are used to identify patterns and trends to lend credence to the reports. In a previous lesson on capital budgeting, you learned about this process as a forecasting exercise. It is ex ante in nature—it occurs before-the-fact. Once an idea has been quantified in terms of feasibility and cost, the next step in the process is to carry sales and cost forecasting over some reasonable time horizon. The emphasis here is on accurate forecasts of the pro-forma incremental net cash flows associated with the project. Obviously accurate sales and cost forecasts are critical to making good capital budgeting decisions.

 

 

There are four basic steps when using statistical data analysis: 

• Defining the Problem: A clear definition of the problem is required in order to gather the correct data needed.
• Collecting the Data: Data can be collected in a number of ways, from existing sources or obtained through observation such as a survey.
• Analyzing the Data: There are two categories when referring to statistical data. Those two methods are exploratory and confirmatory. Exploratory methods are used to find out what the data is saying by incorporating simple arithmetic and pictures to summarize the data. Confirmatory methods answer specific questions by using probability theory.
• Reporting the Results: Results from analysis may be reported in the form of a table, graph or percentages. Probability is a important topic when conducting these reports. Since usually a small sample is used, the reported results must reflect the uncertainty through the use of probability. Those managers that understand and can use the information effectively will be successful.

  

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