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Principles of Finance

1.3 Importance of Data and Technology

Principles of Finance1.3 Importance of Data and Technology

Learning Outcomes

By the end of this section, you will be able to:

  • Describe the role of data in finance.
  • List and describe the various types of corporate data available.
  • Explain how the various types of corporate data can be accessed and analyzed.
  • Describe the impact of data digitization.
  • Explain how stakeholders use data when making decisions.

Importance of Data

Financial data is important for internal and external analysis of business firms. More accurate and timely data leads to better business and financial decision-making. Financial budgeting and forecasting rely on the creation of several types of financial statements including income statements, the statements of cash flow, and balance sheets, as well as the notes and assumptions used to create the financial statements. Insiders such as executive and middle managers use financial data to evaluate and reevaluate decision-making. Having current and accurate data is key to making consistent value-adding decisions for a firm. Data helps inform managers about how and when to finance projects, which projects to undertake, and necessary changes to make regarding physical, financial, and human resource assets. “Gut feelings” and “seat-of-the-pants” decision-making tend to be inconsistent with value maximization.

Outsiders also use publicly available data about firms to make purchasing, investment, credit, and regulatory decisions. Customers, investors, lenders, suppliers, and regulators must be able to access a firm’s financial information. Investors need to determine how much they are willing to pay for a share of stock, banks need data to determine if a loan should be made, suppliers need financial information to determine if they should supply trade credit, and customers need to know that a firm has priced its products appropriately.

Basic Data Types

Financial statements provide some of the data needed for decision-making. Firms summarize data and develop at least three essential financial statements or reports.

  1. The income statement summarizes the flow of revenues and expenses over a specified period. Income statements for publicly traded companies are available quarterly.
  2. Statements of cash flow identify actual receipt and use of cash over a period.
  3. Balance sheets show the existing assets, liabilities, and equity as of a particular date.

These statements represent book values and reflect historical costs and accounting adjustments such as accumulated depreciation. Book values often differ significantly from market values. Market values look forward and reflect expectations, whereas book values represent what has occurred.

In addition to the internal data summarized on financial statements, firms and outside stakeholders also seek external sources of information. External data gathering includes surveys of customers and suppliers, market research, new product development, statistical analysis, agreements with creditors, and discussions with government officials. Broader macroeconomic data is also valuable as it applies to expected market demand, unemployment, inflation, interest rates, and economic growth.

The Impact of Digitization

Data digitization makes the storage and transmission of data easier and more cost effective. Some data starts out as digital data, such as that from a Microsoft Suite product. The Excel files and Word documents we create are ubiquitous and easily stored and transmitted. Cloud storage and video conferencing are now the norm. Emails and Zoom meetings are quick, easy, and inexpensive ways to share and store information. Businesses now create an e-trail, or virtual paper trail, to document, verify, and share processes. Because data is now much easier to access, firms bear the added responsibility of ensuring that it is stored and secured properly so that individuals cannot inappropriately alter or delete information.

Data storage has changed significantly in the last decade as companies have moved the storage of digital data to the cloud. The advantages include only paying for the storage actually used, reduced energy consumption, access to specialized data protection services, and software and hardware maintenance. However, the risk of data hacks and the safety of data are key concerns in the storage of digitized information.

Uses of Data

Taken together and separately, the internally generated financial statements can provide managers with a wealth of information to enable superior decision-making. Harvard Business School identifies six ways managers can use financial statements.3

  1. Measuring the impact of business decisions such as new software, marketing plan, or product line
  2. Aiding in the development of budgets by creating a starting point for future expectations
  3. Aiding in cost cutting or the reduction of duplicate activities
  4. Providing data-supported strategic planning and visioning
  5. Ensuring consistent data and content across departments
  6. Motivating teams to set, meet, and exceed goals and objectives

Concepts In Practice

How and Why Managers Use Financial Statements: The Case of Peloton

Should you lease a new car or buy one? Do you opt for the more expensive high-tech production equipment or reduce your upfront investment and pay higher labor costs over time? Is it better to finance a new product by borrowing money or selling new shares of stock? Should you manufacture overseas where the production costs are lower or in your own country where political and transportation costs are lower? Once you make your choice, how do you know if you’ve made the right decision? Understanding and applying financial principles can help.

For example, consider Peloton, the leader in social exercising with its bike, treadmill, and yoga platforms. In 2012, the principal founder, John Foley, was inspired to start the company because he lacked the time to attend bicycle exercise classes due to his demanding career and growing family. He enjoyed cycling classes, but they could be expensive and often did not fit into his schedule. He recognized that the most popular instructors had developed a bit of a cult following and that the music playlist was a critical component for many followers. His choice of the company name, Peloton, comes from the French word for a “pack of bike riders,” familiar to anyone who has even loosely followed the annual Tour de France bike race. The company name evokes a measure of mystique and prestige.

Peloton started small and underwent five funding rounds in seven years before the company went public with an initial public offering in September 2019. Foley and his friends had the idea that they were a “purposeful music company” and needed to touch on all aspects of the workout experience including the bike; video, audio, and music content; clothing design; competition among the riders; data gathering; and instructors for livestream and on-demand classes. They were selling an experience, not a bicycle. The equipment is expensive—a Peloton bike typically costs over $2,000. Peloton equips its studios with state-of-the-art camera and music systems and pays its instructors top dollar. Along the way, the founders made several critical financial decisions. They kept control of the firm by using private funding at the start.

How can we tell if Peloton has managed its resources well? The company started with $400,000 of funding to develop a prototype in 2012. By 2018, firm value increased to $4 billion with yet another round of private investor funding. As of April 2021, Peloton is a publicly traded company with a stock value of $34 billion. The executives are sacrificing profits in the short term to generate growth and long-term profitability. The firm uses its financial statements to identify sources and uses of funds, to test the effectiveness of advertising, and to forecast future profitability. Analysts like the firm, the stock price is up, and by many financial measures, Peloton has been a great success. Time will tell if the decisions made over the last several years will lead to long-term profitability or if the company has overinvested in marketing only to miss current and long-term profits.

(Sources: Viktor. “The Peloton Business Model—How Does Peloton Work & Make Money?” Productmint. Updated May 9, 2021. Accessed May 18, 2021; John Ballard. “If You Invested $5,000 in Peloton’s IPO, This Is How Much Money You’d Have Now.” The Motley Fool. June 6, 2020. Accessed May 18, 2021; Erin Griffith. “Peloton’s New Infusion Made It a $4 Billion Company in Six Years.” New York Times. August 3, 2018.


  • 3Catherine Cote. “How and Why Managers Use Financial Statements.” Business Insights. June 16, 2020.
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