Number Crunching in Finance Defined

Most people have no doubt heard the phrase “number crunching.” It conjures up images of processing large amounts of data to make some sort of conclusion. Like crunching the numbers to determine a monthly payment on a home after accounting for mortgage, insurance, taxes and other cost to see if you can afford the monthly out-of-pocket.

But in a business context, what does crunching the numbers mean? What are the benefits and drawbacks of number crunching? And what kinds of tools are available to those tasked with number crunching?

What Is Number Crunching?

The term “number crunching” describes the act of processing numerical data. It generally refers to taking large amounts of related numerical data and organising it into a more useful format. That organising often includes running calculations and arranging data in charts, graphs and other visualisations.

Number crunching is a form of objective analysis in that it uses quantitative data from which certain unambiguous conclusions can be drawn. That might include evaluating the overall cost for a new research and development project or how to maximise the profitability of a new marketing campaign. A narrow definition of number crunching would include only the calculation and organisation of existing data. A broader definition might include steps to gather the data to be processed or the numbers to be crunched.

It’s important to distinguish between subjective and objective determinations regarding the usefulness of number crunching. For example, a sales manager may have a hunch that Alia is a better salesperson than Juan. But after crunching the numbers and comparing their sales volumes, the manager may see that Juan sells more products and generates greater revenue and profit for the company than Alia. This is an objective comparison derived from crunching the numbers.

However, the numbers alone don’t always tell the whole story. Other factors contribute to the manager’s subjective opinion that Alia is a better salesperson overall, such as customer service skills and collaboration with other company employees. Additionally, Juan may work more hours than Alia or a different shift with more likely buyers. There is usually nuance to the numbers that should be investigated.

Key Takeaways

• Number crunching is a term for processing numerical data from which to draw conclusions and provides context to business situations, decisions and results.
• Number crunching is an essential part of producing objective data.
• Number crunching is not always useful and may be harmful when making more qualitative or subjective decisions.

Number Crunching Explained

Companies use number crunching to help understand the current state of affairs and guide new decisions. Often, companies may have a general idea of how their business is operating but lack specific, actionable information. Even more troublesome, companies sometimes have a general idea of how their business operates that doesn’t match the true state of affairs. It’s not until they crunch the numbers that they can identify the cold hard facts.

For example, a company looking to reevaluate how it markets certain goods might want to consider its profit margins on sales of different quantities offered per sale. Assume it offers products in 100-unit, 10-unit and single-unit quantities with per-unit discounts for 100- and 10-unit quantities. Also, assume the company ships all sales through its warehouse to customers located all around the country.

This hypothetical company has data on how much it costs on average to ship a one-unit, 10-unit and 100-unit package and how much revenue it brings in for selling each of those quantities. The company might have a hunch about the relative profitability of the single-, 10- and 100-unit packages of its product, but it doesn’t really have a concrete comparison without doing some analysis.

Now, assume an analyst at the company is tasked with crunching the numbers on these different unit sizes. The analyst sees that the cost of goods sold (COGS) is the same per unit regardless of whether the finished products are packaged and sold as a single, 10-unit or 100-unit package. The price per unit paid by customers is highest for a single unit and lowest for a 100-unit package. But the cost per unit of sales and marketing and distribution (i.e., shipping) of those products is significantly higher for single units than for a 10-unit package, which is itself higher than for a 100-unit package. In fact, after crunching the numbers, the analyst finds that the company loses money on single-unit packages of its product.

An objective analysis based on crunching the numbers might tell the company that it should discontinue sales of single-unit packages of its product. After all, that sales revenue results in a net loss based on the COGS, sales and marketing and distribution costs per unit relative to the sales revenue generated from the sale of a single unit.

This is where companies need to be careful about how they draw conclusions after crunching numbers. For example, what if the company has a long-term marketing strategy that relies heavily on gaining new customer exposure to its products through sales of single-unit packages, which are effectively samples for customers to try out the product? This potential benefit won’t be captured in the number-crunching process unless it’s specifically identified, quantified and accounted for. In addition to factoring in COGS, sales and marketing and distribution costs, a company looking to capture the long-term benefit of the exposure from single-unit package sales would need to calculate or estimate the expected additional revenue generated from a single-unit customer. That is a challenging task. It would have to be based on some assumptions, which impacts the reliability of the conclusion.

Benefits of Number Crunching

Businesses are typically awash with data — sales numbers, market research, expenses, payroll information and more. Making sense of it all can be tricky. Crunching the numbers is a way to take all of that seemingly overwhelming data and break it down into valuable pieces of information.

Number crunching is an excellent strategy for analysing and understanding objective data. It’s essential in making data-driven business decisions. Companies can’t know the profitability of specific products or services until they collect the associated data and crunch the numbers.

Number crunching is also helpful for individual employees and managers when making internal proposals. That might include a presentation on the the business case behind hiring a new team member or rolling out a new product line.

Drawbacks of Number Crunching

Numbers alone don’t tell the story of a business, and one of the drawbacks of number crunching is that it is limited in what it can tell a company. Number crunching can’t, for example, place a precise value on the impact of negative publicity for a company or of the current state of employee morale. While there are methods a company might use to get at these numbers, such as surveys and opinion polls, these are imperfect. Companies might unjustifiably rely on them when making business decisions.

Number-crunching depends on having accurate and accessible data. For example, a company would probably love to know how much its top five competitors spend on research and development. Using that data could help determine what it should be spending on R&D to stay competitive. But that kind of competitive information isn’t readily available, as companies don’t want their competitors to know that level of detail about their operations and plans.

Using Tools for Number Crunching

Except for elementary computations, businesses and individual analysts don’t crunch numbers in their heads; they use various tools. Even relatively simple addition and multiplication are best performed with a calculator to ensure accuracy and save time. In reality, number-crunching uses more advanced computers and software than simple calculators. Depending on the complexity of the analysis, there are often specialised applications designed explicitly for crunching numbers in specific business areas, such as inventory management, accounting, finance, marketing and payroll.

Number crunching is a term used to describe processing complex data into useful values to help guide business decisions. Number crunching is an essential part of analysis, but it isn’t always sufficient on its own. Number crunching is limited by the availability of accurate data to paint a broad enough picture to be useful. There are advanced data processing software tools and applications used by companies and their staff to crunch numbers. Many of these are highly specialised for specific business functions and industries.

Number Crunching FAQs

• What industries use number crunching?

  Number crunching is helpful for and used in any industry. The term is broad enough to encompass even simple data analysis, such as calculating revenue at a lemonade stand by multiplying the number of sales by price per sale. It can also include highly complex computations, such as calculations used in high-tech industries like aerospace and finance.

• Where does the term crunching numbers come from?

  The term “crunching numbers” originated with the early days of computing in the second half of the 20th century. Mainframe computers, massive by today’s standards, would be used to process and compute large amounts of numerical data.

• What does it mean to crunch data?

  Crunching data refers to processing or calculating data. It takes enormous amounts of raw data and turns it into something useful by running it through calculations or organising it into a meaningful representation.

• What does it mean to work with numbers?

  Working with numbers is a general expression that can refer to several activities. Accountants, salespeople, engineers, mathematicians and bankers all work with numbers because their jobs require them to gather, record, track, calculate and present numerical data.