A trend is a pattern in the company’s performance over time. While trend analyses are often used to determine and evaluate financial performance, they may also be utilized to highlight statistical tendencies as well. Trend analysis can be applied at any level for financial measurements and across all disciplines within the company. Typically trend analyses compare year over year performances for a given period using 3 to 5 years of data. Also, when calculating the variances between periods show the dollar amount and percentage rate. The percentage rate provides a better visual impact of the trends.
Financial analyses are the most prevalent. You should be comparing the Income Statements and Balance Sheets for critical trends. For example, if gross margin is trending down, then one of three things has probably occurred:
- Price points have eroded.
- Customer or product mix has changed substantially, or
- Costs have increased.
When analyzing the costs be sure to look at material, labor, and overhead separately. Increased material costs are usually easy to pass through to the customer, but labor and overhead increases often must be offset with cutbacks or improved efficiencies. The same holds true for Operating Income. If it’s down from prior years but gross margin hasn’t declined then SG&A, or some other expense is too high, and spending controls should be implemented.
The balance sheet is another area to analyze trends. Individually: inventory, accounts receivable, and accounts payable are accounts to track because they profoundly influence cash flow. Work to reduce total inventory dollars while increasing inventory turns. For accounts receivable and accounts payable, always make sure the Days Sales Outstanding (DSO) or the average number of days one waits to collect receivables is lower than the Days Payables Outstanding (DPO). Tracking these accounts and working towards a downward trend will improve cash flow and ease day-to-day operations.
Another area that trend analyses are beneficial to, is in sales. In addition to tracking monthly revenue numbers and striving for continued growth, you should also be monitoring product mix, market segments, and customer sales. Each of these can have different margins, and a shift in the mix can negatively affect the bottom line. Tracking them enables you to make necessary adjustments should new trends begin to develop.
Historical data is a gold mine. Take advantage of it and compare it to current performance figures. It’s a management tool that enables you to quickly see where to focus your time and attention. It’s a quick and easy way to identify potential problems before they get out of control.
At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information: