Trend analysis is a critical, and all too often overlooked, element of understanding what is happening in one’s business. Far too often we see that companies are looking only at the unformatted, current period financial statements. By doing so, they are missing a valuable opportunity to be educated by their financials statements about the current period performance, but also the likely near-term performance of their business.
Business cycles vary widely by industry, but typically, a one-year look by month (graphically where possible) at the key financial metrics of a business is ideal. Identifying the key financial metrics to measure is a critical step as well that shouldn’t be glossed over. In addition to a one-year look, a more detailed trend analysis of the past 3 months and a comparison to the same period from the prior year are two other great comparators and teachers. Below are some examples:
There are many ways to accomplish and view these trends including: reporting software packages (local or in the cloud), accounting software, or simply excel, to name a few. Some are better than others, but as long as you’re looking at the data in the right way, you’re learning. Here is a brief but helpful ehow.com treatise on the subject.