Why Bother With Trend Analysis?

Author: Larry Chester, President

The year is over. Your accountant did the hard part of creating the financial statements. You have the easy work of figuring out what they mean. But is that really the easy part?

A quick review of your Income Statement and your Balance Sheet won’t tell you about the details of running your business, and the changes you need to make. Trend Analysis is actually an important monthly analysis. Let’s understand why Trend Analysis is so important.

You know your business, and what good numbers look like. But even though you remember these numbers from last month, or even from last year, small changes in results each month will add up.

When you examine those numbers over a period of time, you start to see a different picture. Don’t just look at a spreadsheet, graph those results for the past 5 years, and see what that trend line looks like. Is it going up or down? What are some of the numbers that can identify problems under a trend analysis?

1. Sales – Don’t just look at your sales overall, look at sales by categories or items to get to the base level of your company’s activity.
2. Margin – Are some margins shrinking? Identifying the poor performers will help you decide if there are products to discontinue. Has the margin on sales from one salesperson been shrinking over the years? Is one product family significantly lower margin than the others? How does it compare to 5 years ago?
3. Inventory – Are your turns up or down? How have your inventory levels changed?
4. AR and AP Agings – Track your DSO and DPO. How have they changed?
5. Expenses – These categories are another area to review. Take some significant expense areas and graph them. Freight costs as a percentage of sales. Take a look at Payroll by department. Chart Payroll compared to sales and look at those numbers over time.

Examine these areas by sales and margin – Product Family, Item Group, Item Number, Salesman, Customer, Region

The devil is in the details. Remember that your company’s overall performance is made up of components that add up to the grand total. You need to look into the details to see which results have changed over time. Are you more or less efficient? It is the subtle change over time that goes unnoticed. That’s why a graph of specific expenses, or the detail of items can shed light on the reality of how your business operates.