Business Trend Analysis – What it means?

Varun Hariharan

05 Dec, 2020

Business trend analysis is the process of time-based comparison of business data to identify any consistent results or trends. One can then develop a strategy in line with the business goals to respond to those trends. In this article, an attempt has been made to apprehend how one can use historical data to analyze past trends and improve the business.

Business trend analysis

The presence of data points is not enough for there to be a trend. Instead, a trend suggests that over time, a series of independent and unique values for a variable appear to move in a specific direction. For example, the median value for a small business’ monthly food sales can increase over time. Using a line on a graph, one can show the direction of the trend. To forecast the future, one can analyze the course of change in a variable over time by graphically representing the trend.

Business trend analysis lets you understand how your company has been doing and foresee where you will be taking your current market operations and practices. If executed well, it will give you suggestions about how you should change things to propel your company in the right direction.

If the insights help you improve your company, then spending time reviewing your business results is useful. Genuine trend analysis can help to uncover patterns in the performance of your company that aren’t necessarily evident from regular performance figures. Business managers can analyze the performance of trends by:

• Making financial calculations
• Referring to ratios
• Creating tables of information
• Graphing results over a long time

Where does it help?

Business trend analysis can be used to improve the business by aiding the following:

• Identification of areas where the business is performing well so that such success can be replicated
• Identification of areas where the business is underperforming
• Provision of evidence to validate the process of decision making
• Examination of the expenses’ reports, tracing fraudulent claims if any.
• Analysis of revenue trends to check if the sale is rising or dropping for certain products, customers, and regions
• Budgeting purposes

A trend’s path, actions, and course suggest not just what happened in the past, but also what could happen in the future. The purpose of the trend analysis is to address a specific problem, such as, “Is the number of device failures increasing over time? And “Does the increase in revenue warrant adding a new (additional) production line?”.

The sequence of observations is merely a collection of a variable’s measurements procured at specific times or at regular time intervals. From these historic values, it is quite possible to derive expected values at particular points, which form a sequence of values or a trend that is progressively increasing or decreasing. Business trend analysis is a decision-making method used by leaders to direct the selection and keep a check on the risk of operational, tactical, and financial strategies^[1].

Choice of trends and results

The factors which contribute to a company’s overall success, often referred to as key performance indicators (KPIs), make a good starting point for business trend analysis.

One should look for factors that drive sales figures, costs and cash flows when selecting which KPIs to track and review for trends. For instance, while reviewing sales figures, monitor the parameters that showcase what is happening in the company, such as categories of products/services selling well, how priority products with the best margins and the best payment terms are selling, the performance record of each salesperson, how conversion rates (i.e., the ratio of leads to sales) are fluctuating.

Undoubtedly, some financial trends impact directly on the performance of businesses and are worth measuring. These include sales, cost of goods, overheads, cash flow, and net profit. Some other factors which influence the overall performance of business include the speed of inventory turnover, payment terms and debtor or creditor days, trading hours, staff numbers, costs of waste management, display area or floor space, etc.

Development of a system of trend analysis

One can establish useful information on trends by monitoring the performance of the business entity over a prolonged period. The data will then be used to optimize business decisions and strategies.

An effective trend analysis system can be setup by:

• Preparing for analysis: Determine the performance data or outcomes which you would be looking at, analyzing and comparing.
• Applying a threshold: Defines the degree at which the variance is notable. For example, any rise or decrease in revenue by 10 percent over some time should be investigated for causes. Use your judgment because you know best about your business.
• Conducting cause analysis: Investigate as to why a particular variation occurred so that you can use it for strategic planning and decision-making.

Use of proper information system

Set up a record-keeping system and procedure in place to collect accurate information to ensure that the analysis is meaningful. The business managers must communicate a set of protocols that both they and the team recognize.

To assure that reliable results are obtained, make sure the business data is collected, recorded, reported, and evaluated quickly and efficiently by:

• Keeping accurate business records such as financial information, staff hours, advertising campaigns
• Analyzing trends at critical decision points such as potential cash flow issues, peak sales periods, etc.
• Collecting information regularly with its frequency depending upon the type of data you are collecting
• Maintaining data integrity by deciding on meanings of what is included in or excluded from a given count; for example, sales of new seasonal stock and not old seasonal stock for the duration of a marketing campaign
• Storing information in a useable format such as an accounting software
• Encouraging participation of the team 

Consider benchmarking

Benchmarking is a way to assess your success against companies on a similar scale in your industry. You can benchmark nearly every aspect of your company, which is critical to your success.

Benchmarks can be created by looking both internally and externally. When there are similar-sized companies in your sector that are doing well, they may be used as the benchmark. Similarly, if there are some specific divisions/departments within the company that is performing well, they too may become benchmarks. Also, a particular duration of time (i.e. a specified financial year) can be used as a benchmark for reporting purposes.

Types of Trend

1. Past Trend Analysis
2. Recent/Current Trend Analysis
3. Internal Trend Analysis
4. External Trend Analysis

• Past Trend Analysis

One of the ways to do a business trend analysis is to review several years’ worth of performance. This shall require one to gather data and sort it by year, quarter or month going back several years, depending on how mature the business is. A young business would most likely see greater variability in results over the past three years, for example, compared to a company that has been around for many years and dominated the marketplace.

• Recent/Current Trend Analysis

Your results over six months or a year may be the most reliable predictor of the future, so take time to look at raw statistics and consider the possible explanations for improvements in your recent performance. For example, if your costs are increasing, it could be due to a temporary rise in fuel or material rates, or it could be an indication that your labour costs have risen and will remain at this point for the long-term.

• Internal Trend Analysis

One may look at departmental patterns such as sales efficiency, human resources, development, marketing, and information technology functions. Trends that can be analyzed internally include sales by region, representative, commodity, and distribution channels. They can include overhead and manufacturing costs. Many internal trends may also occur in employee costs and turnover, debt, profit margins, and gross profits.

• External Trend Analysis

Besides keeping an eye on your internal results, you should keep abreast of what’s going on in the wider marketplace. Trade groups, government departments and industry magazines are valuable sources of knowledge on business trends. One can track trends that affect the competition, such as whether or not the number of competitors is rising, where competitors are located, how they are selling and who their customers are.

Limitations of business trend analysis

There are situations where business trend analysis could be of limited use. These may be as follows:

• Where circumstances change drastically, historical data can not apply
• Annual comparison of data may not always reflect accurate business performance, as other factors (other than time-based) can majorly affect the results
• The data obtained over an extended period does not warrant adjustments on account of inflation

Conducting business trend analysis

Being the leader of a small business, one would be interested in substantial fluctuation in the median values of a range of operating and financial issues, such as monthly sales revenues, product costs and delivery times. Nevertheless, for a pattern to be measurable or meaningful, the change in the observed variable must take place regularly from one measuring point to the next.

Analyzing one trend is rarely useful, but it can be a powerful tool for business decision-making when trend analysis is combined with other business insights and knowledge.

Say, the employee turnover ratio in 2019 showed a trend of 10% in the first-quarter, 14% in the second quarter, 16% in the third quarter, and 8% in the fourth quarter. This information suggests that employee turnover has recently fallen, which is usually a positive indication. However, this alone does not tell you what effect it will have on your company. Certain other variables need to be analyzed as well to find out.

It is further provided that the employee turnover ratio in 2018 showed a trend of 3% in first-quarter, 7% in the second quarter, 5% in the third quarter, and 3% in the fourth quarter. Moreover, the employee turnover ratio in 2017 recorded a trend of 2% in first-quarter, 5% in the second quarter, 2% in the third quarter, and 1% in the fourth quarter.This information shows something more useful than the information above (of 2019) does on its own.

Although, the information indicates a positive result in isolation. But when it is compared to the table, staff turnover per quarter is exorbitantly greater than in previous years.There is an upward trend in staff turnover. This indicates an alarming situation that staff turnover is becoming a problem and the entity may need to take steps to alter the trend.

Similarly, where the company’s revenue increases in one quarter and falls in the other for several years. These may mean seasonality in the demand that the business receives for the product. On the other hand, one can use it to locate any errors. For example, a divergence of the current trend from the past may require an analyst to investigate the cause. This can lead the analyst to seek an explanation for a discrepancy.

Conclusion

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