All businesses have boom and bust times, months where the company bottom line rises and falls. These business wave patterns generally follow the same pattern year after year. Follow these waves in a process called month-over-month trend analysis to closer pinpoint potential marketing opportunities and plan revenue targets. By comparing the same time period in years past, you'll have a more accurate view of how your business is likely to fare in the coming months.
TL;DR (Too Long; Didn't Read)
Calculate month-over-month trends by comparing figures from the same month, year after year. For example, use past January figures to make your January revenue and marketing plans for the coming year.
What It Means
Month-over-month trend analysis takes place over a series of financial reporting periods to see if there are any unusually high or low numbers or other indicators that stand out. For comparison, the numbers in each succeeding month you’re examining can be expressed as a percentage of the amount in the baseline year. When you are making this horizontal analysis, you’ll want to compare each financial period, whether it’s a month, quarter or year, to see the changes in a company’s financial condition over time. Comparing months, however, gives you a complete picture of any trends that might be occurring, and alerts you to any potential problems.
How to Calculate Trends
To figure month-over-month trends for one month, take the difference between this month’s value and last month’s value, and divide it by last month’s value. To see a percentage, multiply that answer by 100. You’ll want to set these up in horizontal columns on a spreadsheet. You’ll want to track sales, but you’ll also want to add in the cost of goods sold, salaries and your other regular monthly expenses. List the expenses vertically, and the month or another accounting period, horizontally, so you can see the changes as you read across the chart.
These monthly trends are also excellent to monitor as you go from year-to-year. If your business is seasonal, then you’ll want to compare specific months in different years. For example, if you are dependent on end-of-year holiday sales, you’ll want to measure December of last year to December of the year before, and the year before that, if possible. If your seasonal business depends on web clicks, you can compare those in the same way. These reports can help you realize when your slow period is, which in turn, might be a good time to take a vacation. Even if your business isn’t seasonal, you’ll want to keep a record of your month-over-month reports so that years down the road, you can spot any cyclical indicators or other recurring trends.
What to Look For
You'll need to look beyond the income statement, because that may not reflect the whole picture. For example, your earnings may be up, but your company may be increasing its debt load and have less cash on hand. Seeing these changes over month-to-month periods will help your company see any negative trends going on that you don’t recognize when looking at earnings reports. If you get in the habit of doing month-over-month trend analyses frequently, then you’re likely to spot trends before they become a problem, or see what you’re doing right so that you can adjust your business strategy accordingly. What you’re doing in a month-over-month trend analysis is comparing apples to apples, so the trends will be easier to spot.
A Small Business Example
Jane Dow owns a candle shop in the mall, and she sees a large variance in income from month to month. She compares her monthly income for the past three years. In every year, her income rose by 20 percent in November and peaked with another 30 percent increase in December. Sales dropped off quickly in January, leaving Jane's business with only 75 percent of the previous month's income. Jane used these numbers to find out she needed to buy extra inventory in October when it was less expensive and cut down on inventory purchases in the middle of December. In January, she increased her marketing efforts to help make up for the loss in sales.