Trend analysis
Trend analysis
I’m having a hard time figuring out exactly where the business is. It feels like sales and expenses are all over the place – some real downers, then a few bright spots and then another dip and bump up. I want to keep things in line and come through this year OK. What do you suggest?
If this year feels bumpy to you, you’re not alone. We’ve seen a slow start to the year for most business owners. Many businesses saw a jump in March or April, followed by a drop and then things picked up in May or June. Many businesses are holding their own overall, or are even up, but it’s sometimes hard to spot.
Try trend analysis to see if you can figure out what’s going on. Look at year-over-year and rolling averages. Monitor both income and gross profit. Check out the trend line on overhead expenses, payroll and marketing costs. And then analyze net profit, owner compensation and tax reserves.
Graph out income and expenses for the past three years. Compare each year and look at the overall trend. Are you up or down versus last year and the year before?
If your revenue is trending down, don’t assume things will keep heading south. Put a three-month and six-month average of income onto the graph. What you’re hoping to see is that the six-month average is higher than any long-term drop in the income trend line. And you’re hoping to see that the three-month average is higher than the six-month average. That means things are headed back up.
Then look at overhead versus gross profit. Overhead is usually made up of three categories: general and administrative costs, overhead payroll, and marketing and sales costs. So long as gross profit (income minus cost of goods sold) is greater than overhead, you’ll have a positive net profit. If gross profit is less than overhead, start making cuts quickly to bring net profit back into the black.
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