Trend analysis uses past data in order to predict the future of your business and the environment in which it operates. It’s a simple tool you can use to assist you in planning and setting strategy for your business.
It involves the examination of business data over time to identify trends and develop strategies that are in line with your business goals and objectives. A very simple example might be to plot your sales of various product categories over the last 5 years. Which product groups are trending up, and which are trending down? Once you know that you might make some business decisions about your product lines based on the results.
Trend analysis helps to highlight the strengths and weaknesses of your business, aiding in improving areas of underperformance and maintaining those that are successful. It can also assist in industry comparisons by benchmarking against competitors, maintaining adequate cash flow and profitability levels.
The main form of measurement is known as a Key Performance Indicator (KPI’s). As the name suggests, KPI’s are performance measures aligned with the strategic goals of your organisation. To assist in developing effective KPI’s it is recommend they reflect the balance scorecard of the business, covering the following four factors; Financial, Customer, Internal Business Processes and Learning & Growth. Examples of KPI’s that achieve each quadrant of the balanced scorecard include;
- Ratios measuring profitability (gross profit margin), cost effectiveness (net profit margin) and cash flow (quick asset ratio)
- Customer satisfaction (surveys) and customer retention (number of repeat purchases)
- Internal Business Processes
- Quality control, inventory turnover and safety record
- Learning & Growth
- Employee training, turnover and skills
Once your business has identified which trends to measure, you can establish thresholds to trigger further investigation (e.g. an increase/decrease of over 15% in KPI). The business will then need to consider causation of the trend (internal or external factors) and how to manage this trend in line with the strategic business goals.
To optimise the benefits of trend analysis for your business you’ll need accurate and timely records, full employee participation and clarity of data. It’s also important to recognise that trend analysis only involves the analysis of past data and thus, is limited by its historical nature.
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Author: Georgia Burgess