Chapter 9 – Tracking Trends

‘I believe we are on an irreversible trend toward more freedom and democracy – but that could change.’
Dan Quayle

Overview

This chapter focuses on analysing trends – such as the path of monthly sales or quarterly production. This is perhaps the core of the book with regard to understanding the numbers. With the advent of spreadsheets this analysis is remarkably easy to do, and very instructive. It gives you a good feel for what is happening to your business. It also helps you find relationships between your figures and other indicators. For example, you will be very much on top of your business if you can develop rules of thumb such as ‘a 10% increase in spending on advertising boosts sales by 2% after two months’ or ‘our sales continue rising and peak eight months after the economy starts to enter recession’. For probably obvious reasons, this chapter is also essential reading before the next chapter, How to forecast anything. Later, in Chapter 22, we return to trends, but this time from the perspective of measuring them relative to the expected levels. As you can probably infer, we are about to delve into the folds of spreadsheets again. I hope that you will try out the techniques on your PC as we work through the chapter together.

Mastering trends

If you can cope with the following steps, you can analyse any trends:

Collect monthly sales figures for several years.
Identify blips cased by one-off special factors such as sales promotions.
Isolate the trend.
Look for a cyclical pattern.
Search for seasonality.
Recombine the patterns that you have identified and see how well they match the original sales figures.
If there is too much residual noise, work through the numbers again.
Now examine each pattern in turn and try to deduce what caused it.
Look for relationships with other indicators, internal (advertising, sales promotions) and external (activities by other companies, trends in the economy as a whole).
Based on the above, develop rules of thumb that help you understand what if ... for example, if you cut prices, if you increase advertising, if your competitors cut prices, if interest rates rise, etc.