Understanding how the past affects the future is a key skill for business owners, which is why it may pay to explore trend analysis methods. Similar to predictive analytics or cash flow forecasting, trend analysis uses historical data to help you understand and project future events. How does it work? Read more about trend analysis with our simple guide. First off, what is trend analysis?
What is trend analysis?
Trend analysis refers to the process of collecting data from multiple different periods (sometimes referred to as time series data analysis), before plotting the data on a horizontal line for review. By comparing data over a specific period, you can spot patterns and project future events. Putting it another way, trend analysis is based on the idea that you can predict what’s going to happen in the future based on what has already happened in the past.
How are trend analysis methods used in business?
Within a business context, trend analysis is usually used in one of two ways. These are as follows:
Investment analysis – Investors sometimes use trend analysis methods to predict changes in the price of a stock. Trend analysis can also be used as a predictor for the entire stock market, as well as for working out whether a transition from a bull market to a bear market (or vice versa) is set to occur. Because investors are more likely to make a profit when moving with a trend, rather than against it, trend analysis can be especially helpful within the field of investment.
Revenue and cost analysis – Trend analysis of financial statements can help you uncover trends and inconsistencies within your company accounts. For example, a spike in expenses in one period, followed by a decline in the next, may indicate that you may have accidentally booked the expense two times in the previous month. Because it’s such a great way to catch mistakes, trend analysis methods are often used to examine preliminary financial statements so that you can make any necessary changes before releasing them more widely.
What are the benefits of trend analysis interpretation?
There are several advantages associated with trend analysis of financial statements. Here are some of the benefits that could have the most significant effect on your business:
Measure financial performance – Using trend analysis methods to measure the financial performance of your organisation over a specific period of time can help you make better decisions regarding the future of the company. If you spot any issues or potential concerns regarding the future financial health of your business, you can alter your company’s processes to head them off at the source.
Enable comparison – One of the other key trend analysis benefits is the ability to chart a comparison between your business and a competitor, while you could also compare your company’s performance to the industry standard. This can help you assess your firm’s weaknesses and strengths, identify gaps, and implement changes to make your company a more viable proposition in the future.
Analyse liquidity and profitability – Trend analysis can help you understand your company’s short-term liquidity position, while it may also help you to measure the long-term solvency of the business. In addition, you can use trend analysis of financial statements to measure your company’s profitability over a certain period of time.
Limitations of trend analysis interpretation
When conducting trend analysis and making decisions based on your findings, it’s important to remember that trend analysis predictions are never 100% accurate. It’s also true that while past events are generally indicative of the future, this isn’t always – or unfailingly – the case. As such, it’s important to cast a critical eye over your trend analysis results and only take action if you’re sure that your reading of the market is accurate.
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