As a business continues to operate over a given period of time, data regarding sales, customers, and profits will accumulate. Management teams can leverage this trove of insights to better understand their market and future performance. Also known as trend analysis, this will allow teams to make data-driven decisions and identify ways to meet consumer expectations. It will also help with budgeting and protecting the organization's bottom line.
What is Trend Analysis?
Trend analysis is the process of assessing historical data from different time frames to find patterns in the market. It is used to forecast future events so executives can take appropriate action and prepare. Generally, trend analysis entails compiling information and metrics and then plotting it on a horizontal line. Doing so will highlight any actionable patterns in the collected data.
The process of analyzing trends can boost visibility into different types of insights. For instance, it can help retailers identify patterns in revenue and whether sales for certain goods are declining. They can also use trend analysis to examine sales performance for specific demographics and regions. Additionally, businesses can assess trends in their expenses to see if there are patterns of fraud or other unusual activity. When teams equip themselves with this information, they can make informed decisions to safeguard and promote their business's growth.
Types of Trend Analysis
When performing a trend analysis, business teams will typically encounter 3 types of trends.
Also known as a bull market, an uptrend is when assets and markets progress in an upward direction. This means that prices of assets and stock, or the economy's size are increasing during the given period. Typically, during an upward trend, more jobs are being created and the economy moves towards a positive market.
A downtrend, often referred to as a bear market, occurs when asset prices and markets shift in a downward direction. This movement reflects the decreasing size of the economy, and prices of stock and assets. At this time, many businesses are closing their operations or cutting down production because of insufficient sales. In turn, many people will lose their jobs and investments will falter as well.
A sideways/horizontal trend line is when asset prices do not progress in any direction. Instead, they move sideways, with some moments where it goes up and then down. Sideways/horizontal trends are viewed as risky because it is hard to predict what will happen in the future. Therefore, investors will often avoid making investments when there is a sideways/horizontal trend. During these trends, the government will try to steer the economy in an upward direction.
How to Use Trend Analysis
Identifying and assessing trends can be helpful for accounting and investment analysis.
Trend Analysis for Accounting
Businesses will usually collect sales and cost data from their profit and loss statements to assess their financial performance. By plotting these metrics onto a horizontal line, executives will be able to find trends and inconsistencies in data. A retailer, for example, may discover that their spending increased in one period and quickly declined in the next. This could be reflecting a mistake, in which the retailer bought too much of one product in the first period. The company can then make appropriate adjustments to its spending and budgets.
Accounting departments of organizations will also use trend analysis to compare the different metrics in their financial statements. For instance, businesses can analyze annual sales performance and net profit to determine if their allocation of resources was productive.
Trend Analysis for Investments
Investors will perform trend analysis by using historical stock prices. This analysis will help them predict future shifts in stock prices. Generally, this analysis can be done for the foreign exchange market, derivative market, and stock market. This process involves diligently examining cause and effect relationships to understand why prices are moving the way they are. This will allow investors to find warning signs of any changes from an upward trend to a downward trend. By following these movements, investors are more likely to generate profits because they can act quickly to adjust their investments.
In Conclusion - Trend Analysis
Trend analysis involves collecting historical information and data from different time periods and arranging it on a horizontal line to assess its patterns.
Trend analysis can provide key business information regarding sales performance, demand forecasts, and spending.
There are 3 types of trend movements that teams will often find in their trend analysis. This includes uptrends, downtrends, and sideways/horizontal trends.
Most commonly, organizations will analyze trends for financial analysis and investment purposes.