The Trend is Your Friend

A stock trader will know the saying "The trend is your friend". He/she knows that once a trend begins to appear it tends to gain strength over an extended period before reversing or dying. So he/she invests in the trend, whether up or down, for a profit.

Small business owners should adopt the same saying. Not only will a good trend lead to profit, but a bad trend will lead to a loss. First we should try to understand why trends gain strength over time. I believe that trends detected in business indicators are caused by underlying business practices and market conditions. These practices and conditions continue their course until someone recognizes them and finds a good reason to change them. It can take time to recognize a bad practice, more time to put a reversing remedy in place, and then more time again for the remedy to take effect. An example:

A business owner notices that profits have begun to decline from expectations over two consecutive months. He/she examines the underlying contributors of revenue and cost. The culprit appears to be rising costs, which have been rising for four months, but were masked by better than expected revenues during the first two months. So by the time the two month old profit trend was seen, the rising cost problem was already four months old. Next, costs must be drilled into to find the culprit(s). It turns out that six months before, the procurement manager began buying extra stock because of favorable volume deals offered by a supplier. While this may have been a wise move in the long run, in the short run it raised expenditures and added to inventory carrying costs. The owner stops the practice, but several recent deliveries must still be paid during the next 60 days, which means the trend will continue for another two months after the remedy was applied.

This example illustrates the imperative to carefully monitor a broad assortment of key indicators for both favorable and unfavorable trends. Why favorable? If valid, a favorable trend could be cause for celebration, and an opportunity to exploit the cause further. But it could also be problematic if, for example, revenue booking errors occurred, or bills weren't paid on time.

The more complete and accurate the data being captured is, the more can trends be compiled for viewing. I have found that the best way to view business indicator trends is in graph form. Of course, to see trends, historical data must either be saved from each prior period or constructed each time, which can take some effort.

A good way to proceed is to develop a business dashboard, the subject of another article...