Finance, business and economics professionals use trend analysis to identify past and present patterns in the market in order to assess business performance and make forecasts regarding upcoming shifts.
This information is then used to improve strategies with data-driven decisions. Read on to discover the ins and outs of trend analysis with examples of how you can use it to make strategic business decisions for now and as you plan to grow.💡Key Takeaways:
- Trend analysis is the method of comparing an organization's financial patterns. It utilizes financial reports to forecast future performance or pinpoint patterns using historical data.
- There are three types of trend analysis in finance: uptrends, downtrends and horizontal trends. Sales patterns, expense reports and budget and expense tracking are a few examples.
- Identifying turning points can be challenging because historical data may not be available on certain data sets, such as new products or a newly hired salesperson's sales performance.
What Is Trend Analysis in Finance?
Trend analysis compares business financial patterns within an organization. It uses financial reports to forecast future performance or identify market trends using historical data records.
The process involves collecting data from prior performance records of past trends. Finance professionals use these records to plot the information onto a graph or chart to identify economic patterns. Using this technique, they identify trend lines–grid columns connecting data sets that specify market pattern fluctuations.
Three Types of Trend Analysis
You can calculate trend analysis using numerical data. Once you retrieve this data for trend analysis, you add it to a chart, indicating one of the three following market trends.
1. Upward Trend
This trend is also called the "bull market" trend.
Uptrends mean that your data sets are on the rise. When analyzing your organization's valuation, this is the pattern you want to see.
However, when prices for operational expenses are on an uptrend, that means the cost of supplies and services for your company will increase, raising the cost of doing business. Understanding this data will help you determine when to raise prices due to these increased costs.
2. Downward Trend
This trend is also called the "bear market" trend.
When a market faces a prolonged price decline, we experience a down market. If an organization has more than a 20% decline, that company is going through a downtrend.
This trend is generally associated with a loss of business or a decrease in sales. It can also indicate a decline in performance. A drop in business asset valuation is another downtrend. It also applies when other financial and economic variables, such as stock prices, take a downward trend.
3. Horizontal Trend
This trend is sometimes called the "stagnation" trend.
This trend indicates no upward or downward movement in sales, prices and other financial metrics. A horizontal trend exhibits a steady general direction.
However, making financial business decisions based on these trends is extremely risky because it is difficult to predict what will happen next. We recommend proceeding with caution when evaluating these trends.
Examples of Trend Analysis
Past events generally reflect future possibilities in business—and in life. You can use this strategy to detect patterns and determine if these trends will continue.
You can also compare data points over a specified period, key performance indicators (KPIs), sales performance and customer purchasing patterns, to name a few.
For instance, trend analysis enables you to prepare sales commission forecasting reports to determine appropriate and cost-effective sales incentives, bonuses and additional performance perks.
Here are a few more examples of trend analysis in finance to give you a better understanding of this concept:
- Sales patterns: Financial analysts can review sales patterns to determine if they're rising or falling and what is causing these shifts. Sales patterns vary because of new customers, new products, or differing sales regions' specifications.
- Expense reports: Accountants can examine expense reports to confirm all payments are legitimate. It may substantiate the data to represent accurate trades to assist financial analysts in making fair and honest assessments and predictions.
- Budget forecasting: Financial analysts can estimate expenses and revenue to predict upcoming results and create budgets. Businesses benefit from budget forecasting to optimize profits and prepare for future downward trends.
- Expenditure tracking: Finance professionals can observe operating expense line items during any reporting period. It allows these experts to identify any abnormal expenditures to investigate further.
Breaking Through the Data Limitations
Identifying when there will be a turn in business outcomes is a significant issue in trend forecasting. These turning points are more evident retrospectively.
Additionally, it is challenging to identify whether these turning points are simple deviations or the beginning of a new trend. Long-term predictions will require additional data points.
But this information isn't always available—especially when there is a lack of historical data, such as the launch of a new product.
Time is another issue when it comes to trend analysis of historical data. You cannot make predictions using information that is too far out. Time unavoidably introduces new and unforeseen variables. You risk making mistakes in your forecasts.
To avoid making these mistakes, examine your data and act only when you are confident with your numbers. Be aware of potential inaccuracies or relying too heavily on historical data that might not reflect current trends.
For instance, some pre-pandemic statistics might not reflect current data points. Before the COVID-19 outbreak, 17% of the U.S. workforce worked remotely. Post-pandemic, It more than doubled, with 44% working from home during the global health crisis.
Discover How To Excel at Trend Analysis
Data availability for trend analysis enables improved data-driven decisions. It is an incredibly valuable tool for investors, business owners and finance professionals.
Vena Complete Planning enables you to perform more in-depth trend analysis and leverage internal and external data. It's the best way to anticipate future events to enhance business intelligence and find more promising revenue opportunities.