Trend analysis definition
/What is Trend Analysis?
Trend analysis involves the collection of information from multiple time periods and plotting the information on a horizontal line for further review. The intent of this analysis is to spot actionable patterns in the presented information. In business, trend analysis is typically used in two ways, which are noted below. When trend analysis is being used to predict the future, keep in mind that the factors formerly impacting a data point may no longer be doing so to the same extent. This means that an extrapolation of a historical time series will not necessarily yield a valid prediction of the future. Thus, a considerable amount of additional research should accompany trend analysis when using it to make predictions.
Revenue and Cost Trend Analysis
Revenue and cost information from a company's income statement can be arranged on a trend line for multiple reporting periods and examined for trends and inconsistencies. For example, a sudden spike in expense in one period followed by a sharp decline in the next period can indicate that an expense was booked twice in the first month. Thus, trend analysis is quite useful for examining preliminary financial statements for inaccuracies, to see if adjustments should be made before the statements are released for general use.
Example of Revenue and Cost Trend Analysis
A good way to conduct a revenue and cost trend analysis is with a multi-period income statement format. By doing so, you can see trends in the information, as well as spot changes in the trends that may require investigation. The following exhibit shows the layout of a multi-period income statement over a four-quarter period.
The report shown in the sample reveals several issues that might not have been visible if the report had only spanned a single period. These issues are:
Cost of goods sold. This cost is consistently 35% of sales until Quarter 4, when it jumps to 40%.
Advertising. There was no advertising cost in Quarter 2 and double the amount of the normal $30,000 quarterly expense in Quarter 3. The cause could be a missing supplier invoice in Quarter 2 that was received and recorded in Quarter 3.
Rent. The rent increased by $10,000 in Quarter 3, which may indicate a scheduled increase in the rent agreement.
Interest expense. The interest expense jumps in Quarter 3 and does so again in Quarter 4, while interest income declined over the same periods. This indicates a large increase in debt.
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Investment Trend Analysis
An investor can create a trend line of historical share prices and use this information to predict future changes in the price of a stock. The trend line can be associated with other information for which a cause-and-effect relationship may exist, to see if the causal relationship can be used as a predictor of future stock prices. Trend analysis can also be used for the entire stock market, to detect signs of an impending change from a bull to a bear market, or the reverse. The logic behind this analysis is that moving with a trend is more likely to generate profits for an investor.
Examples of Trend Analysis
When used internally (the revenue and cost analysis function), trend analysis is one of the most useful management tools available. The following are examples of this type of usage:
Examine revenue patterns to see if sales are declining for certain products, customers, or sales regions. This could lead to a decision to curtail certain products, or to shift resources toward other products.
Examine expense report claims for evidence of fraudulent claims. For example, a salesperson who continually claims much higher meal expenses might be submitting duplicate receipts for meals.
Examine expense line items to see if there are any unusual expenditures in a reporting period that require additional investigation.
Extend revenue and expense line items into the future for budgeting purposes, to estimate future results.