20 Apr, 2020
Has your business been impacted in some way by COVID-19 – whether through retail closures, changes in customer demand, supply chain issues or logistics? Or has your business reached a turning point and begun to recover from the impacts of this crisis?
Trend analysis is useful to identify and monitor any changes over time. Trend charts visually reveal patterns of change in your data. This analysis helps to identify direction, strength and duration of any trends.
Direction of trend – is the general direction of data over a period of time. There are three basic types of trends to observe in your charts: uptrend, downtrend, and sideways trend.
Strength of trend – is the size of movement in the direction of the underlying trend. An increasing steepness in any trend line may reveal significant impact for the business. For example, a steep revenue downtrend may reveal a rapid decline in sales.
Duration of trend – this can be classified as either short‐term, intermediate‐term, or long‐term trends. Tip: you can customise your charts in Fathom to assess short-term trends (ie. to view trends over the course of months or quarters), or to assess long-term trends (ie. to view year-on-year trends).
Trend analysis is useful for answering a variety of important business questions. It is useful for identifying trends in revenue, profitability, cash flow, working capital, growth, and liquidity.
Below are some charts that you may consider tracking in your reports. We’ve also highlighted the associated questions these charts help to answer.
Q. Are your revenues in decline?
Q. Are sales rebounding post-crisis?
Chart 1. Revenue trend (all time)Q. Are there falls in customer demand for your products or services?
Chart 2. Customer Enquiries vs Sales
In the above examples, New Customer Enquiries is a ‘non-financial KPI’. You can substitute this metric with any KPI which provides an indication of your future revenues.
Depending on your typical sales cycle, a reduction in demand may impact revenues some months later. For some businesses, demand for products or services may increase during the COVID-19 crisis. For example, demand for online shopping, home delivered food, home improvement and logistics may increase.
Chart 3. Revenue vs Staff Costs
Tracking the trend of other metrics like ‘Revenue per Employee’ may be pertinent for businesses with furlough considerations.
Chart 4. Operating, Gross, EBIT & Net Profit margins.
Charts like the above may help to track eligibility for Government support programs. For example, in Australia the “JobKeeper initiative” requires that businesses show a reduction in turnover compared to the previous financial year.
Chart 5. Operating, Gross, EBIT & Net Profit margins.
Which profitability signals should we be watching before pulling the trigger on alternative spending plans?
Chart 6. Monthly % change in Operating, Gross, EBIT & Net Profit margins.
Q. Is Cash Flow diminishing?
Q. Is Cash Flow sustainable or subject to fluctuations?
Q. Are any negative cash flows one-off or sustained period after period?
Chart 7. Operating, Free & Net Cash Flow chart
Negative operating cash flows, period after period, should be interpreted as a signal that cash may become insufficient to cover expenses or other obligations.
Chart 8. Accounts Receivable Days vs Target of 45 days
This chart is useful for observing any changes in the time taken to collect amounts owed to the company from customers. A lengthening in the time taken to collect debtors will have a negative impact on Cash Flow.
Chart 9. Quick ratio vs Target of 1:1
The Quick ratio tells you about your business’s ability to ride out short-term rough patches. A quick ratio of 1:1 or more is considered 'safe'. A result less than 1.0 indicates that the business is dependent on less current assets (ie. inventory) to meet short-term obligations.
Chart 10. Interest cover vs Target of 2
Interest cover is a measure of the business’s ability to meet its debt obligations, from the profits earned by the business. A high result indicates that the business can easily meet its interest payments. A lower result indicates that the business is becoming more burdened by debt expense. A lower result may also identify the potential risk that profits will be insufficient to cover interest payments. Generally a result of more than 2 is considered to be safe.
We hope the charts suggested above provide some ideas of useful enhancement which you can make to your current reporting.
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Written by David Watson
David is a co-founder of Fathom. He is passionate about designing insightful and visual tools which help to measure business performance.