How to Work with the Pros and Cons of Trend Analysis Forecasting
You can use trend analysis to predict how your business will perform, but be aware of the limitations of the method. When business variables such as sales, revenue or customer complaints change over time, you can see the models that make up trends, allowing you to project the historical data for future values. When understanding the factors that impact your analysis validity, you can then determine the advantages and disadvantages of using trend analysis for a particular situation.
How to analyze trends
Trends could increase or decrease linearly or exponentially and could be caused by seasonal or cyclical factors. You can analyze using manual methods such as drawing graphs and curves or with software such as Excel spreadsheets to find the best fit. But keep in mind that the analysis is likely to have been influenced by random events such as change in weather, competitors or economic environment.
Pros and cons
Trend analysis is often a quick way to better understand business operations and achieve maximum forecast for key variables of the business. For example, each year if sales were up 3 percent for the past five years, we predict a likely increase of 3 percent for the following year. If the summer season usually results in a 20 percent revenue external goods, you can expect the same increase for next summer. The inclusion of historical data in a worksheet allows you to do a more detailed analysis and output mathematical projections. The historical data is usually readily available and you do not need other inputs or outside help to make predictions about.
The trend analysis is based on historical data; therefore, the accuracy and reliability of such forecasts will also depend on other historical conditions such as the changes on work environment or economy. For example, if a new competitor enters your market, sales, revenues and profits can become unexpected drop and your analysis of trends based on historical data provides predictions will be too high. If you arrive at the end of a recession in the economic cycle and having analyzed the influence of cyclical as a long-term trend, the forecasts will be too low as an expansion cycle develops. When you do not know how the changes could affect your business, your predictions based on trend analysis are unreliable.
Working with pros and cons
You can make the best use of trend analysis by examining the data and your markets to capture the benefits and minimize the effect of disadvantages. Check your additional data analysis patterns from the industry publications and the results from public competition will help you validate the results. If your business situation and competition has not changed, your trend analysis will be reliable. If historical data is compatible with a few outliers and small data point variation, the results will be accurate. If the predictions vary for variables related to how your sales and your income, trend analysis may be faulty and you will need to use other methods for your forecasting exercises, such as analysis of current market conditions to obtain reliable and accurate forecasts.