Trend Reports can help individuals and businesses better manage their cash.
We’ll explain what trend reports are, and how these reports can provide some guidance.
In our last post, we discussed how isolating leaks in your budget can aid in improving your cash flow and the budgeting process. Like with leaks, it takes some extra time and special care to see trends unfolding right before your eyes.
Trend reports are best seen on a spreadsheet, but pencil and paper work well, too.
What are trend reports?
Trend reports take current data and then extrapolates this information into the future. The benefit of seeing into the future can assist the business owner, the finance committee of a startup or nonprofit, or even an individual better understand where their cash is heading.
Set aside what your textbook knowledge of inflation, typical growth rates, and wages. For this exercise, simply look at your own historical data. Using a spreadsheet, calculate the rates of increase from one period to the next period.
Is this rate normal and customary? Can it be expected to continue at this rate?
Continue your projections at their current growth rates out for three to five years. Looking ahead, what will happen to your cash reserve? What will happen to your earnings? A trend report can show you a forecast of the future. Your future.
Once this is complete, ask yourself a few questions:
- Does revenue grow faster than expenses?
- Which expenses are increasing the fastest?
- How much cash are we infusing into the budget each year?
- How much cash will we “burn” as we project three to five years ahead?
- Is there enough cash to sustain this model going forward?
Tough questions. But trend reports can provide a crude map to some answers. It’s a chance to learn what the future “may” look like. This can create an opportunity to change or make shifts to land in a better place.
Trend reports also create the opportunity to simulate tweaks and see how cash flow can change. Modifying future growth rates in certain areas can provide insight into a different image for your startup, your nonprofit, or your personal finances.
How Can These Reports Help?
The benefit of preparing trend reports is gaining a realistic projection of the next few periods, or years. It can provide “early warning signs” of trouble. These reports can also help plan a “safe path” for growth. One of the big problems for individuals and organizations of all sizes is “premature expansion.” That is, growing before you are truly ready to handle the capacity and the expenses that come with growth.
Over-expansion can often doom a business. In personal finances, it’s buying the Cadillac Escalade before you can truly handle it financially. There’s probably better uses for your cash over the short term. A trend report can help you see this in black and white.
In 2018, the arts and crafts chain ACMoore announced the company was testing out smaller model stores. This test was being run in an effort to remain competitive. One of these stores would be near our office in Wall Township, NJ. The smaller store in Wall would open in November 2018 despite two other store locations (Brick Township and Seaview Square) being less than ten miles in both directions.
This week (November 25, 2019), the chain announced they would be closing all store locations. Could trend reports have helped company management better preserve cash? Would these reports help management choose to go in another direction?
A private high school recently began using trend reports to forecast their cash needs over the next three to five years. At first, the financial picture was not pretty. But through the benefit of peeking into the future with trend reports, the situation is beginning to turn around.
Through the benefit of trend reports, the school has a better vision of which expenses to trim. For example, the school administrators can see what costs need to be eliminated moving forward. The school has a clearer view of how much they need to raise in new funds.
Trend reports can be extremely helpful in managing cash flow for a business, an organization, or individual finances. It’s one reason why we begin our new relationships at Mullooly Asset Management with the creation of balance sheets and cash flow reports for clients.
Remember, while not always 100% accurate, it is helpful to get a glimpse into the financial future.