One of My Favorite Management Tools

No quote this week. I want to offer a tip you will find useful, but I didn’t have a quote that would complement it.

One of my favorite management tools is a trailing 12-month average. If you’re familiar with this tool, stop here. You already know what I want to tell you. But if not, please read on.

Have you ever seen a chart that looks like the scribble of a 2-year old? You can’t tell if the trend is up, down, or flat? A trailing 12-month average overcomes that problem with a smooth trend line that doesn’t lie. And it works for any data you want to track . . . sales, gross profit, expenses, net profit, or any other statistical information. Here’s how.

Let’s say you want to track sales. Imagine a chart where the vertical axis is dollars or units, and the horizontal axis is months of the year. We can start in any month we like, but for this example, we’ll start in January 2007. The first point of our graph will be the sales results for January 2007 plus the preceding eleven months, totaled and divided by 12. So the sum of sales, February 2006 – January 2007 divided by 12. The next point on our graph will be February 2007 plus the preceding eleven months . . . March 2006 – February 2007, divided by 12, and so on. Each point on the graph represents the current month plus the preceding eleven months, divided by 12. You don’t really have to divide by 12 . . . the trend line will be the same whether you chart the monthly average or the entire 12-month total. But dividing by 12 gives you a monthly average that you can then compare to your actual month’s result.

Since each point on the chart represents an entire year’s worth of activity, seasonal ups and downs get leveled out as do one-time sales spikes (as for instance, a large sale that you don’t expect to repeat). As a result, you get a nice, smooth trend line that tells you clearly and honestly whether the data you’re tracking is going up, down, or flat. It’s a terrific tool to quickly and accurately identify trends that need corrective action. It’s also a tool that can be used as a budgeting or forecasting aid.

For more on this and many other management tools, I recommend “CEO Tools” by Kraig Kramers . . . it’s crammed full of useful ideas to help you improve productivity, results, and profits.

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