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The Importance of Calculating Your Rates-of-Change

December 18, 2020

We've reached the time of year when many businesses take stock of the past year and calculate their rates-of-change. But performing this analysis on an ongoing basis is also vital. Catch our newest TrendsTalk episode with ITR Senior Business Advisor Alex Chausovsky to learn more.

 

 

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Transcript by Rev


Hello. My name is Alex Chausovsky and welcome to another edition of Trend Stock with ITR Economics. I'm really glad you joined me today here near the end of the 2020 calendar year because we're approaching a very important time for most businesses. Now is the time of the year where all companies will take a look at their accomplishments over the course of the last year. They'll compare how they did this year to what they did in the previous year, and then they'll make a lot of very important business and operational decisions based on that growth rate. So, right now at the end of December, typically early January, when you have the full year's analysis in hindsight, that's when the vast majority of businesses actually take the time to calculate their rates of change.

But today's session is designed to really remind you that those rates of change should be calculated on an ongoing basis. It can't be just a once a year exercise for you. There are so many benefits that calculating rates of change as far as month after month, quarter after quarter, and year after year. And really the kind of insights and conclusions that you can derive from that information that many companies are leaving on the table. I'm going to break it down into different components. And the first thing that I wanted to talk about as far as the benefit of knowing where you are in your rates of change at any given point of time, is it helps you identify where you are in your own business cycle. It also helps you get some near term perspective in terms of the direction or the momentum of your business.

You see the interplay between the 1/12 rate of change, which is month over month growth rate, the 3/12 rate of change, quarter over quarter rate of change, and the 12/12 or the year over year growth rate can indicate whether your business momentum is accelerating or decelerating. It's also very informative in terms of helping you identify which phase of the cycle you're in. And that phase is obviously connected to different types of decisions and actions that you take as a business leader. So, what you do during phase B accelerating growth should be drastically different than what you do during phase C slowing growth. And the same thing can be said for phase D recession or phase A recovery.

If you are one of the companies that correlates closely to the overall economy, right now you're probably finding yourself in either recession or recovery. And it's really important to know that for sure because now is the time to implement a lot of change in preparation for a shift in the business cycle momentum as we head into 2021. The key is to track these rates of change consistently over time and identify when you transition from one phase to another. Another great use for the rates of change on an ongoing basis is for benchmarking purposes. For example, if you plot your company's 12/12 rate of change, whether it's for sales or orders, or really any other metric that you use to analyze the performance of your business, and you plot that 12/12 versus the corresponding 12/12 rate of change for the markets into which you sell, that's going to allow you to see whether you're underperforming, outperforming, or simply keeping pace with market growth.

This information can really also yield some significant insight into changes in your market share, which is something that most businesses struggle to calculate reliably. Another great way to leverage your company's rates of change is for better capital deployment. This really affects investments that you do. At the end of the day, business leader's number one job is to deploy resources in the most effective way. So, as we think about where the economy is today, nearing that low point in the business cycle in terms of US industrial production, an effective investment at this particular time, whether it's late in phase D or early in phase A, it could yield really significant benefits down the road for your business.

You see, not only things are typically cheaper during the bottom of the business cycle, but putting people, machines capacity in place in anticipation of phase B and making sure that you're ready to capitalize on that momentum will enable your business to prosper during that next period of economic and industry expansion. Of course, we expect that to happen for many businesses over the course of 2021. And so, calculating your own rates of change will help you make those better capital deployment decisions. Finally, knowing where your rates of change are and what business cycle phase you're in is going to help you improve your resource allocation.

If you, for example, evaluate the various industries that you sell into, and identify their own business cycle phases based on a rate of change analysis, you can identify the sectors that your sales and marketing departments should target. At the same time you'll be able to pinpoint the weaker markets, which are likely to yield little to no return and should therefore receive minimal resources from your company. At the end of the day, all of this comes down to an effective implementation of rate of change analysis on an ongoing basis. If you do that, instead of just doing it once a year once you have all of your 12 months of data put together, but you do that consistently month after month, you prioritize it, you take ownership or have somebody within your organization take ownership of that process, you're going to reduce your risk, you'll make better and more profitable business decisions, and you will outperform your competition.

We've seen this happen time and time again with our clients. And we certainly hope that this episode is going to be the nudge that you needed to develop your own rates of change as you approach 2021. So, with the holidays coming up, I want to wish you a Merry Christmas, a Happy New Year, and most importantly, happy calculating of your own rates of change and bringing that information to bear for a very successful 2021. Thanks so much for joining me today. I look forward to welcoming you to another edition of TrendsTalk with ITR Economics in the future. Have a great day. Take care.

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Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.