A monthly sales chart, when utilized properly, will tell you how your monthly sales stack up to other months within the time period. Tracking your sales numbers is a great way to evaluate how seasonality affects your sales numbers. However, they are not an especially good way to track the welfare of your business as a whole.
For a more comprehensive understanding of your overall businesses performance, a trailing 12 month (TTM or T12M) figure is more useful. To understand why the TTM numbers are a better indicator of company performance, let’s examine the two charts below: Monthly Sales – 2009 and Monthly Sales – 2010.
A cursory view would give the impression that 2010 sales were the same as 2009 sales. A couple of mid-to-late-year spikes would be encouraging, but the drop off at the end of the year would cause concern. This chart would indicate a need to address seasonality issues related to sales. However, it would not paint a realistic picture of the company’s overall health.
The TTM chart removes this seasonality from the equation. It is calculated by first adding a year’s worth of monthly data to provide a 12-month figure. Then, for the next year, as a new month is added, a beginning month of the previous year is dropped from the equation. Thus, each point on the graph represents that month’s sales plus the sales from the previous 11 months. Below is a chart, TTM Sales 2008 – 2010, showing what the above data would look like when recalculated as TTM figures.
As you can see, the TTM graph lacks the volatility of the monthly sales graphs above. It does reflect a dip in sales from May 2009 to June 2009, but shows that the company continues to grow despite similar dips in 2010. Unlike monthly sales charts, any downward trends on a TTM chart are to be given immediate and serious attention. These are warning bells – a call to action. These dips do not reflect seasonality, but rather indicate that the overall health of the company is in jeopardy if changes aren’t made.
Together the monthly sales charts and the TTM charts can provide you with useful tools for improving your overall sales. The monthly figures show you where seasonality impacts your business and is a visual image of where you need to shore up sales. The TTM chart represents the overall health of your company and is not only a good early-warning-system, but can be built upon as a forecasting tool. Please contact your Mackey Advisor if you’d like to know more about adopting TTM sales tracking in your business.