Variance analysis is so deeply embedded in day-to-day practice that many finance professionals cannot conceive of being able to analyse performance without it.
So what do we do when we don't have a detailed budget to compare actual expenditure against?
A very effective approach in these circumstances is to plot a Moving Annual Total like the one shown below copied from 'Present Sense', Steve Morlidge's book on performance reporting.
First here is a graph showing monthly values in isolation.
And now, the same data plotted using a Moving Annual Total (MAT).
The trends and the kinds of question that need to be asked about the current year's actuals and the plan for Year 3 are now much clearer.
Calculating a Moving Annual Total is like having a rolling window into a company's performance over a year. This then slides forward month by month (or whichever period you choose). The calculation is a way to continuously observe a full year's worth of data, without being confined to the calendar year.
Let's break down how it's calculated and why it's so handy.
Calculating Moving Annual Total:
- Choose your data: Select the metric you want to track: it could be sales, expenses, customer numbers, or any other data point that's important for your business.
- Sum up 12 months: Add up the values of this metric for a 12-month period. For instance, if you're starting in January, you'll sum the numbers from January to December.
- Slide forward: When the next period arrives (say, February), drop the oldest month (last January) and add the newest month (the current January) to the total.
- Repeat monthly: Continue this process each month, always keeping a rolling total of the latest 12 months.
Why is Moving Annual Total Useful?
- Smoothing out seasonality: Many businesses have peaks and troughs at certain times of the year (like holiday seasons for retailers). A MAT smooths out these seasonal variations, giving a clearer picture of the underlying trends.
- Up-to-date trends: Unlike fixed annual totals that look backwards, a MAT provides a current view of the last 12 months. This means you're always looking at the most recent year's worth of data, making it more relevant for decision-making.
- Comparative analysis: A MAT allows for consistent year-over-year comparisons at any point in time. You can compare this April's MAT with last April's, for example, which gives you the ability to understand what is driving trends.
- Performance monitoring: Monitoring performance and spotting any changes in trends quickly are helped. If there's a sudden drop or rise in the MAT, it can prompt a timely investigation and response.
In essence, a Moving Annual Total offers a dynamic, up-to-date snapshot of performance over a rolling 12-month period, helping businesses stay on top of trends, smooth out seasonal effects, and make
more informed, responsive decisions.
Calculate yours today.
You can read more on this topic in Steve's book, which is available to purchase in PDF form here: https://bbhub.org/b/yFhoA.
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