Growth is the key to the success of any business regardless of scale.
Regularly tracking the factors that drive growth is critical. One effective way to do this is by calculating the 3/12 and 12/12 rate-of-change in the key variables that have an impact on your overall growth, including but not limited to revenue, cash flow, employment costs, etc., with your monthly moving total (MMT).
What is a 3/12 and 12/12 Rate of Change (ROC)?
- 3/12 rate-of-change: The percentage change of a measured variable’s last three months compared to the percentage change of it for the same three months the year prior.
- 12/12 rate-of-change: The percentage change of a measured variable’s last twelve months compared to the same twelve months the year prior.
How to calculate the 3/12 and 12/12 MMT Rate of Change (ROC):
The 12 MMT rate-of-change is April-March 2009 compared to April-March 2008. 3MMT would be April, March, and February 2009 compared to April, March, and February of 2008. (Source: ITR Economics)
What are we measuring:
The 3/12 and 12/12 rate-of-change metric measures the speed at which your business is growing. Both 3/12 and the 12/12 are comparing a current period compared to the same period 12 months ago. The key difference is in the length of the period being measured (i.e. 3 months versus 12 months)
Rule of thumb: If the 3/12 rate is higher than the 12/12 rate, your business is growing. If lower, your business is slowing down.
Why does this matter?
Too many companies solely focus on their annual growth rate. While important, this tunnel vision can potentially prevent you from noticing additional factors that paint the full picture of your business. Using the 3/12 growth rates in comparison to your 12/12 rates will give you that bigger picture.
Take the following graph of this firm’s business growth, for example:
Whenever the 3/12 rate-of-change (orange line) is higher than the 12/12 rate-of-change (blue line), the firm is growing faster compared to the last twelve months. Conversely, if the orange line dips below the blue line, it means the near-term growth rate is decreasing much faster than the twelve-month growth rate. For both cases, the steepness of the line(s) indicates the speed at which the growth is accelerating and decelerating.
What to do with this new insight:
1. Insert the 3/12 and 12/12 ROC calculations into a graph to visually represent the raw data to analyze and gain insights quickly.
2. Analyze this data for an extended period. Remember: one or two data points are not a trend. If you’re starting to see the 3/12 ROC slowing, pay closer attention to its behavior for a couple of weeks.
3. Determine what variable might be causing a near-term slowdown.
4. Determine actions to reverse the 3/12 ROC’s trends if you need to make short-term decisions that might help you weather a downturn i, such as holding off on a new hire or conserving cash. Think of this as a quick dashboard to help you see the future.
- Are customers not reordering?
- Are your sales cycles getting a little longer?
- Did you have an unusual amount of churn in your customer base?
5. Consider creating an advanced financial reporting solution that delivers additional insights into your business and can help you confidently make informed business decisions.
To learn more about 3/12 and 12/12 ROC analysis, visit ITR Economics at itreconomics.com or connect with us at insightfulpartners.com/connect to discuss how these and other insights can help you run your business better.