The Rolling 12-Month Analysis

The Rolling 12-Month Analysis

Today's newsletter covers one of the greatest tools in all of finance, the rolling 12-month analysis.

A rolling what?

We're simply looking at 12-months of financial information in every column of a financial report. This can be an incredibly helpful tool. Imagine having a year's worth of financial data - every month.

Before we look at an example, lets talk about why you want to use this:

• A single month of financial information can be horribly inaccurate in the context of overall business performance
• Trends become more noticeable with very clear indicators of financial problems (or strengths)
• Eliminates any seasonality or lumpy one-time expenses from a single month
• Financial ratios are easier to calculate and more intuitive... this will lead to improved forecasting

Here's a sample rolling 12-month P&L:

Remember, every column is a full 12-months of financial information.

In this example we can see:

• Revenue: Falling rapidly during this period, suggesting a serious sales issue.
• Margins: A bright spot with increasing gross margins - this tells me we have healthy contribution margins.
• Expenses: Overhead was stable but jumped in the last 2 periods, worthy of a closer investigation. Depreciation is falling and interest expense is stable, check.
• Profitability: The net result is lower net income dollars but stable net margins.
• Conclusion: Let's say this company has a profit target of $1 million. They have 2 choices here: 1) reduce operating expenses (likely payroll) to meet their goal; or 2) improve revenue while maintaining costs.

A few things to keep in mind here...

Common financial software (i.e. QuickBooks) cannot produce this report so you'll have to create it manually. We use this report with every client

Business changes are slow to influence a full 12-month period - if you add or subtract something in your business, it will take some time to see that outcome in this report.

Visuals help a ton (as is true with most financial matters). Use charts and graphs wherever possible to spot trends. Like this:

Homework

This week's assignment – Log into QuickBooks (or whatever financial software you use) and download 18-24 months of P&L data (monthly view!) in excel. Format your report to get a similar rolling 12-month format as above.

What trends do you see?

If you need some help piecing this together, I made a quick tutorial for you:

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