Why You Need to Be Calculating Your Rates-of-Change

By ITR Economics Representative on December 3, 2019

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ITR Economics Representative

ITR Economics has been preaching the advantages of rate-of-change analysis for many years. We are constantly showing business leaders and decisionmakers the numerous benefits that result from tracking their companies’ 3/12 (quarter-over-quarter) and 12/12 (year-over-year) rates-of-change. Today, we wanted to clearly lay out the benefits of this approach for anyone who may be on the fence, or who may have delayed implementing this technique due to other responsibilities.

Rate-of-change analysis gets to the heart of what ITR does – provide our clients with the best economic intelligence to reduce risk and drive practical and profitable business decisions. There are four main ways to leverage your company’s rates-of-change – as well as the rates-of-change for your markets and the overall macroeconomy – to improve your decision-making process.

First, plotting your rates-of-change will help you identify where you are in your own business cycle, while also providing you with near-term perspective into the direction, or momentum, of your business. The interplay between the 3/12 and 12/12 rates-of-change, for instance, can indicate whether your business momentum is accelerating or decelerating. Tracking the movement of the 12/12 rate-of-change over time will help you identify your business cycle phase, a key piece of information you can use to make better strategic decisions. How does it work? It all comes down to the fact that your actions and overall strategic direction need to change according to which phase of the business cycle your company is in at a given point in time. For example, the decisions you make and the actions you take during Phase B, Accelerating Growth, should be drastically different than those you would implement during Phase C, Slowing Growth. The same can be said for Phase D, Recession, versus Phase A, Recovery. The key is to track the rates-of-change consistently over time.

Second, you can use rates-of-change for benchmarking purposes. Plotting the 12/12 rate-of-change for your organization (be it for sales, orders, or any other metric you use to analyze the performance of your business) versus the 12/12 rates-of-change for the markets into which you sell will enable you to see whether you are underperforming, outperforming, or simply keeping pace with market growth. This information can also yield insight into changes in your market share, something that most businesses struggle to calculate reliably.

Third, rate-of-change analysis (and the attendant knowledge of your company and markets' business cycle phases) can be used for better capital deployment. Making investments late in Phase B, Accelerating Growth, can be detrimental to your organization. This applies to hiring people, spending capital on new machinery and equipment, or expanding your production capacity. However, an effective investment in late Phase D, Recession, or early Phase A, Recovery, could yield significant benefits down the road. Not only are things typically cheaper at the bottom of the business cycle, but putting people, machines, and capacity in place in anticipation of Phase B, Accelerating Growth, will enable your business to prosper during that next period of economic and industry expansion.

Finally, knowing the rates-of-change and business cycle phases for your vertical markets will help you improve your resource allocation. If you evaluate the various industries you sell into and identify their business cycle phases based on rate-of-change analysis, you can then identify the sectors that your sales and marketing departments should target. Concurrently, you will be able to pinpoint the weaker markets, which are likely to yield little return and should therefore receive minimal resources.

Effectively implementing rate-of-change analysis and the consequent strategies outlined above will help you as a business leader. You will reduce your risk, make better and more profitable business decisions, and outperform your competition. Happy calculating!

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