Page 135 - Finance for Non-Financial Managers

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Finance for Non-Financial Managers
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future periods, can become a major surprise when taken cumu-
latively. When the surprise is a pleasant one, everyone can
laugh and say, “How weird we didn’t see that earlier!” When the
surprise is unpleasant, however, the tendency is to begin a fran-
tic search for answers. “How did this happen?” “When did this
happen?” “Why didn’t we know it was happening?” “Who’s
responsible?”
What We Learn from Trends
The most important things we learn from studying trends are
clues to the future. In high school physics, many of us learned
the principles of Newton’s first law (the law of inertia): an object
in motion tends to continue in motion in the same direction at
constant speed unless acted upon by another force. Well, that
may not be exactly what your teacher said, but it’s close
enough for our purposes. Of course, the object your teacher
used to make this point didn’t have market forces, interest
rates, recessions, and human intervention and emotions to
bump it around or its path would have been a lot more erratic.
So, too, the paths of many of our economic indicators are often
erratic, but that doesn’t change the validity of studying their
trends to begin to estimate where they might go in the future.
As it turns out, a strong sales effort that brings in good sales
numbers tends to continue to do so, given no radical changes in
its environment. A company whose costs are rising slowly and
steadily because it doesn’t effectively control them will likely
continue to see its costs rise until it takes some action to disrupt
the trend. Human nature being what it is, costs are more likely
to rise without controls than they are to fall of their own weight,
so studying trends of costs is useful to enable management to
identify those trends soon enough to keep the cumulative effect
within acceptable limits.

The 6-to-12 Rule
We have found that the most effective way to follow trends in a
company is to use an easy-to-read format that shows at least