New Year’s Eve celebrations typically include champagne, party horns, singing “Auld Lang Syne” and the perfectly timed midnight kiss with that special person in your life. And New Year’s Day follows with college football games, black-eyed peas and optimistic New Year’s resolutions that mark a new chapter in a person’s life. Many of us have made a New Year’s commitment to losing weight, spend less or live a healthier lifestyle. And a substantial number of us are also guilty of not following through on our resolutions. Research from the University of Scranton suggests that only 8% of people achieve their New Year’s goals.
The length of time between these New Year’s celebrations and subsequent resolutions is based on the number of days it takes the Earth to orbit the Sun – technically 365.25 days. An interval that makes sense for most individuals to follow for personal goals because it marks the beginning of the four seasons – winter, spring, summer, and fall. But “seasons” are also the reason why it doesn’t make sense for most businesses to follow the same solar year. A simple change to your business calendar can deliver more accurate financial numbers and improve your decision making.
Most businesses look at their financials at two primary intervals: a monthly basis and a year-end recap. The year-end recap is primarily driven by the need to file taxes, but the tax schedule shouldn’t drive your day-to-day decision making. Occasionally, businesses want to understand what kind of “year” they’re having, so they look at Year-To-Date (YTD) numbers and compare them to YTD from the previous year. While this can be helpful, it’s not perfect. In fact, almost every business has some level of seasonality in sales, expenses, and/or labor.
Instead of waiting for the Earth to complete its orbit of the Sun to look at an annual perspective, start viewing every month as the end of a 12-month financial year. So, when you close the May financials, look at the May numbers and the last 12 months of financial data ending on May 31 – this would include June, July, August, September, October, November and December of the previous year, in addition to January, February, March, April and May of the current year. This technique is called the rolling 12-month view because you’re always looking back at the last 12 months of financials. By looking at your financial numbers this way, you completely remove all seasonality from your financials. It doesn’t matter if April is always your busiest month because April is always included in your rolling 12-month financial view.
The rolling 12-month calendar also makes it easier to put the current month in the proper perspective. Most businesses compare the current month to the previous month. This comparison has less value if you’re comparing May to April, and April is always your busiest month because of seasonality – for example, a CPA firm. Besides, some months don’t even have the same number of days. Why compare April with 30 days to May with 31 days? In a rolling 12-month calendar, instead of comparing May to April, we compare May of this year to May of last year, removing the seasonality of the business. Team members in a rolling 12-month calendar learn that they’re goal is to make this May better than last May.
The rolling 12-month calendar also makes it easier to track annual targets. If we set our goal for $10 million in annual revenue, we know every month we’re tracking towards the goal by looking at the past 12 months of revenue. It removes the need to project how much revenue we’ll generate in the remaining months of the calendar year. And it’s not just revenue that should be viewed on a rolling 12-month calendar; you should also look at Gross Margin, Net Profit, quality metrics, customer satisfaction scores, employee retention and any other critical numbers. The monthly numbers are still important for the trend, but looking at the rolling 12-month view will remove seasonality and get a more predictable view of your performance.
Don’t wait for the next New Year’s Day, make a resolution today to look at your financials using the more accurate rolling 12-month calendar and you’ll improve your chances of achieving your goals and hitting your targets. As far as your individual goal of losing weight this year, that’s the subject of a future article.