The Trailing Twelve-Month (T12M) Chart
The trailing twelve-month (T12M) Chart identifies future problems and opportunities, giving you time to take action to fix things before they go awry or to move quickly and decisively to take advantage of a unique situation. If you can use only one tracking tool, it should be T12M.
This chart has many benefits. First, it’s versatile; T12M can be applied to just about any meaningful metric or measurement in your company. Second, it’s clear; no other tool gives a better snapshot of where the company has been and, more importantly, where it’s going. Third, it provides a historical perspective, gives current clarity, and projects future outcomes equally well.
Former hockey great Wayne Gretzky said, “I don’t skate to where the puck is; I skate to where the puck is going to be.” That’s what anticipating the future and making projections is all about, and the T12M chart will do this for you.
Many entrepreneurial CEOs and managers don’t have financial backgrounds, and many hate numbers, dashboards, spreadsheets, and financial analysis. If this describes you, take heart. This tool is for you, and it will change your business life forever. Perhaps the best part is that your CFO or controller can create or maintain this chart for you. But it’s critical that you check it on a monthly basis.
Tracking Sales
In his 2008 book, The Breakthrough Company: How Everyday Companies Become Extraordinary Performers, Keith McFarland discusses companies that achieved a huge breakthrough in growth, profits, and culture by making “a big strategic bet.” In some cases, these bets put the entire future of the company on the line.
Imagine that you’re contemplating a big strategic bet for your company, and you’re relying on your financials to help you decide whether to take the risk. What you need to know is, can you bet on your current sales trend? Typically, you’d look at a few years of monthly financials to confirm a reliable sales pattern. But compare the chart of monthly sales figures that you might well use (at left) with the T12M chart built using the same sales data (at right).
The sales data on the monthly chart on the left, which shows all the seasonal and other cyclical factors, fluctuate widely. But now look at the data plotted on a T12M chart, accounting for seasonal factors and quarterly aberrations. Seeing the strong upward trend in sales figures on the T12M chart, it’s much easier to feel confident in making that big bet.
Now, look at the chart below showing the same data over the same time horizon with the T12M superimposed over the monthly chart to show its impact.
Here’s how it works. Each dot on the following T12M chart represents the sales for the previous twelve months, ending in that month. It’s a rolling annual total of sales data for three years, entered monthly, that eliminates the seasonality effect from the results because all twelve months are imbedded in each data point.
The first dot on the lower left of the second chart, the T12M chart, represents total sales from January 2014 through December 2014; the next point represents total sales from February 2014 through January 2015; the next point represents total sales from March 2014 through February 2015; and so on. As you move across the page from left to right, you get a rolling annual total, shown monthly.
The T12M is the only chart that tells the truth—by eliminating seasonality—and that pinpoints where to take corrective action. By contrast, ordinary monthly charts track a single month at a time, going up and down from month to month without showing any relationship to prior performance. They give a very limited—often incorrect—perspective of a company’s performance.
Even worse, monthly charts seldom provide information about a company’s future performance. There can be many reasons that the monthly plots go up or down; some reasons are good, and some are bad. For example, if your ordinary monthly chart goes down this month, you might conclude that’s not bad news because it dropped less than it did in the same month last year. But even if the monthly chart went up this month, that may not be good news, because it may have risen less than it did for the same month a year ago. The T12M, by contrast, shows you whether current performance is good or bad every time, taking prior performance into account.
It’s easy to get acclimated to using T12M charts. And for the first time in your company’s history, you’ll see your revenues, profits, and any other business measures as they truly are.
Quick View
One look at a T12M chart tells you if things are good or bad. The good direction, allowing you to relax or nudge the data upward if you choose, is up. If the curve goes sideways or down, you know that you have a problem requiring your immediate attention. It’s as simple and clear-cut as that. Moreover, the clarity that T12M provides can translate to a huge competitive advantage for your company—or provide your competitors with an advantage.
Say you don’t have T12M, but your competitor, Company X, does. Every year during seasonal downturns, you think, here we go again, into the usual slowdown. I guess it’s time to cruise through this slow stretch, maybe lay off a few people to preserve profits.
But with T12M, Company X can clearly see the first down month of the slowdown and take action to see a future payoff. This competitor might instruct its salespeople to push harder to get a few more orders each week before the slow period, providing incentives or a special performance incentive fee (SPIF) as encouragement. So, Company X will be positioned to see sales go up instead of down— and even to steal market share from your company.
Tracking Activities That Produce Sales
There’s something else that’s important to track on the T12M: what produces sales. In almost every business, the specific actions causing a sale to close occur at least thirty days before the month in which the sales dot is added to the chart. Think of these activities as key leading indicators (KLIs). By focusing on your company’s KLIs, you’ll spot potential weaknesses early enough to do something about them and enhance your company’s growth opportunities.
That’s what Guarantee Insurance Resources, an insurance underwriter, did. The company’s primary KLI was the dollar value of quotes generated per week—which led sales activity by three to four weeks. Whenever this indicator showed the first signs of weakness, the company moved into corrective-action mode. The T12M chart provided a real-time snapshot of activity that had slowed, giving management a heads-up that the sales team needed to generate more activity to ensure its monthly sales targets.
By identifying and tracking your company’s KLIs, you can determine how to drive performance for your company—just like Guarantee Insurance Resources does. Are your KLIs advertising or marketing dollars? Bids submitted? Marketing calls made? Employees on the sales team? Requests for Proposals (RFQs)?
For construction companies, one KLI might be the total dollar volume of RFQs. For retail operations, it could be total dollars spent on advertising, emails, and direct mail pieces, or response rates to marketing activities. Using T12M to track these indicators and their corresponding results, you can identify trends and take action quickly.
Tracking Other Data
Here’s just a sample of the other variables that you can track using T12M:
Income statement—Sales and revenue dollars, gross margin percent, SG&A as a percentage of sales, profit dollars
Balance sheet—Stockholder equity, debt-to-equity ratio, receivables turnover, accounts receivable to accounts payable ratio, inventory turnover
Cash flow statement—Net cash generated (or used), net new borrowings, total credit line used
Use T12M charts to track sales and profit, and key indicators such as gross margins. You’ll be amazed at how this tool allows you to see your business differently.