There are many different ways you can analyze your company’s financial statements. Many small business owners limit their balance sheet analysis to either the last fiscal year or calendar year, the previous month or the current year. However, there is another analytical tool that can help you better assess the financial health of your business. This analysis is known as the twelve-month lagging calculation.
What is a trailing twelve month calculation?
A trailing twelve-month calculation is a type of analysis that takes into account the financial data of the last twelve months in your company. After twelve months – often abbreviated as TTM – you can analyze financial data for an entire year at any point in the year.
Say it’s July and you want to do a TTM analysis of your income. You would compile information for your company from the income statements that start on July 1 of the previous year and end on June 30 of the current year.
Why the financial data for the previous year and the current year may not be enough
Your accountant or bookkeeper will likely include a variety of financial statements in your monthly or quarterly reporting package. These statements can include:
Income statement and cash flow statement for the last month (or the last quarter) and a balance sheet for the last day of the month or quarter.
Income statement and cash flow statement since the beginning of the year.
A comparative analysis of these reports for the same period last year.
Your accountant or bookkeeper will provide you with an annual profit and loss account for the entire year and a balance sheet as of December 31. The year that has just ended (or the last day of the fiscal year, if your fiscal year is available) is different from the calendar year).
This is all very helpful information, but there are some pitfalls in relying solely on this information.
If you rely on last year’s data, You are using outdated data. This isn’t terrible in the first few months of the year, but as the year goes on, the data becomes less representative of your company’s current performance.
If you rely on the data so far this year, Your numbers will be more up-to-date, but you will be missing out on valuable comparative analysis. You may also get a false sense of security – or needless panic – if your business is seasonal or if something extraordinary happens in your company.
Calculations after twelve months are helpful here. When looking at your data for the past 12 months, in addition to checking the latest numbers, you are also taking into account seasonality and other factors that may not be immediately apparent if you just check the data for the previous year or the current year to date . This can help you identify the ebb and flow of your business, which in turn will help you make more informed business decisions.
Other uses for twelve month calculations
If you are looking for financing for your company, a subsequent calculation of twelve months can be very advantageous.
Let’s say your company saw a significant increase in income at the end of the first quarter of the year. You are fulfilling your obligations to your customers with your existing equipment, but you could be much more efficient and profitable! – when you have bought a new device. However, to buy the equipment you will need a business loan.
Since it’s the end of the first quarter, your financial statements would be sufficient for most lenders to make a decision on your loan application. However, these statements would not show the increased income for the current year. Similarly, the current financial statements would show the increased revenue, but there would not be enough information for the lender to make a decision about your loan application.
By doing a twelve month calculation for both the current 12 months and the previous 12 months, you can prove to your lender that you actually saw an increase in sales. This can help the lender realize that you can repay the loan you requested, which increases the likelihood Your loan is approved.
When Not use subsequent twelve month analysis
Some companies have complicated accounting records that your accountant or accountant may only calculate and keep quarterly or annually. Performing a follow-up twelve month analysis of your financial statements prior to these submissions can lead to inaccurate assumptions about your company’s financial condition.
In addition, not all business owners have access to the software their accountants or bookkeepers used. In that case, you would have to manually do your calculations for the past twelve months using the financial statements they provided to you. This is not only cumbersome, but also prone to errors.
Both of these situations can easily be resolved by talking to your accountant or accountant. Let them know that you want to run a twelve month lag calculation on your business so they can make sure your information is up to date. They may even perform the analysis for you and offer advice to review the results.
However, there comes a time when you don’t want to use a twelve month lagging calculation, and then you calculate your tax liability for the current year. Even if you make estimated quarterly tax payments, your tax liability is only calculated for one annual transaction of the current year. Using twelve month lagging calculations for your estimated tax payments could result in overpaid or underestimated taxes. Use your most recent financial statements to help you calculate your tax liability.
How to perform a trailing twelve-month calculation
With your accounting software, you can easily calculate your company’s financial information after twelve months.
For your income statement and cash flow statement
Most accounting software packages allow you to easily set a custom date range for your income statement Cash flow statement. To do a twelve-month calculation for these statements, your start date is the first day of the month that just ended the previous year.
In other words, if you run your subsequent twelve month reports in July 2020, your start date will be July 1, 2019. Your end date will be the last day of the month that has just ended – June 30, 2020 in this example.
Using the comparison function in your accounting software, you can compare your current figures for the last twelve months with the figures for the last twelve months. And, to make your analysis even more powerful, most accounting software packages have a calculation function that automatically calculates the dollar amount or the percentage change between the two periods.
For your balance sheet
Your balance sheet is a snapshot of your business at a specific point in time. You can set a date range for your balance sheet, but it will still contain the accumulated financial information for your company.
In other words, in order to perform a trailing twelve-month calculation on your balance sheet, you only run a balance sheet on the key date for the twelve-month period you analyzed.
After twelve months: A powerful tool for managing your company
After twelve months of calculations, there is an easy way to take into account the seasonality in your business, as well as the increasing income or income in terms of income, cash flow or expenses. Awareness of these leading indicators in your company can help you make proactive decisions, seize opportunities, and avoid potential pitfalls.
With the accounting software it is easy to carry out calculations for your annual financial statements after twelve months. With a simple adjustment of the date range, you can run financial trailing data for twelve months in a matter of moments. However, make sure your books are up to date before doing your analysis, especially if your company has complex accounting records that need to be filled out on a regular basis.
If you don’t have access to the accounting software used for your business, ask your accountant or bookkeeper to do the analysis for you. This is an excellent opportunity for you – and them – to have a strategic conversation about the health and direction of your business.
Finally, make sure you use the past twelve months calculation appropriately. This is a powerful administrative tool, but it shouldn’t be used to calculate tax liability. Use your current financial statements for tax calculations or ask your accountant to do your tax calculations for you.
Now that we’ve demystified the calculation for the past twelve months, you can use it as part of your routine review of the financial statements. This, along with your other financial analysis, can help you rest assured that you are making the best possible decisions as you propel your business toward profitable growth.
A version of this article was first published on Fundera, a subsidiary of NerdWallet.