12 on 12 Analysis » Overview
The Purpose of 12 On 12 Analysis
There are two main purposes to executing a 12 on 12 Analysis:
- To identify trends in your KPIs
- To identify potential cause and effect relationships between 2 variables
A 12 on 12 analysis shows relationships between variables, such as sales and number of customers. This analysis is often referred to the Trailing Twelve-Month Chart.
Kraig Kramer of CEO Tools originally came up with the concept of a Trailing Twelve-Month Chart (TTM). In simple terms, a 12 on 12 analysis tool, or the Trailing Twelve-Month Chart as Kramer called it, is an economic analysis tool and a predictive analysis tool. This tool will allow you to anticipate any downturns or upturns in your business/industry, leaving you more prepared to weather any storm or seize any opportunity.
Steps on How to Complete a 12 on 12 Analysis
One of our clients, JKL Company, had more than $30 million in revenue. When they were completing their sales projections for the bank, they were trying to compare December’s sales to May’s sales. Pause. What’s the problem there? JKL Company was not accounting for seasonality.
Step 1: Determine the Variable
Identify your key variable(s). Whether it’s sales or number of customers, you need to determine what you’re going to measure for.
Step 2: Accumulate Historical References
Take the past 12 months of sales over the previous year’s sales and analyze the trends. Compile data for at least the past 2 years. We’ve completed some 12 on 12 analyses that used 30 years of data! Use your judgement on how many years of historical references you want to use. If you aren’t able to draw any relationships within the previous 2 years, then continue to go back a year at a time until you can identify trends.
Take the past 12 months of sales over the previous year’s sales and analyze the trends.
(You can either stop OR continue to Step 3.)
Step 3: Identify and Test Other Variables
Find the 2-3 indices that correlate with your key variable (Step 1). At first, it might take testing a few variables before you’re able to identify a couple more variables that can be correlated to your key variable.
Step 4: Track and Maintain
Continue to track historical records and maintain your 12 on 12 analysis.
Example
JKL was a steel manufacturing company that serviced the oil & gas industry. Because they had no trends readily available to use in their projections, our consultants researched the past 30 years of trends in oil prices and put them in the spreadsheet you’ll see in the next Topic.
If you’re not familiar with the oil & gas industry, let’s give a brief rundown…
Use West Texas Intermediate (WTI) as a benchmark for oil pricing. Many commonly compare it to Brent crude. We compiled all of the data for WTI over the past 30 years.
One of the conclusions that we came to after researching trends in WTI is that the price correlated with Baker Hughes rig counts. The lower the WTI, the more rigs that were built. Once you’re able to calculate these indices, you’ll be better prepared to create economic and predictive analyses.
12 On 12 Analysis Template
Download the 12 on 12 Analysis Template. This is a useful guide that we’ll walk you through during the rest of the 12 on 12 Analysis Execution Plan.