Identifying & Assessing Financial Trends in Business

Instructor: Scott Tuning

Scott has been a faculty member in higher education for over 10 years. He holds an MBA in Management, an MA in counseling, and an M.Div. in Academic Biblical Studies.

Business, economic influences, and politics are dynamic and sometimes unpredictable. This lesson lists some of the financial trends that must be monitored by businesses on an ongoing basis in order to keep pace.

Things Change

If you were a licensed driver in 1980s America, you might remember when a gas station sign only needed two (rather than three) numbers in their sign because gasoline was under one dollar per gallon. Twenty years later if you were unlucky enough to live in southern California, unleaded gasoline regularly flirted with four dollars per gallon. Now imagine how badly that would have busted the family budget if you were still basing your projection on gas that was less than one dollar per gallon. It's an exaggerated example, but it is an accurate portrayal of why there are certain indicators that businesses must review regularly.

Let's look at few important indicators.

Trends to Watch

There is a virtually unlimited number of financial or economic trends that a business could monitor, but they're not all of equal importance. In fact, the phrase analysis paralysis is an informal way of saying that trying to monitor too many things actually makes decision-making harder rather than easier. With that in mind, what are the essential trends to watch, and how does an organization determine which ones are most important?

Margin Compression and Expansion

When you pull up to a gas station to fuel your car, you probably glance at the board indicating the current price of fuel. But even though you are paying a lot more for fuel than you are for a soft drink in the convenience store, the station owner isn't making much money on the fuel. In fact, per dollar spent, it's far more profitable for him to sell you a soda than a gallon of gas. This is called a margin, and it refers to the difference (hopefully positive) between his cost and what you pay. However, if the convenience store's cost of soda doubles but the store does not raise prices in response, margin compression is a threat.

Business leaders must monitor financial trends associated with margin compression or expansion. Failing to watch this indicator could become a very costly mistake. If margin compression is imminent but unrecognized, a business will be undercharging customers for their consumption. The cost of goods sold will rise, but the selling price and profit will not rise. This will, of course, lead to substantial losses.

Trends Relating to Raw Materials

If you lived in Pittsburgh, Pennsylvania between about 1850 and 1950, the steel industry would have been booming. Massive factories and foundries produced the raw material in large volumes. At its height, Allegheny County produced as much as half of the nation's steel and iron. Of course, the profits were good, too. But today, the steel is gone. If you were a steel mill owner, the failure to recognize market trends in the price of raw materials might have done you in.

Even businesses not in the raw materials industry will be affected by trends in these materials.
Steel Mill

Some businesses do not need to monitor this trend directly, but it shouldn't be ignored altogether by any type of business. Whether it's lumber and steel, or silicon and copper, everything we use ultimately comes from raw materials. Recently, a world-wide shortage of copper drove prices sky high. Scrap copper was going for so much that thieves sought to seize on the opportunity by stealing copper from construction sites. Unfortunately, some thieves who tried to steal the copper in exterior primary utility lines were unfamiliar with disconnecting power. Many were seriously injured or killed. Just think for a minute just how many organizations might have been affected by the change in copper prices:

  • The copper mines and metallurgical factories that produced, refined, and stored copper
  • The manufacturers of things like electrical wire, coinage, electronics, and anything else that relied on a copper alloy
  • Business who suffered losses from the theft
  • Contractors who had to pass on the cost to customers

Even if you're not in the raw materials business, it's a trend that will affect you.

Trends that Impact Market Share

Market share, the percentage of the overall market a particular player controls, is another important trend that should be monitored by all businesses. In the last few years, electronics giant Circuit City and bookseller Borders both went out of business and surrendered quite literally 100% of their market share. That's an amazing stroke of luck for former competitors like Best Buy and Barnes & Noble that would have a large chunk of the market share simply dropped into their lap.

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