Rolling averages are a powerful tool used by businesses, investors, and analysts in order to track and manage market trends, forecast future results, and make better decisions. A rolling average is a statistical technique that smooths out short-term fluctuations in data and provides a more accurate view of the overall trend. In this blog post, we’ll take a look at what a rolling average is, how it is used, and why it’s such a valuable tool for businesses and investors. We’ll also explore the different types of rolling averages and discuss the advantages and disadvantages of each. By the end of this post, you’ll have a comprehensive understanding of rolling averages and be able to leverage this important analytical tool to make better decisions.
Why are rolling averages useful?
Rolling averages are helpful for identifying long-term trends that may otherwise be hidden by sporadic fluctuations. For instance, if your business sells ice, hot days may see an increase in demand. Your data might become challenging to follow if the temperature in your area varies frequently. You can determine your ice sales trends by computing a rolling average for each time period. While you might observe a decline in ice sales during the winter, your business may actually experience year-round growth.
You can also use rolling averages to identify the causes of your trends. This can aid in your decision-making and planning for the future of your company. In the summer, you might see an increase in ice sales if the weather causes them to fluctuate on hot days. By using historical data, you can use this to set strategic goals and estimate how much ice to produce during those months.
What is a rolling average?
A rolling average, also known as a moving average, is a metric that computes trends using a set of data over brief periods of time. In particular, it facilitates the calculation of trends when their detection would otherwise be challenging. For instance, you might be unable to determine whether your data set exhibits upward or downward trends over time if it contains numerous points where the numbers sharply increase or decrease.
A rolling average makes use of smaller portions of the data to identify the trend. For instance, you could calculate the average using the data gathered over the previous 30 days. Then, the average rolls or moves for each new period. Making these calculations for each 30-day period enables experts to learn how the average changes over time.
How do you calculate a rolling average?
Professionals use a formula to calculate rolling averages. To do this, data must be gathered over time and entered into the formula. The equation is as follows: rolling average = total data over time divided by time period You can determine which numbers to put in the formula and then how to solve the equation by following these steps:
1. Determine your time period
The duration of your rolling average depends on the purpose for which you are calculating it. For instance, you might select a rolling 12-month period if your goal is to ascertain how much each month’s sales influence your trends. A rolling seven-day average could be used to determine which day of the week has an impact on the trend.
2. Collect the data
The data based on the time you selected is required next. It is beneficial to gather data over a longer time frame than the one you selected. For instance, if you were tracking the yearly trends in monthly sales, you might gather information from the previous 18 months or the previous year. More information can help you understand how trends change.
3. Add your earliest totals
It’s helpful to start with the earliest totals you have available to track your trends. A good rule of thumb is to start by adding the 12-month period from July 2019 to June 2020 if you have sales totals from July 2019 to December 2020. For example, these might be your totals for those months:
July 2019: $48,904
August 2019: $49,615
September 2019: $47,546
October 2019: $51,600
December 2019: $50,455
January 2020: $50, 690
February 2020: $51,900
March 2020: $52,420
April 2020: $51,981
May 2020: $53,315
June 2020: $54,100
Total: $526,526
4. Divide the total by your time period
You can determine your average for each unit by dividing the sum by the time period. Divide by 30 when calculating your average over a 30-day period. If youre calculative over a 12-month period, divide by 12. To continue with our example, it might appear as follows for your total of $526,526 over the course of a year:
$526,526 / 12 = $46,877.17
This means your business averaged $46,877. 17 per month from July 2019 to June 2020.
5. Calculate the average for your next rolling period
By omitting your earliest unit and including your next unit, you can calculate your next rolling period. This means omitting the sales from July 2019 and including your sales from July 2020 in the monthly example. You can use this to determine your average for the 12 months between August 2019 and July 2020. Your new total would be $532,622 if your sales in June 2020 total $55,000. Again, since it is a 12-month period, you can determine your monthly average by dividing by 12.
$532,622 / 12 = $44,385.17
6. Continue the formula for each rolling period
As you continue, the rolling period keeps moving. You can now calculate the average for each 12-month period by subtracting the earliest months’ sales, including the subsequent ones, and finishing the formula. Your next 3 months sales might look like this:
August 2020: $54,200
September 2020: $55,600
October 2020: $56,100
This helps you continue to calculate your rolling period averages. Your averages when you enter them into the formula are as follows:
September 2019 to August 2020: $537,207 / 12 = $44,767.25
October 2019 to September 2020: $545,261 / 12 = $45,438.42
November 2019 to October 2020: $549,761 / 12 = $45,813
These calculations show that your sales typically increase over the course of a rolling period.
7. Complete the formula regularly
You can continue to complete the formula as you run your business and gather additional data. You can do this on a regular basis to calculate your rolling average and keep tabs on your trends. Once you have a better understanding of your company’s health, you will be able to report it to executives and shareholders and make decisions that will help your business succeed in the future.
