The best way for you to help your small business clients grow and strategize is to look for successful trends. It’s also equally important to be able to guess what costs or outcomes will happen in their future. In both of these situations, it’s useful to calculate simple linear regression. This analysis technique uses one variable to predict the value of another variable. The standard formula is written as y= x+b, where y is what you’re trying to find, x is the variable the outcome depends on, and b is the value if your activity is zero.
Say you want to guess what your client’s commission expense will be if its salesperson sells more goods. For each successful sale, the salesperson gets $100. Even if the salesperson fails to sell anything, your client still agrees to pay $250 per month. Your simple regression formula is y = 100m + 250. If the salesperson sells 10 units, plugging in 10 as the value for m lets you know your client will end up paying $1,250. If the salesperson sells 20 units, the pay is $2,250.
This type of analysis is fundamental to creating your client’s budget. You can only guess what the business activity will look like in the future based on cost behaviors. It’s easier to make these predictions about what will happen and use expense trends to figure out the costs. Instead of guessing that the commission expense will be $2,250, it’s easier to conceptualize a guess of the salesperson selling 20 units (which results in $2,250 of expenses).
Linear regression is also useful for analyzing your client’s marketing effectiveness. You can input what it spends (the x variable) to predict how many customers will visit its website or respond to a public advertisement. You can also guess what the revenue will be in future periods. If you know what sales prices will be, you can enter in different sales volumes to predict total revenue.
Simple linear regression is a fairly simple, yet effective, analysis tool. By using a few bits of information, you can predict what will happen to your client in the future. Although it’s not useful in all situations, you can easily leverage this tool to predict certain types of revenue, expenses, or market activities.