Simple linear regression analysis, often just called linear regression, is a method you can use to see the relationship between two variables. For example, you can use linear regression to see how the costs of raw materials affect the total output of a manufacturer. More complex relationships can’t be determined, such as exponential relationships, but in many businesses, understanding simple linear relationships can be more powerful.
Since linear regression is a statistical concept, the details behind how it’s calculated can be overwhelming to some people. Luckily, there are many different software packages capable of doing the calculation, such as Excel.
In general, you need to identify a variable that you think is driving change in another variable. For example, how do fuel costs impact a company’s shipping speeds? Or you could analyze how the frequency of fundraising events affects total fundraising for a nonprofit. Not only is the method helpful in analysis, but you can also use the expected relationships between items to make better financial statement projections.
Once you identify specific variables to analyze, you need to gather an equal number of data points for each item and make sure they’re on the same timeframe. Say you want to analyze how a product’s price has affected its sales over the last three years. First, you gather the average monthly price of the product for each month over the last three years. Then, you gather the average monthly sales for each month over the last three years. From there, you can run a linear regression on the data to see the relationship between the two variables.
Simple linear regression is a useful tool in business and for accountants with business clients. It’s a way you can see how two variables are connected. With this knowledge, you can help your clients make better business and accounting decisions.