To understand how using TTM analysis can benefit your business, you’ll need to understand what it is, how to calculate it, and when to use it.
Definition and Example of Trailing 12 Months (TTM)
TTM is the process of calculating small business financial information using the previous 12 months of financial statements. This analysis is used to evaluate a business’s financial health and standing using the most recent financial information. TTM isn’t based on the fiscal or calendar year, but instead relies on 12-month analysis based on a combination of year-to-date and previous calendar year financial information. It can be calculated on any date, making it a convenient tool for small businesses to use.
Alternate name: Last 12 monthsAcronym: TTM, LTM
For example, let’s say today is Aug. 1, 2021, and you as a business owner want to see what your revenue was like for the past 12 months. With TTM analysis, or the last 12 months calculation, you or a bookkeeper would review and gather information from financial statements such as profit and loss (P&L) and income statements as well as balance sheets from Aug. 1, 2020, through July 31, 2021.
How Trailing 12 Months (TTM) Works for Small Businesses
Using the example listed above, if you wanted to apply for a business loan, you might provide the previous year’s financial statements to the bank, spanning Jan. 1, 2020, through Dec. 31, 2020. However, considering you’re more than halfway through 2021, last year’s financials may seem outdated and not as helpful as more recent financial activity. Meanwhile, year-to-date financial analysis that only uses the last seven months in 2021 may not provide enough historical information and might miss seasonal fluctuations to properly reflect your business patterns and help a lender make an informed loan decision. TTM analysis, on the other hand, is not swayed by seasonal trends and covers a more extended period to give lenders a view of more recent activity as well as some historical data. Lenders tend to feel more confident having up-to-date information on how your business performs.
How to Calculate TTM
You can use several financial statements to run a TTM analysis, including balance sheets and income and P&L statements. Most accounting software allows you to select the date range you’d like to use for financial statements, so it’s fairly simple to create in most cases. However, it can be helpful to appoint a professional accountant to run a TTM analysis for you. If you choose to run TTM analysis manually, you can do so by adding the most recent 12 months of financial information together. So if you need to run a TTM on cash flow on Nov. 1, 2021, you will start with the Nov. 1, 2020, statement and then add the remaining 12 months, working your way from the oldest statement to the most recent. The last statement will include the last day of the final month, so in this case, Oct. 31, 2021. The sum of these financial statements will be your TTM for Nov. 1, 2021. You can also compare the current TTM analysis to previous TTM calculations to get a good idea of how your business did in the same periods in previous years. For example, comparing Nov. 1, 2021, to a TTM spanning from Nov. 1, 2019, through Oct. 31, 2020.
When to Use TTM
There are more than a few financial statements that businesses rely on for financial review, including cash flow statements, income statements, and balance sheets. TTM analysis is a great way to review your business’s financial activity because it includes the most recent information. Here are some ways in which TTM calculation is helpful.
Recent Business Growth and Changes
TTM analysis can benefit businesses that have experienced recent growth, as it can make it easier to track the most recent changes. For instance, let’s say your business held pretty steady revenue for the previous two years but had a significant influx in sales in the last eight months. With the increased sales, you may need more equipment and resources to keep up with demand. However, reviewing last year’s statements won’t include your most recent business growth, giving you an inaccurate analysis of what your business will need. Running TTM analysis over the previous 12 months will reflect the most up-to-date information and give you a way to better plan for the highs and lows of your growing business.
Getting Business Loans
If you apply for a business loan, it’s likely that you’ll provide the lender with financial statements from the previous year. But if your business experienced changes in financial activity toward the end of the previous year, your business snapshot wouldn’t include more recent activity, falling just short of providing the full picture.
When Not to Use TTM
In most cases, business taxes are based on the previous calendar year, so TTM isn’t appropriate or helpful in terms of calculating your tax liability. You should also avoid using this method for public financial statements, as these statements are regulated by the Securities Exchange Commission (SEC), generally accepted accounting principles (GAAP), and the Financial Accounting Standards Board (FASB). TTM analysis is not included in the official public financial statements guidelines.
