The Pulse and NorthStar are all about computational intelligence and data-driven solutions but what if your business doesn’t have access to a team of analysts or expensive forecasting software?
A good and simple method that can help your business is the 3-Month Moving Average (3MMA), a simple yet powerful forecasting tool that can benefit businesses of all sizes, from mom-and-pop shops to larger SMEs.
What is the 3-month Moving Average?
The 3-Month Moving Average is a statistical method used to smooth out short-term fluctuations in data and highlight longer-term trends.
It works by averaging the actual values from the last three months to predict future performance.
For example:
If your sales in January, February, and March were
£500
£600
£700
Your 3MMA for April would be:
3MMA= (January + February + March)/3
which becomes
(£500+£600+£700)/3=£600
This gives you a clearer picture of where your business is heading without being swayed by one-off spikes or dips. Does it account for seasonality and sudden changes? No, but it can be a good starting point to start understanding what to expect in the short term, especially when one is missing historical data. So, why use this specific model?
Why Use the 3-Month Moving Average?
For Smaller Businesses
Even the smallest businesses generate data—whether it’s daily foot traffic, weekly sales, or monthly expenses. The beauty of the 3MMA lies in its simplicity:
- Reduces Noise: Small businesses often experience erratic sales due to seasonal demand, holidays, or even weather changes. The 3MMA smooths out these fluctuations, helping you focus on the bigger picture.
- Easy to Calculate: You don’t need advanced tools or expertise. A basic spreadsheet will do the trick, making it accessible for businesses with limited resources.
- Actionable Insights: By identifying trends early, you can make informed decisions about inventory management, staffing, and marketing spend. For instance, if your 3MMA shows a steady increase in customer visits, you might consider extending your hours or launching a promotional campaign.
For Larger SMEs
For SMEs generating over £1 million annually, the stakes are higher—but so are the opportunities. Here’s how the 3MMA can scale to meet their needs:
- Budgeting and Forecasting: Larger businesses often deal with complex financial planning. The 3MMA provides a reliable baseline for predicting cash flow, enabling better resource allocation and risk management.
- Performance Benchmarking: By comparing the 3MMA across departments, product lines, or regions, you can identify underperforming areas and take corrective action. For example, if one region consistently lags behind its 3MMA while others excel, it may signal a need for targeted marketing or operational improvements.
- Strategic Decision-Making: Executives need accurate forecasts to guide long-term strategies. The 3MMA provides a quick yet insightful snapshot of trends, informing everything from expansion plans to pricing strategies. When coupled with comparisons from the same period in previous years, it becomes an even more useful tool.
3-Month Moving Average: possible applications
Let’s look at two scenarios—one for a small café and another for a mid-sized e-commerce company—to see how versatile this method can be.
Scenario 1: a small Café
Imagine you run a cosy café with modest monthly revenue.
Your sales figures for the past few months are as follows:
| Month | Sales (£) |
|---|---|
| January | £2,500 |
| February | £2,800 |
| March | £3,000 |
Using the 3MMA formula:
3MMA for April=£2,767
This tells you that your expected sales for April should hover around £2,767. With this knowledge, you can adjust your inventory orders, schedule staff shifts, and plan promotions accordingly.
Scenario 2: The E-Commerce Store
Now imagine you manage an e-commerce store with monthly revenues exceeding £800,000. Your sales data looks like this:
| Month | Sales (£) |
|---|---|
| January | £850,000 |
| February | £900,000 |
| March | £950,000 |
Calculating the 3MMA:
3MMA for April=£900,000
With this forecast, you can confidently allocate budgets for ad campaigns, negotiate bulk discounts with suppliers, and prepare for peak seasons. How can you use it? Firstly you can avoid stressing out your team if you see a sudden -20% sales compared to the previous month, or, if you see a -20% of the same time the previous year. It surely helps you contextualise.
Limitations of the 3-Month Moving Average
While the 3MMA can be very useful, it’s not a magic bullet. Here are some limitations to keep in mind:
- Lag Effect: Since the 3MMA relies on historical data, it may not react quickly enough to sudden changes in market conditions.
- Seasonality Ignored: If your business experiences strong seasonal patterns (e.g., holiday sales), the 3MMA alone won’t account for them.
- No Contextual Factors: External influences like economic downturns or competitor actions aren’t factored into the calculation.
To address these limitations, many businesses combine the 3MMA with other forecasting methods, such as exponential smoothing or trend projection models.
Unlock Advanced Forecasting Techniques
Ready to take your forecasting game to the next level? Our comprehensive e-book dives deep into advanced techniques like:
- Exponential Smoothing: Prioritize recent data to capture emerging trends faster.
- Trend Projection Mode: Predict future values based on historical growth patterns.
- Hybrid Models: Combine multiple methods for even greater accuracy.
Each chapter includes step-by-step instructions, real-world examples, and downloadable Excel templates, all designed to help you implement these methods seamlessly.
To give you a taste of what’s inside, sign up for our newsletter and receive a free sample chapter with interactive templates ready for use.
