How to Forecast Using Average Percentage Growth
Average percentage growth tells us how fast something has grown, and eventually forecasts the future through extrapolation.
There are different ways of calculating average growth in Excel (e.g. LOGEST, LINEST, lines of best fit, etc.) and some of these will give different results. Let’s take a look at the simplest: an annual level of growth that would take you from the first year’s level to the last.
Suppose you have profit figures year-on-year as follows:
The line on the graph shows average growth in line with our definition.
We use this simple formula:
=100*(/)^(1/<number of=”” years’=”” growth=””>)-100
For the data in the example, which spanned seven years’ of growth, this formula was used:
=100*(C10/C7)^(1/7)-100 (where cells C7 & C10 contain the first & last data values)
…giving a result of 2% annual average growth.
Technically this is called CAGR, Compound Annual Growth Rate, and it’s explained well here: http://www.investopedia.com/terms/c/cagr.asp
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