Importance of Acceleration Rate

RAB 8 Barisal

Introduction

Business world is dynamic and it is changing rapidly and quickly over a period of time. To cope with the changing situation, business firms need to make quick and proper decision. So most of the firms are spending time and giving attention to the future than to the past in order to make intelligent managerial decisions and to handle uncertainty about future.

In making predictions about future most of the firms perform time series analysis as a forecasting too. By calculating trend equation, growth rate (GR) and acceleration rate (AR), any firm can predict about its future prospect. Though all are important in assessing business dynamics, AR possess a special emphasis because of its powerful use to assess growth rate of the firm. Before understanding AR, we must well grasp the concept of growth rate.

Growth Rate (GR):

Growth means an average rate of growth at which the variable (sales of manufacturing company or GDP of a country) is increased per year during the period. In calculating GR, we use the following formula:

 

Acceleration Rate (AR):

 

Acceleration rate is the average growth rate of the growth rates. It indicates the future trend of the growth rate. Unless we calculate AR, we don’t get the real picture of growth rate or future trend.

In calculating AR, we use the following formula:

where,

Yn = data of last year

Yn-1 = data preceding last year

Y2 = data of second year

Y1 = data of first year

This can be understood from the following example:

Year 1999 2000 2001 2002 2003 2004 2005
Sales ( in lac TK) 5 11 17 21 29 35 38

The tend equation of above data is

Y = a + bt

Or, Y = -0.4285+5.68t

 

Interpretation:

GR = 40.21 % indicates that during the period 1999-2005 sales of the company increased at an average rate of 40.21 % per year.

 

Interpretation:

AR= -13.18 % indicates that in future the growth rate will be 86.82 % of the previous year growth rate i, e; in future growth rate will be decreasing at a rate of 13.18 % per year. So, we can predict the growth rate of the year 2006. Growth rate of 2006 is:

GR= (40.20.8682) % = 34.91%

One thing is to be noticed that AR may be either positive or negative. Positive AR indicates that in future growth rate will be increased at a particular rate per year whereas negative AR indicates that in future growth rate will be decreased at a particular rate per year.

Thus, depending on the AR, management can make intelligent decisions regarding the firm’s future prospect. That is why AR plays as important role in proper decisions making and holds a better position in business statistics.

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